What Are The Implications Of Google Inc’s Entry Into The Wireless Industry?

What Are The Implications Of Google Inc’s Entry Into The Wireless Industry?

Google’s entry into the highly competitive wireless market will further put pressure on industry leaders AT&T and Verizon, but might help Sprint improve subscriber count

By Usman Farooq on Jan 22, 2015 at 6:09 am EST

Google Inc (NASDAQ:GOOG) has taken it upon itself to disrupt the telecom industry. After launching its fiber to premises broadband services in the wireline market, the Internet giant is looking to foray into the wireless arena. It has been in talks with T-Mobile US Inc (NYSE:TMUS) and Sprint Corporation (NYSE:S), and will start providing wireless service as their Mobile Virtual Network Operator (MVNO), according to The Information.

Sprint and T-Mobile stocks rallied following the news. Sprint stock rose 5.5% to close at $4.39 yesterday, while T-Mobile stock rose 1.83% to close at $30.08. Meanwhile, Google stock rallied 2.05% to close at $520.39.

Google plans to provide voice and data bundles, as part of its Project Nova, which is being headed by longtime Google exec Nick Fox. The company has been working on the plans since last year, and is expected to launch the wireless service sometime this year. The Project Nova is part of its broader attempt to expand Internet coverage in the US, which would in turn increase the volume of its search engine traffic and allow more people to stream videos on YouTube.

It is still not known whether Google plans to launch the service nationwide, or opt for a more phased out launch. However, it will likely launch its wireless service in few cities, just like it did with Google Fiber.

Entering the wireless market as an MVNO is more feasible for a new entrant, as they do not have to invest billions of dollars in laying out their network. Google’s earlier foray into the broadband market has not been so successful, and the company has decided to put the expansion of its Google Fiber on hold for the time being. While the exact reason for the delay is unknown, it is believed that the search engine giant may have been overly optimistic while making the decision to roll out fiber in 34 cities.

But an MVNO partnership is less likely to face similar problems, since Google will depend on Sprint and T-Mobile’s networks to provide the wireless service. However, it will still be responsible for marketing and customer services.

Implications For The Wireless Industry

Google has a history of being a disruptive force in any industry that it enters, and will therefore create serious repercussions in the wireless market, which is already in the midst of an aggressive price war.

According to The Information, Google wants to be creative with the pricing of its services, and has been experimenting with “communication apps” for the purpose. It already allows users to make low-priced international calls using its Google Voice app.

This may allow Google to have lower user acquisition cost as compared to other players in the wireless industry. But the industry is already struggling with a price war, which is weighing in on the margins of industry giants AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). While industry experts expected the price wars to subside in the second half of 2015, Google’s entry into the market may completely change its dynamics.

Google may also be interested in offering wireless service using the unlicensed spectrum bands, and may use them in conjunction with Wi-Fi networks.

The Wall Street Journal quoted Jan Dawson, analyst at Jackdaw Research, as saying: “It’s probably an attempt to put pressure on the carriers to improve their own products by showing new ways of offering service,” and, “When Google enters existing markets it tries to do things differently, rather than just doing something slightly better or cheaper.”

Meanwhile, T-Mobile and Sprint are already known for slashing prices; with T-Mobile especially being known for making waves in the industry with its eccentric Un-carrier moves. So it will be interesting to see if Google undercuts their pricing, while using their network to provide services to its users.

Furthermore, the rising cost of spectrum has also been a problem for wireless carriers. While both Sprint and T-Mobile have been expanding their network, they still lack in coverage, compared to bigger players AT&T and Verizon. The smaller carriers, especially T-Mobile, are likely to have been outbid by Verizon and AT&T in the ongoing spectrum auction; and with the growing need for wireless spectrum, they may have problems handling the large volumes of data if Google’s wireless service takes up.

Citing a source close to the matter, the Wall Street Journal reported that Sprint may be “putting a volume trigger into the contract that would allow the deal to be renegotiated if Google’s customer base swells”.

While Google is being seen as a disruptive force, it may be a blessing in disguise for T-Mobile, and especially Sprint. Sprint has been losing wireless subscribers for the past few years. Even though CEO Marcelo Claure may have brought life back to the struggling carrier, it still has a long way to go.

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