WSJ: Why AT&T Killed Google Voice

Earlier this month, Apple rejected an application for the iPhone called Google Voice. The uproar set off a chain of events—Google's CEO Eric Schmidt resigning from Apple's board, and the Federal Communications Commission (FCC) investigating wireless open access and handset exclusivity—that may finally end the 135-year-old Alexander Graham Bell era. It's about time.

With Google Voice, you have one Google phone number that callers use to reach you, and you pick up whichever phone—office, home or cellular—rings. You can screen calls, listen in before answering, record calls, read transcripts of your voicemails, and do free conference calls. Domestic calls and texting are free, and international calls to Europe are two cents a minute. In other words, a unified voice system, something a real phone company should have offered years ago.

 Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that's nothing—hence Google's proposal to offer voice calls for no cost and heap on features galore.

What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.

For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%. With customers unplugging home phones and using flat-rate Internet services for long-distance calls (again, voice is just data), AT&T's wireline operating income is down 36%. Even in the wireless segment, which grew 10% overall, per-customer voice revenue is down 7%.

Wireless data service is AT&T's only bright spot, up a whopping 26% per customer. How so? As any parent of teenagers knows, text messages are 20 cents each, or $5,000 per megabyte. After the first month and a $320 bill, we all pony up $10 a month for unlimited texting plans. Same for Internet access. With my iPhone, I pay $30 a month for unlimited data service (actually, one gigabyte per month). Is it worth that? The à la carte price for other not-so-smart phones is $5 per megabyte (one-thousandth of a gigabyte) per month. So we buy monthly plans. Margins in AT&T's Wireless segment are an embarrassingly high 25%.

The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don't have wired pipes, but by owning spectrum they do have a pipe and pricing power.

Aren't there phone competitors to knock down the price? Hardly. Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. That all gets passed along to you and me in the form of higher fees and friendly oligopolies that don't much compete on price. Google Voice is the new competition.

By the way, Apple also has a pipe—call it a virtual pipe—to customers. Its iTunes music service (now up to one-quarter of all music sales, according to NPD Market Research) works exclusively with iPods and iPhones. The new Palm Pre, another exclusive deal, this time by Verizon Wireless Sprint, tricked iTunes into thinking it was an iPod. Apple quickly changed its software to lock the Pre out, and one would expect Apple locking out any Google phone from using iTunes.

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that—see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?

So now the FCC and its new Chairman Julius Genachowski are getting involved. Usually this means a set of convoluted rules to make up for past errors in allocating scarce resources that—in the name of "fairness"—end up creating a new mess.

Some might say it is time to rethink our national communications policy. But even that's obsolete. I'd start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data. We need a national data policy, and here are four suggestions:

• End phone exclusivity. Any device should work on any network. Data flows freely.

• Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.

• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.

Technology doesn't wait around, so it's all going to happen anyway, but it will take longer under today's rules. A weak economy is not the time to stifle change.

Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don't need to file with the FCC.

And new features for apps like Google Voice are only limited by the imagination. Mother-in-law location alerts? Video messaging? Whatever. The FCC better not treat AT&T and Verizon like Citigroup, GM and the Post Office. Cellphone operators aren't too big to fail. Rather, the telecom sector is too important to be allowed to hold back the rest of us.

Comments

[Raf]

As always, very insightful and interesting analysis. My only question as a lay person is: Could the REAL reason our communications policy is lagging is one of national security? Ie the gov't doesn't have the ability to control/access that level of data or type of infrastructure. They barely have the ability to do it today so they want progress in the markets to match their budget and technology timeline. Just a thought.

[Ward]

I feel sure that the Bush administration was reluctant to deregulate the incumbents more for that reason. Perhaps with some merit although it strikes me as a bit like the toothpaste on the airplane. I wonder how Andy reconciles the ideas of the incumbents claim that the pipes or spectrum are their property with the notion that the property is in some way communal since it was built with monopoly money.

[Teleco]

Palm Pre has an exclusive with Sprint, not Verizon.

Congress banned exclusive municipal cable franchises in 1996.

