The Google Phenomenon

The fact that a single contract bid took on so much importance is a measure of a changing competitive landscape in communications — at least in the perceptions of the public and many on Wall Street. Already America Online Inc., Google, Microsoft Corp.’s MSN, Skype Technologies S.A. (now part of eBay Inc.) and Yahoo! Inc. are mentioned in the same breath as BellSouth Corp., SBC Communications Inc. and Verizon Communications Inc.

The bold moves of these online giants into communications of every kind have left traditional telcos looking flat-footed and out-of-touch. Some, such as BellSouth and Sprint Corp., have yet to launch a consumer VoIP service, though Sprint has managed to sue Vonage Holdings Corp. for what it claims is patent infringement.

How that competition develops and intensifies — and what telcos do to counter it — likely will be the central business drama of the next decade in communications. Today, the fight has been joined; tomorrow it will become fierce.

Google and Wi-Fi

Google’s interest in Wi-Fi was the subject of hot rumor throughout the summer, but became reality with the revelation of its reply to an RFI by the City of San Francisco in September. The city says it plans to review the RFIs, and make a decision on the technology and scope of the project, but has not announced a time frame.

Forgotten in the hoopla is that many other companies also responded to the San Francisco RFI, many with top Wi-Fi credentials. These include Wi-Fi vendors Alvarion Ltd., Motorola Inc. and Nortel Networks; mobile operator Cingular; EarthLink Inc., which already has won the Wi-Fi contract for the City of Philadelphia; Hewlett-Packard Development Co. L.P., with extensive integration experience; and a consortium of Cisco Systems Inc. and SeaKay Inc., a nonprofit provider of community education projects.

In that list of competitors, EarthLink may be the most significant, whether or not it wins. In the realm of online communication services, EarthLink has a breadth of services similar to Google, offering VoIP, ISP services and Internet content, though Google has been more aggressive of late, branching into e-mail, IM, VoIP, online maps and geographic images, and now Wi-Fi.

Like Google, EarthLink appears to have a strong interest in acquiring its own broadband access to customers. The company has been trying to compensate for its loss of dialup customers with added services and sales of others’ broadband offerings, with some success. With its win in Philadelphia, EarthLink has new credibility, not to mention a large broadband outlet, for its services.

Like EarthLink, AOL suffers from dialup erosion, yet the company has been able to retain a complement of about 50 million users worldwide. Yahoo!, which has never owned its own network, has partnered with large service providers, such as SBC, to become their ISP.

The popular interest comes from speculation that these services can use their dollars and marketing muscle to launch large Wi-Fi access networks, especially in core metropolitan areas, that will compete directly with the telcos. The cost of Wi-Fi deployment is low, and the bandwidth used by most is unlicensed, though some now are acquiring licensed bandwidth. Whether Google or EarthLink will move beyond these municipal networks — which could be seen as large trials for the online companies — is very much unclear at this point.

Will these companies have to acquire their own networks to compete with traditional telcos? The answer, say many analysts, is no.

The motivation for large online providers to operate their own broadband networks is motivated partly by fear of getting shut out of existing networks. It is a poorly kept secret that many service providers, fearful of the coming competition from the online behemoths, have looked at ways to close their broadband to outside services.

What would today’s large telcos and cable companies, which provide much of the broadband connectivity, do if Google took away their phone subscribers?

Broadband providers already resent that third-party VoIP services get a “free ride” on what they see as their networks, calling them “parasitic services.” “[Telcos] can’t survive being a pipe, getting $29.95 for providing a broadband connection, when Vonage is getting that amount without providing facilities,” says Joe McGarvey, senior analyst, carrier IP telephony at Current Analysis Inc. “It will be the same thing with a [third-party] video-on-demand service.”

Today some vendors are building capabilities into switches, routers, monitoring software and rate-shaping devices to give operators the ability to look into a packet and discover if it is a voice packet from a third-party competitor. The same capabilities are present in some software for network management, fraud protection and legal intercept.

As a vendor that provides network monitoring software, Jay Thomas, vice president of product marketing at Narus Inc., freely admits that his company’s products could be used to detect VoIP and other third-party services.

Thomas says that the issue of third-party providers weighs heavily on established service providers. “All the carriers I know are trying to figure out, ‘What the hell do I do?’ A few have said, ‘If I block it, that will work,’” Thomas says, adding, “If you do that, all you are doing is guaranteeing that you go out of business.”

So far U.S. regulators have come down on the side of open networks. One initial attempt early in 2005 by a small CLEC to block VoIP resulted in a quick slap on the wrist — in the form of a $15,000 fine — by the FCC. More recently, the FCC required net neutrality and no limits on third-party VoIP providers as terms of its approval in November of the U.S. telco megamergers of Verizon-MCI and SBC-AT&T.

