Carrier Clout Prevails as Google is Forced to Beat a Hasty Retreat

The mobile operators have finally had their say and the equilibrium is restored. Google's announcement that they are going to withdraw selling the Nexus One through their own online channel and instead work with 'partners' in expanding presence vindicates the risky nature of their decision that I had alluded to a few months back. While getting US consumers to part with full unsubsidized rates was a challenge in itself, I believe the larger issue that forced Google's hand in this case has been its handset partners and the pressure from carriers such as Verizon.

Take the case of HTC. The Taiwanese vendor has been one of the most active promoters of Android, given its lack of a clear identity in the Windows Mobile days when it moved from being an Original Design Manufacturer to a full-fledged smartphone vendor. HTC's business potential is severely impacted if some of the best phones that it makes are restricted only to a channel that does not subsidize the cost of the handset. Moreover, by coining marketing phrases such as "Superphones" Google made it all the more tough for HTC to sell its other high-end smartphones to carriers willing to pick the subsidy tag.

For the ecosystem, Google's decision to go on its own clearly had larger implications over trust. Carriers were concerned that Google with its unsubsidized channel could potentially attract the high-ARPU customers who were then free to choose their own operator; not the most ideal of scenarios for carriers that historically were used to exerting extreme control over their consumers, through low entry and high exit barriers.

For Google as well, the channel wasn't without its more than adequate share of challenges. I reckon other than all the issues around managing partners in the Android ecosystem, Google also woke up to the fact that customer support in an important expense item. The initial wave of complaints against the device and its limited support options forced Google to come up with telephonic support one month into the launch.

While Google may have retreated from its online store, I don't believe it is the end of the road when it comes to Google's attempts to disrupt traditional channels. For those channels exert far too much control over the overall mobile ecosystem in the US and some other European countries. And controlled ecosystems are a ticking waiting-for-disruptor bomb. I believe Google's results with its online channel are not indicative of their future, but are an important milestone as these markets move to a more equitable and customer-centric model.

Google’s fiber network is attempt to force telcos to change

A version of this post appeared first in VentureBeat

Google's come up with yet another ambitious plan- that of deploying fiber-to-the-home as a trial in select communities across the US. The company claims it will will adopt an open access approach making its network open to other service providers as well. What’s most interesting about this announcement isn’t the possibilities of high-speed, instead, it’s the thought of how this test rollout could effect the telco industry.

Google has slowly been crossing paths with the telcos, a fact that’s been more than obvious from its series of forays over the course of recent years. However, while telcos have always looked at Google with a sense of alarm, this latest announcement is likely to set the cat among the pigeons. Telcos have traditionally considered selling voice minutes and, of late, data bundles, their raison d’être. While so-called “over-the-top” services from Internet players such as Google have threatened telco revenues from additional services, their core networks were never under threat. At worst, most telcos believed they might be relegated to the role of a dumb-pipe. That is now set to change.

Google’s apparent entry into the fiber-to-the-home (FTTH) space comes as a rude awakening for US telcos. Consider for instance, Google’s proposition that it will allow third-party service providers to use the network. While that might sound great in isolation, Google appears to be making a clear move aimed to force the FCC to allow last-mile fiber unbundling. “Unbundling” would allows service providers to use the existing last-mile network of an incumbent operator. The FCC currently exempts incumbent telco operators from having to lease their lines to other providers. But the FCC continues to get requests from providers to fully enforce unbundling with regards to fiber rollouts, as it does for fixed lines.

Similarly, consider Google’s emphasis on communities. In its announcement today, it reached out to local community managers interested in bringing the test network to their neighborhoods through its public Request for Information. A key factor that determines speed of FTTH rollouts, and implicitly cost, is getting the necessary regulatory permissions and the right to use existing infrastructure. By encouraging local residents/community managers to reach out to Google with a list of what their community can offer, Google is striking at one of the biggest challenges telcos routinely face across the world in terms of fiber rollouts: that of encouraging higher uptake in areas where they’ve already rolled out services. Experience from smaller European fiber operators such as Lyse clearly demonstrates that higher user involvement in the overall fiber rollout process helps drive down churn (churn refers to the number of subscribers that move away from a service — a key metric for any telecom service provider). Lyse rolls out the fiber network right up to the edge of a subscriber’s home and then encourages the subscriber to dig and lay out the fiber themselves through their gardens and into their homes. This has helped it create create an emotional attachment to the service, which has a clear impact on churn.

I’m not saying Google is already looking to build services aimed at rapid uptake with minimal churn. But these are two sure indicators that Google is now ready and willing to shake up the teleco ecosystem by striking at the heart of what they do and how they do it. They are pointers that Google clearly understands some of the biggest telco challenges and is ready to come up with innovative ways to address them should it decide to go all-out as a fiber service provider.

