Google and Microsoft in Telephony: Anticipating Disruptive Change

Rob Enderle

The Wall Street Journal got folks excited about the Google phone this week and Microsoft has been in the news regarding its new management server for cell phones and its unified communications products. Both companies seem to be suddenly in the phone business and while they are on different paths, for now, they showcase an interest in phones that actually goes back some time.

 

Let's take a look at why the phone is suddenly important.

 

The Phone Is the Next PC

 

We spend most of our time browsing the Web and doing text-based communication on our PCs, but this is clearly changing, particularly for the youngest of us. Texting is a common practice and with the advent of the first really successful consumer smartphone, the iPhone, we suddenly have traction in the consumer segment. This segment had largely avoided smartphones before the iPhone launched and even though the iPhone was restrictively expensive, folks lined up for blocks to become the first to get one.

 

RIM (Research in Motion) has been on fire on the professional side of the smartphone segment and delivered impressive growth quarter over quarter. People are getting more used to doing things with their phones that used to require laptop computers. This elevates the smartphone to the position of contender for what has been the fastest-growing segment in the PC space, the laptop.


 

On the roadmap is a product called the UMPC, or ultra mobile personal computer. This concept, which will emerge as a blend of a PC and a smartphone in some instances, promises a future when many of us may never use a PC, and most of us may seldom use our PCs, while all favor future smartphones.

 

Microsoft's Strategy

 

For Microsoft, the strategy is to increasingly treat the phone as a full-on platform for development and advancement. Its most recent offerings include a management server, which can do things many of us wish we could do on lost laptop computers, like remotely wipe the drive if the machine is stolen, and a convergence offering that would tie Microsoft's platforms into existing PBX systems. For Microsoft, this is the typical embrace and extend strategy applied to phones and phone services. It just filed an interesting patent that suggests a vastly more interesting phone may be coming based on future technology.

 

If successful, Microsoft will be well penetrated both on cell phones and across the ecosystem that surrounds them, resulting in a strong hedge for the company should, as is likely, PC use fall off in favor of advanced communications devices.

 

In addition, Microsoft has assured s significant spot in the new communications-centric world and remains both very powerful and financially secure.

 

Next page: Google's Strategy

 

Google's Strategy

 

Google's strategy is vastly more risky. It plans to jump into the global cell phone market and basically take over control of it by becoming the supplier of free phones to the masses. Google's strategy is more risky than Microsoft's but, if it is successful, it's a game changer and could subordinate all other players, including Microsoft.

 

What happens is Google becomes a super customer. Aggregating what may be the largest group of cell phone users under its model grants it massive negotiation power, not to mention an even more legendary revenue stream. If successful, it will be the biggest communications customer in the world, which means when it says jump, if someone doesn't, that someone can kiss their company goodbye even if that someone is as powerful as AT&T. This is because Google, in theory, can move customers to another carrier en masse and potentially crater the revenue associated with that customer. This could easily go well beyond cell phone service, particularly in blended cell phone/DSL/entertainment/landline accounts.

 

Unless someone else figures out how to do this as well or better, Google ends up as one of the most powerful companies ever. What makes this more risky than Microsoft's path is that some of the large players already see this risk and are responding to it before Google can acquire the customer base it needs to make this all work. However, carriers are not known for moving quickly. Microsoft is out of position to effectively counter Google's move alone. This is going to be a horse race where Google, right now, does have the fastest horse. We'll just see if it can also go the distance.

 

Wrapping Up: Looking for Disruptive Change

 

Both Microsoft and Google are attempting to change the telecommunications game. Microsoft's is more of an evolutionary move that has taken decades to mature. Google's is revolutionary and can be measured in months. Both could be successful, but under that scenario, Microsoft is still effectively subordinated to Google's model because Google is going after the revenue source while Microsoft is going after its traditional technology leadership position -- this isn't about technology, it's about building power directly and Google is playing this game very well (at least so far).

 

The end result is that five years from now, our phone services and capabilities will be boosted significantly. Likely, what we pay for services from cell phone to wired data will go down even more significantly. Initially, that is very attractive, but if you remember that power corrupts and that this will aggregate an unprecedented amount of power in Google, you have to both hope that Google will behave better than other firms have done with a fraction of this power and anticipate that it probably won't.

 

In any case, at least for the short term, we are due for some impressive changes. Given that we can't do much about the risk, we might as well kick back and enjoy the benefits. Fortunately, this will develop over time and, with a little luck, we should be able to figure out a way to protect our corporations from any possible fallout resulting from this change if we stay alert. Here is hoping we all stay alert.



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