But what about elsewhere in the world? Dave Passmore, research director for the Burton Group, describes a conversation with a “monopoly PTT” that plans to add 200 milliseconds of delay into competitive VoIP streams, but to do it 20 milliseconds at a time so customers will see gradual degradation rather than a sharp drop in performance.

Thomas strongly doubts incumbent broadband operators actually will take such drastic steps. “I think those conspiracy theories are not correct,” he says. Telcos are starting to look at how to compete in the new environment. “I think they are getting it, though they are not totally there,” Thomas says.

Thomas further sees nations slowly giving up the fight to block third-party Internet services. “Some have already figured out they are never going to win. It’s like trying to turn off spigots where thousands are turning them on.”

More Than Just Voice

Considering that the rising online competitors already offer a tremendous variety of services from shopping to communications to education, rather than shutting networks possibly telcos should look to expand them.

Thomas believes traditional telcos “will survive, but they have to change their business model, because people can go to any application.” He says telcos need to figure out new business models: Indeed one customer may use Narus software to analyze a third-party competitor’s offering for that purpose. Telcos need to understand “what is a successful business model if they manage the network,” says Thomas. “They have to get their heads turned around a little bit about these things.”

New services are a key to survival, agrees Henry Goldberg, senior analyst, networking at In-Stat. This means “services that are attractive to end users that will essentially make them use communication more in their daily activities.” Many telcos are installing larger pipes, using fiber optics or ADSL2 technologies to enable large-bandwidth multimedia services, such as video conferencing, collaboration and IPTV. These services “will be the real important providers of opportunities. It’s not going to be voice over IP that is going to drive revenue in the future,” says Goldberg.

There are many downsides to blocking online competition other than whatever the FCC might do. The political fallout could be considerable. Consumers would howl, and Vonage customers are more than a million strong. Some consumer groups have taken up the torch for the four “Internet freedoms,” such as open access to Internet services and content, articulated by former FCC Chairman Michael Powell.

Besides, the new voice competitors — eBay, Google, Microsoft and Yahoo! — are large, growing companies with solid bottom lines and ample resources compared to the increasingly cash-strapped incumbent telcos. “These guys finally have energized lobbyists and are aggressively pursuing their own interest in keeping the Internet open,” Passmore says.

Also, an open Internet means that incumbent telcos that are limited to specific territories today can compete globally, and not just for the business of large multinational enterprises that traditionally need services across the globe. “If they offer applications, they should compete globally, not locally,” says Thomas. “If they can offer services better than anyone else, then they can compete globally to anyone who wants to connect to them anywhere in the world.”

Verizon first tested these waters more than two years ago when it did a trial of GoBeam’s IP Centrex service in Chicago, which is SBC’s territory. The service was offered without installing any local infrastructure, and call control was handled from a server in California. The service was later abandoned for business reasons, not because the technology did not work, but it gave an indication of what is technologically possible with an open Internet.

The flip side of that is that everyone else could come into any service provider’s territory to compete. Of course, an operator could try to close its networks at that point, but that likely would set off a cascade of retaliation that ultimately could be self-defeating.

McGarvey says, “Traditional service providers realize that they can’t provide everything to everyone and have to open the network to bring in services everyone wants.”

However, Passmore wonders if telcos are equipped to compete on a global stage. “Where does it say that telcos have the best and brightest to figure out what the public wants? How can they compete with Google with hundreds of thousands of Ph.D.s coming up with hundreds of exciting ideas? It is counter to their culture for telcos to do that,” he says.

A third disadvantage is that there likely will be competition from other new broadband providers — with wireless heading the list — that can bypass any closed networks.

Who gets credit for a service will be a competitive point. With the IMS architecture that many traditional telcos plan to install, a service provider “can put their front end on it and make it look like it’s coming from them,” says McGarvey. Service providers will have to figure out whose branding has the most clout. With a video-on-demand service, for example, is a consumer more likely to buy SBC’s video service or HBO’s? Retaining a brand doesn’t necessarily mean giving up control. With IMS, service providers can “set up an arrangement with a supplier or ASP where they are getting the money and taking care of the transaction,” says McGarvey.

With the brutal competition in the offing, Passmore has been looking at how telcos can leverage their traditional strengths. It still may be possible to offer better QoS for a high price, he says. Also, “One of the things they are really good at is billing people, and they have scalable billing systems.” Another advantage is installation and maintenance services leveraging their fleets of trucks and trained technicians.

And what many see as the winning strategy is bundling. “Maybe the total amount each household pays [for a specific service] doesn’t change, but they end up getting more and more services,” says Passmore. “And providers become more efficient in how they deliver services and are still able to eke out a profit.”

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