Too hot for iPhone

Why Google Voice is a huge threat to the wireless industry

Too hot for iPhoneApple has drawn a lot of attention lately for banning applications from its iPhone. There was the Me So Holy app (which let users paste their face on a picture of Jesus), the Hottest Girls app (featuring nude photos) and the disturbing Baby Shaker app (shake your phone to quiet a crying baby). But the latest app to get the boot has been the most controversial rejection yet: Google Voice. The decision, made last month, immediately drew the attention of the U.S. Federal Communications Commission (FCC), which demanded that Apple explain why the app was rejected. There were even whispers that iPhone’s exclusive U.S. carrier, AT&T, was behind the ban.

Why such a backlash? Because there’s a lot at stake. Google Voice is more than just another fun iPhone add-on. It could rock the very foundation of the traditional telecommunications landscape. By offering consumers the promise of a “Google number” for life, which replaces their existing home, business and cellphone numbers, Google Voice is a bold attempt by the Internet giant to wedge itself between consumers and their cellphone carriers. Once you subscribe, all your calls are routed through Google’s servers before they even reach the phone company, and you control which calls can reach you where. On top of that, the service offers free voice mail, a free voice mail transcription service—even free long distance. Letting Google park this app on the iPhone’s home screen, says Carmi Levy, an independent technology analyst, would be like “renting space in your business to someone else who then uses that opportunity to cut the legs out from under your business.”

Google Voice’s primary offering to consumers—a single, unchanging phone number—seems innocent enough at first. The service, which began with one million numbers and is being slowly rolled out by invitation only in the U.S. (it’s not yet available in Canada), allows users to take calls from their Google number on as many as six different existing phones. Users can even arrange to have calls from specific numbers sent to specific lines. That way, if a friend calls your Google number, it could be automatically routed to ring both your cell and home phone. If it’s your mom, it could ring your work line too. When calls go to voice mail, Google automatically transcribes them and sends you emails that can be stored and searched. “Think of it as a number and a bunch of features tied to you, not the device or location,” says Vincent Paquet, a senior product manager at Google, and a co-founder of GrandCentral, the company that originally developed the Google Voice technology before being bought up by Google in 2007. Best of all for users: Google Voice is completely free.

To use the service, people still need cellphones and cell plans, but with one fell swoop Google Voice has already sounded a death knell for many of the lucrative money-making features that were once the domain of traditional phone companies. Right now, those companies are charging as much as $9 a month just for basic voice mail. Even their ability to dictate long-distance phone charges could evaporate­. When calls are routed through a Google server, they all appear to be local, so you don’t have to pay long distance rates. Already, Google Voice is offering cheap international calling.

Even more worrisome for telecom players is the possibility that one day a tool like Google Voice will also let users make phone calls via the Internet, using smart phones connected to WiFi hot spots instead of the carriers’ own cellphone towers. That kind of technology, which completely bypasses the cellular networks—as well as their calling plans—already exists. Skype, a billion-dollar business, has been allowing its 400 million users to make low-cost phone calls over the Internet via computers for years, and a few months ago, it began offering the same service on smart phones. Analysts say it’s only a matter of time before hot-spot calling becomes widely available, further eating into telecom profits.

For now, Google is moving carefully to avoid setting off any alarms, emphasizing that it’s not out to compete with the phone companies. “Google Voice is not a phone service and it does not replace your phone service,” says Paquet. In fact, Google Voice could even generate higher call volumes on wireless systems, he says. But analysts suspect Google may be playing down the threat of the service to ease the fears of wireless carriers and to help it win a foothold in the mobile market.

To understand Google’s true goal, analysts say you simply need to look at what it already does so well: organizing information online and linking it to advertising. In this, the company is unrivalled. It already controls a third of the US$24-billion online advertising market and its latest quarterly results reported revenues of US$5.5 billion. The main reason Google is moving to cellphones is because that’s where the Internet is going. Google has to follow, or risk losing its core business. In just the past year, the number of people accessing the Internet over their cellphones has more than doubled, and Google’s mobile traffic alone has gone up fivefold since 2007. “For the first time ever, half of all new connections to the Internet will come from a phone in 2009,” says Shyam Sheth, a product manager at Google’s Waterloo, Ont., office, who develops mobile apps for things like the Gmail email service. Google believes that from here on in, the mobile phone will be most people’s primary entry point for the Web. “In the last year and half the world has changed completely,” Sheth says.

To stay relevant as its users go mobile, Google has already developed an operating system for cellphones called Android. But Google Voice, if it takes off in popularity, is the kind of service that could be “a gateway into all the other things they do so well on the Web,” says Jon Arnold, an independent telephony analyst and head of J Arnold & Associates. “Their concern is that their business model may not or cannot translate into the wireless world. That’s why voice is so important.”

Google may also see Google Voice as a way to help it perfect voice recognition technology, which is part of the service’s mail transcription service, says Arnold. Many expect this kind of technology will become the future of mobile search. It is, after all, a lot easier to ask your cellphone to find information as you walk down the street than it is to type requests on a tiny touch-screen keypad.

This suggests that Google is not really out to get the telecom companies, in that it doesn’t want to be another phone company. “Google doesn’t want to step on any of the carriers’ toes. It simply wants access to the platform so it can do its work,” says Levy. But the fight could still get ugly—and not just with telecom companies, either. There’s a nasty battle brewing with the smart-phone makers too. Apple, for instance, has carved out a comfortable niche with the iPhone and it’s jealously guarding its place. Apple explained to the FCC that the reason it rejected Google Voice is that, when installed on the iPhone, it displaced several of Apple’s own features, including its basic telephone and voice mail functions. “Apple spent a lot of time and effort developing this distinct and innovative way to seamlessly deliver core functionality of the iPhone,” it told the FCC.

But trying to fight off Google is a risky game. Google has two big competitive advantages: it’s popular and it’s free. If a smart phone manufacturer like Apple or a carrier like AT&T tries to block its apps, Google may simply focus on improving how they run on its own Android-based phones. And everyone agrees that without Google’s cool apps for things like mapping and email, the iPhone would be a less popular device. This is something that Apple’s rival RIM appears to have clued in to. It quickly approved the Google Voice app for its BlackBerries.

Already, in both the U.S. and Canada, the phone carriers have started to fight back by offering their own similar services like voice mail transcription and single numbers that ring on more than one line. But they charge between $5 and $10 a month for them. That sets up an interesting dynamic, says Levy. Carriers might not like Google Voice, but they can’t hold off forever the kinds of changes it represents. Their best option may be to try to work with the company, perhaps forming some kind of partnership that would allow them to share in Google’s profit in exchange for giving the company greater access to their networks.

In the end, Apple and the telecoms may have to compromise. In its submission to the FCC, Apple backtracked on its opposition to Google Voice, arguing that it never really banned the app from the iPhone, contrary to widespread reports. The company “continues to study it,” Apple wrote. AT&T chimed in that it had nothing to do with the rejection at all. Google, meanwhile, told the FCC it will “continue to work to bring our services to iPhone users.” The relationship Google has with its mobile rivals is best summed up as “frenemies,” says Levy. They might not like each other, but they may have no choice but to work together if they hope to succeed.

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