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Google anchors its carrier off the coast of Telcoland

So what’s up with Google and the 700MHz spectrum? Well, Google has “pre-bid”-that is, declared its interest in bidding-for a large block of radio spectrum in the US’s 700MHz ex-TV band. (See here.) The big friendly search engine (or menacing, Orwellian data monster, depending on point of view) doesn’t just want the spectrum for itself; it wants it to be sublicensed for public access.

Traditionally, the economic value of radio spectrum has been largely an economic rent, originating from the fact that licenses grant a monopoly of its use. No cash changes hands when the various unlicensed bands, such as the 2.4GHz swamp beloved of Wi-Fi users worldwide, are used; even though, of course, its use creates value for the user, this isn’t accounted for.

So why would anyone want nonexclusive spectrum? Isn’t it a contradiction in terms? And what does Google plan to do with it? Google, after all, is a model Telco 2.0 company, designed around the
horizontalisation of the industry (NB: in the plenary session of the Telco 2.0 Executive Brainstorm in October we’ll be talking about ‘coopetition’ strategies based on some new analysis by our senior stimulus presenters).

googleship-cvn65.jpg

Google: Emerging Backbone

It’s well-known that Google’s infrastructure development has involved quite a lot of telcolike activity. For some years, Google has been a major buyer of dark fibre, constructing its own private (and apparently IPv6) backbone between its data centres. This makes a lot of sense; the opex cost of one’s own fibre is not great, especially for a company with hordes of its own engineers and network administrators, and fibre is a long-lived asset.

Therefore, Google seems to be assuming that a substantial fraction of its wholesale transit bill is made up of other people’s profits. Assuming that they expect to be in business a long time yet, the depreciation cost of buying dark fibre is minimal; it beats filling Level 3’s pockets, or relying on AT&T when AT&T likes to talk about charging Google packets at higher rates.

But this is all backbone networking. Nobody would seriously suggest using 700MHz for backbone/backhaul; range and penetration are inversely correlated with frequency, which is why the 700s are so coveted, but throughput is positively correlated with frequency, which is why high-capacity point-to-point microwave links are 5GHz and above.

The Access Cartel

Google’s real strategic problem, vis-a-vis the US telcos, is their oligopoly of access networking. In fact, it’s more like a group of regional monopolies, and the same goes for cable-TV operators. Throughout Internet history, and indeed telecoms history, long lines has been more competitive than local; the reason being that value is geographically concentrated in long distance and bulk IP, but dispersed in local, and that therefore the capital required to build an alternative local loop is prohibitively large. If AT&T did go through with Ed Whitacre and Randall Stephenson’s bloodcurdling threats of last spring, there’s always Level 3, Savvis, and GoogleNet itself for the backbone - but at the local level, there’s no substitute for tubes.

Should the Bells gang up on Google, there’s also another option; apply YouTube tactics to the infrastructure. Having a big long lines fibre network gives Google the option of becoming a backbone operator itself, and announcing that it will peer with independent ISPs. These, of course, rely on leasing telco lines to reach their customers; at this point, Big Telecom would be faced with a choice of pulling the plug on millions of customers (and probably getting involved in a mass of antitrust litigation) or backing down.

But they might still be vicious enough to go through with it. What then? In the absence of anything like local-loop unbundling, British-style, you might think Google (and the wider Internet community) would run out of options. This is where radio comes in. The CAPEX to deploy a radio network is considerably less than digging up the roads, especially if you already have spectrum. And technological change is making it more so; WiMAX equipment looks likely to be dramatically cheaper than cellular. Better yet, Google doesn’t have to pay; sublicensing the spectrum would mean that independents, municipal networks, and others could finance their own radio-access network. Alternatively, Google’s interest in Wi-Fi sharing (Fon), femtocells (Ubiquisys), and metro-WLAN (Google’s project in Mountain View) suggests they might be thinking in terms of user-provided infrastructure.

Perhaps such a system would offer free connectivity to GoogleNet, but charge for anything further? That would match with the cost base - anything on your own network is cheap relative to anything you have to pay for in kind (peering) or cash (transit). And it would - dare we say it - be rather Telco 2.0? It is worth noting, though, that Google itself has so far been far keener on HovisNet (Internet with nowt taken out) access than anything like that.

Balance of TerrorTelco

Put another way, securing access to the radio spectrum is the remaining chunk of Google’s strategic triad; rather than land-based missiles, submarine-based missiles, and aircraft, though, it consists of dark fibre, peering with the dark fibre, and radio.

There’s a long way to go before this is tested. It’s possible that regulatory action, Net Neutrality legislation, or simply a realisation that IMS everywhere costs too much, will render the whole thing moot. And there’s also a counter-strategy before using the deterrent; Google has just announced a partnership with Sprint-Nextel to develop services on its big WiMAX network. S/N hasn’t been anywhere near as keen on building a neo-Bell world as the neo-Bells; after all, it is itself a product of the competitive era in telecoms. So we might want to include Sprintlink in the backbone section of Google’s deterrent, and its various radio systems in the access side.