[George R. Langworth]

I'm an avid reader and appreciate your point of view as always.
There are a number of services that are best managed for Quality-of-Service at the network level, rather than the application level.
Voice is "catch as catch can" when slithering through the Internet. It's best managed. I think the universal service theory that created these monopolies was implemented wrongly. Tax incentives should have built the national broadband network infrastructure, and value-added management as well as content could seek customers on this virtual broadband marketplace.
But any transition must confront the fact that there is an enormous amount of "widow's and orphan's" money in U.S. telcos equity and debt -- hardly funny money invested in all this infrastructure.

[Gary White]

???? "End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass."

Sir, that ended in the 1992 Telecom rewrite (and before that in many states)!

An otherwise, insightful blog

[Realist]

I didn't see any mention of the incredible capital investment made by each carrier to provide these huge pipes you seem to think should be free. I also don't see you point out that there are at least three or more ususally highly cutthroat competitors per market, most of whom paid through the nose for that spectrum you think should be free. Is it unamerican to make a profit on your investment? There is plenty of competition out there as well as plenty of innovation, just not what you want to see so you gripe. Unfortunately the real world gets in the way of the utopia you discuss. Maybe Obama should nationalize the telecom system in the US and all the taxpayers can subsidize entire network even more than they do right now.

[Michael Hickins]

Andy,
Your post makes good sense--and I'm glad someone else sees the connection. I posted this piece with what I think is a pretty clear smoking gun with AT&T fingerprints.
http://industry.bnet.com/technology/10002928/att-your-world-of-hurt-delivered/
Cheers,
Michael

[Roger Barnes]

You even edited out my very valid criticisms of your poorly-written article. Well done.

[Sam]

Gary White has a point. If Google wants unfettered freedom to market its services, it should build or buy its own wireless network and not get a free ride on someone else's. (They'll soon learn what it takes to maintain QoS in the mobile domain.) Alternatively, work out an equitable financial formula that will compensate the carrier and allow them a means to offer tiered pricing based on consumption. Bandwidth is not limitless, and data hogs should not be entitled to gobble it up to the detriment of other paying customers. The root of the problem is the flat pricing model for undifferentiated data services. It is not sustainable economically. So carriers must either offset their cost with advertising (the Google model) or charge a premium based on usage.

[James Snowden]

This whole line of argument flies in the face of logic. If it is true that AT&T killed the Google App, why is it allowed and running on the Blackberry Bold running on the AT&T network. There is clearly an agenda here. For some reason, there appears to be an orchestrated vendetta against AT&T that is not obvious. Could this be orchestrated by people who have a stake in seeing AT&T fail? Hmm I wonder.

For validation that the Google App runs on the AT&T network, visit this link....
http://gigaom.com/2009/07/28/google-voice-iphone/

[att]

Clearwire anyone?

[Mike Rogers]

Google Voice is the implementation of a technology I anticipated 3 years ago. With the growing digitization of cellular and other wide-area connections, and the trend toward packetised voice, I posited to my friends that the future of telephony would be a "Phone Feature Provider" who managed your number, features, messaging and billing, with their packets running over a variety of "Bit Transporters" who would simply deliver the packets. In this model, the "PFP" would execute roaming agreements with the transport providers, and present an integrated bill.
This would be the exact inverse of the old Telco model, where they charged you for your phone number and features, and "as a favor" integrated billing from the long distance providers which they permitted to connect to your line.
Of course, small upstarts could never hope to set up as "Phone Feature Providers", since the carriers would have no incentive to partner with them, but a BIG UPSTART like Google - disruptive technology - no wonder they're scared.

[David Boettger]

Regarding the suggestions, the situation can be improved dramatically using techniques along the lines of items 2 and 3 without the need for the government meddling implied by 1 and 4.

Spectrum ownership is one of the two or three primary means by which the wireless behemoths keep new competitors out of the market: They buy spectrum they don't need just so others can't have it, and comply with the letter of the FCC's "use it or lose it" requirement by lighting up a single channel in otherwise vacant spectrum. And the carriers years ago lobbied successfully to repeal the spectrum ownership caps that had enabled new market entrants and, thereby, fostered competition.

Similarly, the wireline carriers and cable companies fought tooth-and-nail against "equal access" legislation -- which would have permitted any carrier to provide service using the wires or cables that go into a home. The phone companies were forced to implement some amount of equal access at least for ADSL (broadband over phone lines), but, in practice, have made it insanely painful for competitors to get access to the wires. The cable companies, however, were completely successful in fending off equal access, which is why we have to pay for 60 channels of garbage just to see The Daily Show.

