Tuesday, September 20, 2005

Google's Core Business and the Demise of the Cellular Carriers

Many people think that the reason that GOOG raised all of that money in their secondary offering for the purposes of creating a nationwide Wi-Fi network. I see a lot of comentary that sounds like this:

A WiFi service, which offers a high-speed connection to the Internet, would take Google even further from its Internet search roots and move it into the fiercely competitive world of Internet access providers and telecommunications companies.

This isn't a departure from Google's core business, though. Google isn't in the "search" business. Google is in the business of placing context sensitive ads in front of your face as often as possible, by whatever means possible. Search is just one way they do that. Like most internet users, every time I use the internet I use Google. Every time I use a Google product, I give Google's software an opportunity to learn what I'm interested in by analyzing the words I type into the Google product (search engine, blogger, chat, gmail, etc.), so that Google can present an advertisement in front of me that reflects my interests. Because I use Google's products repeatedly every time I use the internet, it is in their best interest to make sure that I am able to access the internet as often as possible. Every time I use the internet the likelyhood that I might click on a google-ad increases. This is why a nation-wide free Wi-Fi network fits in perfectly with Google's business model. They have become such a ubiquitous and essential part of internet usage that they are in a position to benefit from increasing internet usage in general.

Google's new Wi-Fi network is a major threat to the cellular phone carriers business. Google's new chat software gives everyone essentially free internet phone calls. It has been widely recognized that companies like Skype and now Google represent serious competition to the phone companies land-line services. In a couple years no one is going to pay for land-line phone service when you can get that for free over the internet. I personally haven't had a land phone-line for almost 7 years. One thing I am willing to pay for still is cell phone service.

Now consider this. Almost everyone I know uses Google Talk now. Those people not on Google Talk are on MSN Messanger service. This includes freinds, family, and business. Everyone I need to talk to I can get ahold of using internet chat clients. If there was Wi-Fi internet access everywhere I go, and if the sound quality of the voice-chat in Google Talk is as good as cellular phone reception (it is), then why would I ever need to pay for cellular service for voice and text messanging? I could use any generic portable Wii-Fi enabled internet device for what I now use a cellular phone for. So now, not only are the legacy phone companies endangered by google talk, but also so are the cellular carriers.

(Disclosure: I'm currently long GOOG and QCOM call options.)


At 2:07 PM, Blogger Alien Shaman said...

We are very well connected internet type people, but there are still a fair number of people that are not - so phones are safe for a while, not forever, but the foreseeable future.

At 3:27 PM, Blogger Quant Trader said...

If by "the forseable future" you mean any period over 5 years and we are talking about land-lines, I have to strongly dissagree.

The highest margin customers for phone-companies aren't residential customers. The high margin customers are businesses. It costs less (per marginal phone line) to provide phone service to business and yet generally, regulations allow your local phone company (which has a monopoly) to charge more for a business phone line. For your long-distance phone charges you were limited to 4 or so carriers, offering essentially the same service. Land-line phone providers are allready suffering significant declining revenues do to competition from VoIP and it is in it's infancy still. (Their residential customers are also largely getting eaten up by the cellular providers.)

Notice that almost everyone you know who's used a VoiP phone has probably used it at work. That's not a coincidence given the above paragraph. Businesses will be the early adopters. People who aren't techies will get exposed to the technology at work. They will see how easy it is to use and get used to the superior feature set of the phones, and when it comes time to pay for land-line service, they'll buy the VoiP phone service that will be bundled as a low-cost add-on to the digital cable-tv service they are allready paying for.

Cable companies are running to roll out VoIP service to their customers. They won't require "internet skill", or knowledge of how to use a computer. To the consumer the only difference between a VoIP phone from their cable provider and a land-line phone from their local phone company will be a smaller price and more features.

It will take longer for the cell-phone carriers to go the same way, but if Google's Wi-Fi roll-out is extensive, successful and cheap for the consumer, I wouldn't give the cell-phone carriers much longer to live. Right now the Google Wi-Fi is just hype. We won't know for another couple of years if it rolls out large enough to be serious competition for cellular phone carriers.


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