Globally, telcos have always tried to make the case that fiber rollouts are highly capital intensive — even more so when they are FTTH as opposed to Fiber-to-the-Node/Cerb. They’ve used this point to make their case against last-mile unbundling or, in some instances, as a case against net neutrality. High investments have acted as a natural entry barrier, and with low competition, pricing of the access services has remained high. Moreover, lower competition has meant there’s less incentive for telcos to rapidly rollout networks. Google’s entry (or the threat of it) could change that.

It is quite possible that Google will back down from its stated “experiment” after the initial rollout. But it’s more likely that Google will continue with a phased rollout program until it can generate enough panic amongst the telcos to create what it set out to create. But until then, the noise around Google’s FTTH plans are only going get more shrill and gain more momentum across the developer and user communities.

Google does not necessarily have to go ahead with a highly capital-intensive network rollout and subsequent maintenance, a completely alien line of business compared to its core search advertising business. All it needs to do to is ensure that the right environment is created to force change upon existing telcos. For proof of the same, think back in time to the whole debate around open mobile ecosystems and Google’s ‘bids‘ for wireless spectrum. I believe today’s announcement was a first — albeit giant — step in that direction.

Google's risky attempt to rewrite the carrier-customer relation

Google has finally decided to put its weight behind phones that ostensibly represent their vision of a smartphone, making for a, er, Superphone. The Nexus One in many ways, has been viewed by many as a response from Google to take on Apple in its (now) own backyard, the high-end smartphone. While Google has indeed made a strong effort to meet the expectations of its own fanboys, by coming up with what many claim to be the best implementation of Android, however, in the process, Google is also attempting rewrite the traditional rules of the mobile industry in the US. In a market where carriers have historically held an iron grip over the consumers, and any other stakeholder in the value chain, (including device vendors, content creators, app developers) was kept on a tight leash, by opening up its own distribution channel, and encouraging people to buy directly, the company is attempting to break the nexus between carriers and device vendors.

For long, the US mobile market has grown on a diet prescribed by the carriers, that had made it extremely difficult for handset vendors to directly take a device to the market. With rampant handset subsidies, device vendors were left with little chance of trying to engage directly with consumers who were happy paying a fraction of the device cost upfront. While multiple others have also attempted to go direct to the consumer, however, few had the weight of a large player such as Google. Lacking the presence of an iTunes-like ecosystem, and a handset-presence, Google is now trying to create alternate channels to carriers and in the process displace them from their 'hallowed' position. By making it clear that it is going to only showcase a limited number of handsets on its channel, Google is making it amply clear that they now want to take the position occupied by the carrier in terms of driving device specifications, and now, tightly integrated applications.

The initial uptake might have been low, but this move is not really about one handset or of the resultant margins. Combine the Android marketplace, with Google Voice and Gizmo5, and a direct distribution channel to customer that's free of carrier-interference, and you are increasingly looking at the prospect of Google creating AND monetizing several over-the-top services and in the process bypassing the carriers completely.

All these moves are however, not without their more than adequate share of risk. Google's pseudo-entry into the handset space will prove quite uncomfortable with its handset partners that decided to latch on to the Android bandwagon. The fact that the Nexus One used the latest Android version before it was made available as an SDK will definitely not be lost on its partners. And by declaring that only select 'superphones' will be retailed through Google's online channel, the company runs the risk of negatively impacting sales of Android 'smart' phones that it has deemed not worthy of the 'super' tag!

Google sure has embarked on a pothole ridden path to controlling the customer relation on the mobile platform. It has its task cut out if it is to emerge unscathed, without antagonizing its partners, whilst hoping to significantly change consumer behavior.

Economy and Internet Trends Presentation

Mary Meeker from Morgan Stanley comes up with a data-rich presentation every year at the Web 2.0 summit. Some of the panels from this year's presentation are pretty telling. For instance, the massive drop in mobile Internet traffic to operator portals! True indeed, mobile is going to play an increasing role in the lives of consumers, and location adds the ideal topping. Mobile broadband is likely to hit its inflection point in developed countries, and find its feet in emerging markets in the coming year. Social network sites are rapidly replacing horizontal portals as the landing pages and walled gardens appear set to be relegated to being a relic of the past.

Check out the complete presentation below.

Economy & Internet Trends - Morgan Stanley Presentation

View more presentations from kvjs.

Functional Ecosystems: The Need of the Hour?