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Comments

If you can't beat 'em, join 'em...?

Will Google get bogged down with the mundane task of running a network and open the door for competitors in their back yard? How will the Big G behave if HovisNet customers develop a way to bypass Google in the search & advertising space...?

I wonder how Google is going to reconcile it's historic open infrastructure demands with ownership of spectrum and the need to build barriers to entry to protect their RoI?

A poacher turned gamekeeper is still a gamekeeper.

Let's not forget, Google is essentially an "advertising enablement" company that just so happens to have all the network and infrastructure assets that you mention.

IMHO, they do not seek to become a Telco, in any shape or form. However, their executive leadership is frustrated that the U.S. market is under-developed -- that's why they have decided to champion the wireless "open access" cause.

Google feels constrained by inept U.S. broadband service providers who want to maintain their control of the market, and yet the same BSPs clearly have no apparent plan of how they will develop the market to its full potential.

For all the reasons that you have uncovered at your events, and clearly articulated on this blog, the Google "intervention" was necessitated by the BSP's myopic vision of the world in which they operate.

Unlike the BSPs, Google realizes that a rising tide raises all ships in the fleet -- they see the U.S. market within the context of the greater Global Networked Economy. As the market collectively prospers, Google can enable more advertising related transactions.

In contrast the BSPs just don't seem to appreciate (or perhaps care) how their restrictive agenda inhibits the free-flow of eCommerce related activity in America -- and ultimately the creation of new business models.

Perhaps a better analogy for Google's role in the U.S. market is that of a Hospital Ship, not an Aircraft Carrier -- as you have suggested. Structural separation of wholesale and retail would provide a much needed sanctuary for the weary technology entrepreneurs of America.

How will the Big G behave if HovisNet customers develop a way to bypass Google in the search & advertising space...?

Wouldn't that just be the existing competition from other search engines (Yahoo! specifically)?

they do not seek to become a Telco, in any shape or form.

They already are; it's the infrastructure, stupid.

Good point Alex. How will HovisNet treat Yahoo!?!

Do Yahoo! get all the benefits without the cost of the license or the network? Is an open GoogleNet really going to enable Yahoo! to thrive and take share off Google?

Sure, a rising tide floats every boat, but if one of them is leaking water, this won't go on for ever ;-)

Jeremy and Alex, with all due respect, from where you sit in the UK I can understand and appreciate your perspective.

FYI, I am a Brit that has lived in the U.S. for more than 25 years, and I have worked for incumbent and competitive local exchange carriers. I have also participated in attempting to evolve telecom public policy.

That said, and given that backdrop of experience, I can tell you that the U.S. telecom sector is grossly under-performing and it's a direct result of the systematic attempts of a few selfish people who want to perpetuate 20th Century public policies that enables blatant restraint of trade business practices.

BTW, I am not naive regarding Google's influence over the Internet landscape, but they have given me no reason to be disgusted and appalled by the way they choose to grow their enterprise.

Yes, Google will likely be a driving force behind the bidding. But in this case, existing operators wield more power than Google, as the ongoing costs are best served by a company that can roll out and operate a new spectrum off existing network infrastructure. So the purchaser is overwhelmingly likely to be an existing operator--most likely a Tier 1 wireless service provider. It's a good move by the FCC to assume an incumbent operator will be able to bid more.

And why would the operators be tempted? Certainly the emergency services wholesale traffic will be tasty revenues. But also the open access revenue potential will now be given serious consideration....

If an existing operator wins the bid, it is likely to try to restrict or price contain the emergence of third parties content providers running their own virtual networks without a decree to mandate this. No open access is not that - it is the mandating upon the spectrum operator to allow unrestricted access to a network by third party devices. But when you think about this, the likely providers of the third party devices are likely to be the likes of Google, Microsoft and Dell who will want to have their devices access spectrum so they can sell or offer services almost independent of the host operator. This will make wholesale traffic a hot item!. The pricing for the third party virtual operation using open access devices will probably be determined by FCC wholesale pricing rules. This then sets a minimum return (or a max price) chargeable by spectrum owner to third parties. Again--score for the FCC as it puts wholesale very much back on the radar. Previously MVNO's have had limited success - the MVNO 2.0 enabled by Open access will be far more stable.

If the US marketplace follows European competition (price on wireless voice falls, and new services are slow), then the free market may drive existing wireless operators to offer spectrum access at wholesale rates to third parties in any case.

In summary, this move to include open access is unlikely to diminish the desire of operators to buy the spectrum and compete with Google's appetite for it, nor will it significantly damage the price the FCC will achieve. Tier 1 operators won't hand over the spectrum to Google without a fight. They lose everything is they do.

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