Fixing the problems identified here starts with fixing "last mile" (radio spectrum and wires/cables to the home) policy.

[Mark Katerberg]

This post was incredible. I am subscribing. Thank you for being sane.

[Dan]

I think some of your suggestions are incredibly unrealistic.

• End phone exclusivity. Any device should work on any network. Data flows freely.

There are clear technical reasons why this is unrealistic. The CDMA technology used in my Sprint phone is very different from the GSM used in phones used in this country and overseas. The cost of a high-end phone today is already very very high, to have to integrate a bunch of additional circuitry to handle multiple, completely different formats on different frequencies would add even more cost and size, and weight, and potentially power consumption. My phone will roam onto Verizon's network which uses the same CDMA as Sprint when Sprint is not available.

• Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.

Quite the contrary, even licensed services often interfere with each other unintentionally. Unlicensed services clearly interfere with each other, microwave ovens can interfere with WiFi or 2.4GHz cordless phones (2.4GHz phones can interfere with WiFi). Sharing the same spectrum among totally different multiple owners is a recipe for quite a bit of interference. You don't see the problem because interference no longer produces something that is obvious to you as interference, its just dropped data packets or momentary drop outs in your phone conversation, and you would simply blame that on poor coverage by your carrier. Interference is an incredibly difficult problem to deal with from a technical perspective.

• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

The exclusivity deals are long gone, and guess what, there's no competition. Just like there is no serious competition for home phone service. Why? Its an incredibly capital intensive process to build stuff out. If they deregulated electricity and natural gas distribution it would be a disaster, no one would come into that market, and rates would go through the roof. Also, TV channels are nothing like "voice pipes." The usable bandwidth of a phone line is a few kHz, whereas the usable bandwidth of a single cable channel (and there are many) are a few MHz. Coaxial cables have relatively speaking low attenuation and good shielding. From a technical perspective, they are one of the best bandwidth delivery mechanisms short of single mode fiber optic. What you object to is how they were being used 20 years ago. Now a days, there are being used in a much more efficient manner, with phone calls and data being passed through various channels. Also, Verizon is now rolling out fiber optic to the home (FIOS), but for the user it is expensive, and for Verizon its incredibly expensive. Again, major capital outlay.

• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.

Technically doable, yes... Realistically doable, no... If everyone can suck down data at 100Mbps, then the longhaul pipes upstream better be able to handle traffic increasing by 1 or 2 orders of magnitude. You're going to run into other bottlenecks, and again, it's going to cost money which no one wants to spend. Ignoring long distance capacity, the last mile link speed can be increased like you said, but again, its a matter of cost not "obsolete voice and video policy" holding it back.

The basic problem is that the businesses you are talking about are very capital intensive and so it is very difficult to compete in the sector. From a feature perspective capability is often driven by the technology. There are companies out there that exist to come up with new and innovative features (like Qualcomm). Handset manufacturers make money selling handsets, and their new handset better be better than their last one, and their competitor's last one. If they don't constantly come up with something new, they're in trouble.
Service providers on the other hand get a certain amount of recurring money by providing service. Adding new features doesn't necessarily bring in more subscribers, but it does cost them more money. They have more limited competition, and hence their objective is to set pricing to maximize their profits with feature cost and pricing going in as part of a calculation versus losing customers. Its really not the provider's fault, its just how capitalism works.

[Mike]

Interesting,

Seems to me in my research the only real technology which gets around all these exclusive blocking agreements is Cellular Over Internet Protocol, VOIP-COIP.com It simply puts a dial tone on any cell phone, no smart phone required, no SIM card swapping when traveling internationally, no optional cost for data plans, no hassle, clear calls and you can use it worldwide and call worldwide for a fraction of roaming fee costs. With VOIP-COIP.com you get home phone, office and wireless mobile for less than VOIP and any mobile plan individually.

[Raj]

Very insightful. The question that has been bugging me for a while is: How is Google offering free calls within US and Canada? From what I understand, telephone carriers, whether AT&T, Skype or Google Voice, will have to pay to complete calls to landlines and wireless. So, if you assume that the average user makes 10 calls a day and it costs half a cent for every call completion, it would still cost Google $1.5 a month. Am I missing something or is Google bypassing paying landline operators and wireless carriers somehow?