Google versus the telecoms

If Google wins the 700MHz wireless spectrum auction in January, expect Google-branded phones galore.

There may just be a Google phone after all.

Google said on Friday it would apply to bid in the U.S. Federal Communications Commission's auction of 700 megahertz band wireless spectrum.

If it wins, it could build a wireless network for that spectrum on its own, or partner with others to build and operate such a network. Either way, Google could put its brand on millions of mobile devices that use the network. It would also be able to control the Internet experience on the devices and how much people would pay--or not pay--for the services.

In essence, Google could control the direction of the next-generation wireless network.

"Imagine an iPhone where the whole thing is a screen and the bottom eighth is banner ads running across," said Iain Gillott, a wireless analyst at IGR. "Spectrum is king; you own everything."

The 700MHz spectrum, which has been used to provide analog TV service, travels far and penetrates walls. As a result, it's considered the last remaining chunk of attractive wireless airwaves and is viewed as an opportunity to expand the Internet to a new frontier. The spectrum auction is scheduled to begin on January 24, and the deadline to apply to participate is Monday.

Google and other Internet companies have been hampered in their ability to expand their markets into the wireless space because carriers have had such a tight hold on the cellular industry. Right now, U.S. consumers are locked into the handset they use, the network it operates on, and the software it runs.

"Imagine an iPhone where the whole thing is a screen and the bottom eighth is banner ads running across. Spectrum is king; you own everything."
--Iain Gillott, IGR wireless analyst

This situation has crippled consumers' ability to use the Internet on their mobile devices, compared to how they use it on their PCs. Google executives say their aim is to bring the PC-style of Internet openness to the mobile world so that users have more choice in mobile services and applications, as well as price.

Google was instrumental in getting the FCC to adopt so-called "open access rules" that would ensure consumers could use any mobile device they choose on a large chunk of the 700MHz spectrum.

Profit motivates


While Google's entrance is likely to turn the wireless world upside-down, market disruption is not its motivation. Google's priority as a public company is to make a profit; having a Google-branded wireless service would attract a good deal more eyeballs to its ad-based services.

And mobile, in some ways, will be particularly fruitful for advertising. Owning the spectrum would give Google an advantage in local advertising, which is tailor-made for mobile use as people look for nearby restaurants, gas stations, or copy shops.

Conquering the mobile world would also give Google a boost in international markets, where people tend to be even more dependent on their mobile phones than they are in the U.S.

Google has managed to turn Web search into an $11 billion business on PCs by selling simple text ads that appear with search results. Imagine how lucrative that market will be when the ads, including local advertising, can get to the far reaches of the world where there aren't any PCs.

Right now the global PC search market generates about $20 billion in revenue, assuming each PC owner conducts an estimated 35 searches a month, according to Citigroup research. If they do just one search per month on the four billion mobile phones expected to be in use in 2010, they could generate $2.3 billion in revenue, assuming PC search advertising economics migrate as-is to the wireless world, Citigroup said in a report this week.

For Google, that could translate into $700 million in incremental revenue in 2010, according to Citigroup. A new network on the spectrum isn't expected until 2010 at the earliest, analysts say.

"If you can get the most attractive demographic, the 18- to 30-year-olds (who have grown up on Google), then advertisers will be lining up at the door," Gillott said.

The wireless spectrum bid dovetails nicely with Google's moves to unify handset makers, software developers, and carriers on Android, an open mobile platform .

Mobile isn't the only place Google is eyeing the wireless access business. The company is dabbling in Wi-Fi-based services for PCs, building its own free wireless network in its hometown of Mountain View, Calif. It had also partnered with network provider EarthLink on a proposal for San Francisco. Despite initial support from city officials, the approval process stalled and EarthLink backed out in August amid a company restructuring and significant layoffs.

"Google is spending time and money paving this new superhighway," said Jeff Kagan, a wireless and telecommunications analyst. "Google is creating the world they want to compete in because it doesn't exist for them right now."

A Google representative said no executives were available to comment on their spectrum plans or motivation.

Even if Google doesn't win, its actions have already shaken up the stagnant mobile industry, said Derek Brown, an analyst at Cantor Fitzgerald.

For Google, "there is a risk that they get in way over their heads in a field in which they are late to the party and in which they have no expertise," he said. "But history suggests Google has made some very good strategic, operational, and financial decisions and seems to have done as good or better a job at investing toward the future than many other similar companies."

 

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