Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Analysis: Here's What's Next After Nexus - GOOG's Cunning Mobile Strategy...

Posted by Tom Foremski - January 6, 2010

Yesterday I made the case that Google's Nexus phone is nothing without the network. Whatever wonderful software and features Google and partners pile onto the phone, it is the network operators that have the final say on whether they will allow it -- which is why Google needs to own its own Telco more than it needs a branded phone.

Google cannot risk being cut off, or positioned a couple of clicks away because of a future decision by a Telco. If it owned its own network it wouldn't ned to worry about this issue.

Analysis: GOOG Needs To Have Its Own Telco Service More Than It Needs A Phone...

Here are some additional points to ponder:

- One of my readers suggested that Google could make an investment in a Telco that would ensure a couple of board seats -- that way Google wouldn't need to operate the Telco business itself and that would guarantee not being thrown off the network.

I don't see this as working because there would be too many conflicts of interest. Board members are chosen so that they can offer the best possible advice without a conflict of interest. GOOG has many areas of overlap with a Telco ranging from advertising to services such as Google Voice.

- Wouldn't net neutrality regulations protect Google and others?

No, not really because a Telco could decide to put Google's services a couple of clicks away from a cell phone's home screen. It is isn't preventing access to Google but it's not making it easy. It would be impossible to have a net neutrality regulation that guaranteed rights to a mobile phone's home screen.

- Why would Google sell it's own branded phone and compete with handset makers such as Motorola and others?

It doesn't make sense except to make sure that the Android standard doesn't fragment into many slightly different, but incompatible versions. That's what harmed Unix for many years. This way there will always be one true standard, the Nexus One, and that will discourage handset manufacturers from customizing their Android phones with proprietary features.

- What's Google's long term plan with mobile, what comes next after the Nexus?

The Nexus phone shows that Google is very serious about mobile. Eric Schmidt has publicly said on many occasions that the mobile web is a much larger business opportunity than the desktop/laptop search market.

But it's a totally different market where there is a lack of software and hardware standards as in the PC market. And for good reason: the Telcos and phone makers fought against Intel and Microsoft's attempts to standardize these markets in the same way that they succeeded in standardizing PC markets with their proprietary technologies.

In the PC market, Intel and Microsoft managed to aggregate most of the value-add. Their duopoly managed to maintain huge profit margins in the 60% plus range while PC makers, and others have had to survive on razor thin profit margins of just a few percent. The Telcos won't let that happen to their industry.

This means Google has to play by the rules of the Telco industry. It will need to pay for access.

It will pay the Telcos for prominent position on handsets and to guarantee that users have easy access to its services.

The iPhone holds the clues. Google pays to have its search box easily accessed on the iPhone. It also has prime position for its YouTube service on the home screen - you can't delete this icon like you can with downloadable apps.

This is the model for Google moving forward - paying the Telcos for position and access to mobile users.

Making such payments is nothing new for Google. In its most recent financial report it paid $1.59 billion to third parties for access to search traffic. These 'Traffic Acquisition Costs' (TAC) were 27% of its total advertising revenues. This was mostly to third-party web sites. In the future, it will be increasingly paid to Telcos.

This is a far better strategy than owning your own Telco. It's better because:

- It doesn't need to make a very expensive and complex Telco acquisition and deal with the government regulations.

- By not owning a Telco it can hit back at competitors and better control its partners. That's because it can use its money to buy clout. Smaller companies don't have the resources.

If Google had its own Telco it would feel obligated to ensure fair access to all. This way, it can hide behind the self-interest of Telcos and their control over their network and services.

And that's what will be next after Nexus: Google will make deals with Telcos to ensure its mobile services have prime positions.

- The Telcos will agree because Google can monetize the mobile phone screen real-estate -- and the network bandwidth -- better than the Telcos can themselves.

- The Telcos get paid and the business deal acts as barrier to entry for any Google competitors.

What's Microsoft going to do? It will have to follow suit. It has a mobile OS, it has relationships with the Telcos, it has the financial means to muscle in on similar type deals.

The losers will be the thousands of startups that won't have the same easy access to mobile users. They will be forced to partner with Google, Microsoft, or the Telcos, on their terms.

This means less innovation, less competition, and continued high prices for mobile access -- a digital divide far greater than the one on the desktop.

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