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Google Voice: Race to the Bottom for Telephony - or Something Else?

Just when you thought making phone calls couldn’t get any cheaper, along comes last week’s news from Google about their latest iteration of Google Voice. There have been several steps along the way for Google to get to this point, and there are a host of reasons why this news is of interest to service providers of all stripes. I often write about how certain technologies and disruptive forces change the business of being a service provider, and this is but the latest example.

Ever since Vonage came to market, residential carriers have been faced with declining revenues for landline service, which itself is quickly losing ground to wireless substitution. Then Skype came along and brought desktop VoIP to a whole new level of adoption. Along with that came a new value proposition for voice. Whereas Vonage was offering a lower cost monthly plan, Skype was offering free or near free voice, driving the price down to levels that no conventional service provider could sustain.

Google has its own take on voice, which is why this story should be of interest to service providers. Vonage is marketed primarily as a replacement service for POTS, making it a direct competitor to telcos. Nothing complicated there—it’s really just a price game, but telcos do have more options to bundle telephony with other things—and of course, even more so for cable operators.

Skype is primarily a Web-based IM/chat service, on top of which they do voice very well, and at low cost to subscribers. As popular as Skype is, their proprietary technology keeps them a bit inside their own sphere. They are still a major threat to telcos, but when positioned a bit differently, they can be a very good complement.

The latest news with Google, though, is something entirely different. Their calling service—Google Voice—is mainly an add-on to Gmail, and works a lot like Skype. As such, it’s not a pure telephony service like Vonage, and it’s not really built off IM/chat like Skype; it’s built around email. Of course, Google has all these other tools, but email is ubiquitous, and Google has been successful building a strong user base here. Gmail binds the user more deeply than IM/chat, making it a great platform for both business and personal usage. I’m not alone in noticing these days that when you get a personal email address as a backup for someone you’re working with, more often than not it’s a Gmail address.

Google already has GTalk, which supports free online calls between Google users—and is comparable to the free calling Skype users have among themselves. Google Voice is much bolder and is their answer to Skype Out/In, and gives Gmail users a PSTN interface to make calls to the rest of the world. In the short term, this may take a bite out of Skype in that Google Voice calls within the U.S. and Canada will be free until year end (but maybe longer). Longer term - along with Skype - Google Voice is more of a threat to telcos as they accelerate the race to the bottom, bringing the value of a voice call pretty much down to where email is.

Why are they doing this?

In my view, it’s not to put the telcos out of business. They’re offering domestic PSTN calls for free, in the hopes of subsidizing them by charging two cents a minute for international calls. Fair enough, but I don’t see that happening, and Google really doesn’t need to make money with this service. Of course, free beats paid any day—so long as the quality is comparable—and I see them making the voice pie bigger, much the way Skype has. The key for me is more about how Google Voice interacts with Gmail. By escalating an email message to a free phone call, users will stay longer in the Google environment, and the ability to transcribe voicemail will certainly appeal to some.

However, I think there’s more to the story. Am mentioned, Google is coming from a different place than Skype, who depends almost solely on those Skype In/Out minutes for revenues. VoIP service is not expensive to provide, and Google has spent relatively little to get in the game. I would contend that the vast majority of their Google Voice capability comes from three small acquisitions that cost them maybe $150 million. When you think about the annual Capex budget of any incumbent, this really is pocket change. Going back to 2007, they acquired GrandCentral; last year they acquired Gizmo5, and a few months ago, they added Global IP Solutions. Collectively these companies have given them the pieces to offer a very appealing VoIP-to-PSTN service globally, and if they never make a penny from it, so be it.

As mentioned, free beats paid, and there’s no better incentive to get people to use your service. Look how long Vonage has been around, and they barely have two million subscribers. Unlike Skype, Google doesn’t have to build its user base from scratch, and it won’t take long for them to start logging millions of calls. Just consider what happens when school resumes next month, and students will be falling over each other to make free calls home from those super-retro red UK phone booths that will be popping up on college campuses (and solar powered to boot).

As such, Google Voice will be one more reason to cut the cord, and the race to zero just picked up some speed. Thanks to Gizmo5, Google Voice is SIP-based and works nicely on both softphones and hand-held endpoints. Short term, there will be some cannibalization with Android by competing with voice from data plans, but Google will figure out how to make all these pieces fit. This is actually where the GIPS acquisition comes in, with their ability to support both voice and video over mobile devices, which in turn can make Google Voice a great add-on for businesses.

While Google Voice is primarily an outbound telephony service, I think they’ll be able to take free calling beyond the desktop, and that’s really what service providers need to be thinking about. Free on the desktop is one thing, but when you push out to mobile devices, things get more complicated. If this isn’t enough, I think there’s a separate agenda at work here, and it’s something I’ve commented about elsewhere for quite some time.

Google is really interested in the voice business, not to make life difficult to telcos, but as a source of raw material—snippets from voicemail and live calls, if you will—that can be harvested for search. I’m not sure about the regulatory issues around this—and apparently Google has been vague here—but certainly for voicemail, free calls will generate a huge cache of “content” that they can apply speech recognition algorithms to and build an archive of audio-based search prompts. Once those audio cues are transcribed into text, they can become hugely valuable for the next frontier—mobile search. This sounds a bit on the dark side (“do no evil” as we’re told), but it’s a far better way to monetize voice than charging a few cents a minute or a few dollars a month. When viewed from this lens, Google Voice is a very different business than Skype, Vonage, or any telco for that matter. Disruption comes in many forms, and we’re seeing a new one with Google Voice. Don’t let the race to zero fool you; I think it’s just a side-show compared to what Google really has in mind.

This article of mine originally ran today on my Service Provider Views column on TMCnet.

By Jon Arnold, Principal, J Arnold & Associates

Jon is also co-founder of Intelligent Communications Partners that focuses on the smart grid space.

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Interesting take on the strategic direction of Google Voice Christopher Parente  –  Sep 7, 2010 6:16 PM

Good post Jon, thanks for that view. Disruption is right. Haven’t we seen this movie before? Nothing changed in mobile for years until the iPhone, designed by a company outside the telco space. Will the same be true for UC?

Whether or not Google means to hurt telcos, the message is the same—WAKE UP! Yes I understand the regulatory differences, but when will the incumbents innovate? They complain about being big dumb pipes, then ... act like big dumb pipes. With the possible exception of Verizon, looking to cut a deal with Google.

OK I’ve made some sweeping statements—lets see if this spurs some comments for you.

Christopher's comment Jon Arnold  –  Sep 8, 2010 2:22 AM

Thanks for the good words - glad you enjoyed the post and are of a similar mind.

I agree - let’s see what others have to say. Enough people have read this post by now - don’t be shy folks - we really do want to hear from you!

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