Social Machinery

There is no doubt that we are living in complex and changing times for Telecom industry. I think a good glimpse of the unprecedented transformation Telcos, media companies are internet players are going trough happened during this year’s Mobile world congress in Barcelona.

Several big mobile operators like Telefonica and Vodafone set the tone of the discussion about how Google is turning their business into a mere “dumbpipe” role. Even do the “frenemy” relationship between Internet players like Google and wireless service providers has been there for a while, this is the first time, Telcos ask openly for more regulatory intervention on Google’s internet dominance.

 An example of the frustration coming from Telcos was Vodafone’s CEO Vittorio Colao, comments about Google during the mobile world congress held in Barcelona. He denounced the lack of competition in the internet search and digital advertising sector were around 90% of all revenues on advertising and 70% profit margin is held by only two players: Google and Yahoo. 

Colao invited industry players and regulators for a value chain sanity check “that all players can enjoy an open and competitive environment that does not lead to fragmentation of services, negative for customers.” 

Interestingly, Vodafone was not alone in its ambition to get a better deal with Google. During the same week, the chairman of Telefonica, Cesar Alierta, showed discontent about Internet search engines using telecommunications networks “without paying”. He also surprised everyone by raising the possibility of charging Google for the use of their network. 

Telefonica’s CEO comments were not very clear about which elements of the network Google is using without paying. From one side consumers are already paying for internet access, therefore I assume that The “use” consists of crawlers (“spiders”) from Google to index pages.  Essentially, most of the times a sites like Google wants to index a public website they must pass through operators network segments

Nevertheless, if this is the case Vodafone and Telefonica are referring to and they will like to charge for the use of their network to any website indexing site trough their network, they would need to impose this costs to thousand of sites, breaking the equality that now exists among all companies entering freely.

Is Google becoming a real threat for wireless operators?

From the other side of the value chain, chief executive Eric Schmidt used a very friendly tone during his keynote session at Mobile World Congress in an attempt to placate the mobile service providers discontent. 

And there was a good reason; over the last two years Google has become a strong mobile player that competes in many ways with Telco operators. Android OS markets share is already 6% worldwide after only one year out, new applications like Google Voice or Maps navigation are taking operator’s control of their traditional value added services revenues therefore threatening wireless service providers role in the value chain and pushing them into a “dumbpipe” scenario. 

During Barcelona, Google CEO Eric Schmidt tried to calm the tense relationship with service providers assuring that they are not planning to compete but to cooperate: “We feel very strongly that we depend on the success of the carrier business” Schmidt said. “We need a sophisticated network for security and load balancing.”

Nevertheless, Google is entering more and more into operator’s domain. I did just a few lists of initiatives that show Google strategy to outsmart operators:

 1. Google Voice will kill operator’s cash cow

Google Voice replaces all the basic services an operator provides except for the actual data and voice. Google controls your phone number, voicemail, gives you free text messages, sets cheap rates on international calls.

2. Google ISP – Next generation access

Google is already experimenting with Gigabit-per-second broadband in several cities of US. As a first step, they will illuminate 500.000 households with high speed fixed internet access. Some analyst believes this is a first step to understand Telco operations.

3. Nexus One distribution – By passing operators

For Nexus One distribution Google decided not to sell the phone through operator’s physical storefronts, instead offering it directly through Google’s own Web site. This allows Google to sell both subsidized and unsubsidized phones.

4. Android Appstore- Taking our operator’s value added services revenues

Wireless service providers are starting to get nervous about Handset application stores like Apple or Android. The main reason is that its take control and revenues out of their domain. Now applications like Navigation, games or ringtones can be bought without operator’s involvement.

5. Advertising- A new revenue stream under threat

During the last years operators started looking advertising as a new source of revenues. This could create a two sided business model for monetizing their network via access and monetization of consumer “eyeballs”. Nevertheless, in a still fragmented industry, Google has taken advantage of this problem by playing an aggregator role. Admob is an excellent example on their plan to dominate the mobile space when it comes to advertising.

Towards a new internet business model?

 The debate, called network neutrality, that is currently happening in the U.S., where some operators want to offer a two-speed network based on whether the website destination pay for your traffic could create two different networks, where service providers could slow down user access to pages that choose not to pay.

Still an unpopular idea for regulators, having a controlled network access is a dream that Telcos are pushing harder and harder as a way to justify their network investment.

Basically, operators complain that their networks could become congested. In 2009, the data traffic grew by 74% compared to 2008. To meet the flood, operators invested for 9.4 terabits per second of extra capacity.

The ‘open bar’ for all service providers to give priority for critical time services like maybe justifiable; a remote telemedicine operation should have more bandwidth than an email. In their view, some companies would pay extra for that guaranteed or prioritized access. In that sense, Net neutrality would slows the emergence of ‘premium’ access.

Is it neutral mobile network?

In the mobile space, Net neutrality has not started yet. Anyway, data traffic over mobile networks grew 72% in the second half of 2009. YouTube, IP telephony and P2P downloads the most traffic were consumed. Therefore, operators do not want to extend the neutrality of the mobile network. In fact, the FCC has excluded from its preliminary report. Even so, operators have had to offer flat-data rates to entice customers.