In recent times there has been a lot of noise around ecosystems, and how open ecosystems, given Google's flashy entry, are now here to stay. In the mobile space, the transition to open mobile ecosystems appears to be happening rapidly, with traditionally open Symbian, having had to re-position itself, and older consortiums such as LiMo trying hard to tell people that they've been around for a while. Android in particular is increasingly being touted as the platform of the future. With reports coming in of Android deployment not just on smartphones, but on netbooks/set-top-boxes and what not, the clamour around the potential of these open ecosystems appears all set to rise further.

However, amidst this cacophony, it will be pertinent to take a step back and see what lessons existing systems have for us. Arguably, one of the most successful ecosystems in recent years has been the iPod-iPhone-iTunes combo. Apple has successfully created a completely vertically integrated system that made the user-experience a stroll in the park. Consumers were offered a simple way of downloading content/apps with billing tightly integrated. On the supply side, Apple maintained a stranglehold on pricing, availability and distribution. It stood up to content majors in deciding the pricing of single tracks, and it made the app store proposition attractive to mobile developers by keeping only a flat 30% retainer. The results are out for everyone to see. The iPod has become one of the best selling portable devices of all time, while the iPhone has set the cat amongst the device manufacturers aflutter.

The other successful ecosystem example in recent times has been the Amazon Kindle. The Kindle, in both its iterations, has consistently been sold-out, with varying sales estimates. Again, the Kindle too offers a vertically integrated ecosystem with mobile connectivity built into the cost of the device, and content availability driven by Amazon. Despite the high price tag, the simplicity of the offering, is attracting customers in droves. And like the Apple ecosystem, Amazon too exercises tight control over what can and cannot be viewed. And it is to Amazon's credit that by limiting, rather inconveniencing, usage of the Kindle, they can even charge for pulling RSS feeds !

In both these cases, consumers have shown a clear preference towards a simplified usage-experience, and one that is devoid of roundabouts. Consumers do not want to be bothered about confusing options around content discovery or billing. And this is something that device vendors, telcos and content players alike need to imbibe in future offerings. While early adopters will always be willing to go through a couple of hoops, however, hitting the mainstream will require players to bring elegant integrated and transparent solutions. Players along the value chain will increasingly need to collaborate in driving uptake. Traditional models that have worked in the past will not work in the future. For instance, while telcos have been able to get away with high revenue share for any third-party service in the past, increasingly, they will have to come to terms with the changed reality and accordingly price their role in a ecosystem. A delay in doing so will hurt everyone involved in the process. Amazon's attempts at launching Kindle in Europe have apparently been stalled due to breakdown of talks with telcos on revenue-share and pricing of connectivity. Likewise, Nokia's attempts at easing consumer hassles by having integrated carrier billing are slowing up their rollout of Ovi Store, giving its competitors strong headway.

It is indeed true that advent of digital media has had a strong impact on existing business models, however, the true benefits of digital media can only be achieved if and when competency-based collaboration kicks in the industry. End of day, as the Kindle and iPod/iPhone examples have shown, consumers are least bothered with the question of an open or closed ecosystem, all they crave for is a functional ecosystem which meets their needs!

Voicing its way ahead

It appears any and all news in the online world in the recent past has been doomed to be focussed on the GoogApp duo ! Be it Apple' announcement on its new iPhone OS or Google's launch of a souped up Grand Central or the more controversial move to have behavioral targeting in adsense !   

Google's frontal move into voice appears, as always, ominous to the telcos that have hitherto survived in locking out users in closed environments. Google's attempts to open this ecosystem up, with all its efforts on spectrum/platforms/handsets, whilst having minimal immediate real impact, are however forcing telcos to go in directions that they have resisted up until now. Whilst Google has thus far restricted itself to what can best be described as Guerilla tactics in targeting telcos, Google Voice goes a step forward and takes the competition right into the backyard of the operators. With free domestic calls in the US, and low rate international calling, Google appears to be looking at a revenue stream that goes beyond its staple diet of search advertising. Of course, directory services will likely be a focus and be tightly integrated with Google Voice. However, I am more inclined to look at this launch as an acknowledgment of the fact that establishing platforms and ensuring Android based handset uptake grows is an uphill task. In its home market, Google is yet to tie up with the top two operators for the Android platform. And with the global handset market showing clear signs of losing steam, mobile advertising could take that much more time in becoming mainstream. And it is in this backdrop that Google's launch of Google Voice appears all the more interesting. Instead of building an ecosystem that is favorable to its core business from ground up, Google appears to have realized the advantages of taking a multi-pronged approach that effectively uses their repertoire of acquisitions.   

Telcos will definitely not be pleased with Google's latest move. However, there's little that they could do, other than accept the fact that their distance from the consumer is rapidly increasing. Being a dumb pipe now appears to be thrust upon them, even when it comes to delivering their core service, voice!  And while the extent of upside for Google is debatable, what appears certain is the downside for telcos that competition of this nature is likely to bring to the overall telco industry.