“Google Phone” – a new front in Net Neutrality?
It’s fairly well understood that Google’s idea of “Net Neutrality” is to view the telco as a “dumb pipe” and nothing more. Looking over the barrage of reports of the “Google Phone” that have come out over the last few days, I have come to realize that most analysts are completely blinded by the device itself, and do not see the underlying logic in the strategy. Aside from any technological innovation in the device, aside from any privacy concerns one might have with it, what’s really going on here is that Google is trying to expand their vision of Net Neutrality beyond the basic ISP and into the world of cell phones.
Right now, the cell carriers control the entire user experience, from being able to cut off certain applications (like AT&T can with the iPhone), provisioning other applications (Verizon’s VCAST comes to mind), telling the handset maker what kind of UI it should have (Verizon phones again), what Bluetooth profiles to support, and more. Part of this equation is phone exclusivity. A phone is only sold through one carrier usually. The carrier subsidises the phone, and in exchange for taking the up-front loss, locks a customer in to a 2 year contract where they know they’ll get the subsidy back. Even though the customer is paying a fortune for cell phone service, they don’t care, because otherwise they couldn’t afford the up-front phone cost. I know, earlier this year I had to buy a phone a “full retail price” (I lost the phone I had bought a month after I got it), and I was flabbergasted at the prices of handsets. $100 is the basic minimum for the garbage phone that they give away for free, $300 is the base price to get a phone that you won’t throw out the car window on purpose. How many teenagers, college kids… heck, anyone who isn’t well into “middle class” do you know that can spend $300 on a phone? Even if you are solidly “middle class”, $300 phones are a real deterrent from giving one to your spouse and each of your three kids, that’s $1,500 in phones. Not happening. And this is why the current system works the way it does.
Google is looking to subvert this system with the “Google Phone”. If you read the news reports carefully, you’ll see an interesting tidbit about the sales model. Instead of giving an exclusive contract to a carrier, the carrier subsidizing the phone, and locking the customers into a contract, Google is going with a more European/Asian model. They are planning on selling the unlocked phone directly, and at the time of checkout, pointing the customer to a choice of carriers. Right now, it looks like carriers would be offering discounted plans, to compensate for not having to subsidize the phone. An alternative that I could see as well, would be for the carrier to still subsidize the phone. Regardless, what Google is clearly doing, is trying to shift the balance of power. They controlled the development of the Google Phone without input from carriers. In previous Android phones, the carriers did the work with the handset folks and consulted with Google. This time around, Google did it themselves, in association with HTC. So the phone does not have the carrier’s interests baked into the design (just Google’s, and presumably the customer’s). And along the same lines, the phone is divorced from carrier-specific technologies and features. Is this a new idea? Hardly. It’s the way cell markets work in Europe and Asia. Even in the US, you can buy an unlocked phone to use on the carrier of your choice, but it is too expensive for all but the wealthiest to consider it a viable option (think: $700 phones like the Nokia N97). This is a unique proposition because the “Google Phone” already looks to be a “crave phone” and it’s from a vendor that is currently picking up a lot of momentum in the space.
By offering a choice of carriers, Google is basically saying: “the cell carrier is a ‘dumb pipe’. The only factors left in your choice of carrier are customer service, price, and coverage. You no longer pick a carrier based on the phones they offer (AT&T and the iPhone benefit from this, Verizon usually suffers for it), you pick a phone that you want and then the carriers compete with each other to get your business based on their ability to be a good ‘dumb pipe’.” It’s an interesting idea, and it is one that I fully support.
Does this mean that I am suddenly in favor of the current Net Neutrality legislation? No, because the two ideas are hardly the same. But at the same time, by seperating the phone from the carrier, Google can reinforce in peoples’ minds the idea of a “dumb pipe” cell carrier, which is important in their push on Net Neutrality.
J.Ja
You made some great points that people won’t pay $300+ up front for a phone, but why would people suddenly rush to pay $300+ for a Google phone? People have the option of buying unlocked phones today and they can even use cheaper pay-as-you-go service plans, but they’re not doing it. What would change?
Also some clarification: Both AT&T and Apple have said that Apple is the one that decided to block the Google Phone Application, so why do people keep saying AT&T blocked Google Phone? Besides, at no time was Google Phone (the web version) blocked by Apple or AT&T. It was the Google Phone Application that Apple found objectionable since it drastically replaced Apple’s standard functionality.
I think that people will be more willing to buy the “Google Phone” for three reasons:
1. It looks like the carriers will be offering cheaper service plans to offset the price, kind of a back door subsidy.
2. I would not be surprised if Google convinces carriers to kick in, say, $100 or $200 towards the phone.
3. Google could subsidize the phone themselves, and make a lot of it up in ad revenue. Perhaps make that optional?
Basically, Google has a lot of options to make the phone cheaper to the end user one way or the other.
Regarding the issue around AT&T, the iPhone, and Google Voice, note that I never said “Google Voice”. AT&T can block any app they want, or any traffic they want. Apple can block any app they want. You are right that in the case of Google Voice, no one blocked the traffic, just the app. But it’s definitely in the realm of the possible as I understand it. I would imagine that the iPhone data plan has a TOS not dissimilar to what a consumer-grade ISP’s would look like too, filled with all sorts of things that they can shut you down for if they want, like acting as a server, sending spam, etc.
J.Ja
I’ve got an unlocked Nokia e66, bought used on eBay for $110, to replace an unlocked RAZR that I bought used on eBay for $50, three years ago (it flunked the washing machine endurance test). My pay-as-you-go plan has cost me a total of $120 over the last three years (it has to be topped off every year to keep the minutes from expiring, or I’d still be on my first hundred dollar credit). It’s worked very well for me, except now that I have a smart phone, I’d really love a data plan, which I can’t get with pay-as-you-go. Wifi mitigates some of that, but it would still be nice. Not fifty bucks a month nice, but nice.
I do wish they’d permit Google Voice on the pay-as-you-go phones. What do they care if my voicemail gets stored on somebody else’s system?
@Justin James
The only business reason that a carrier would give you a subsidy is if you committed to a 2-year contract or at least some kind of contract. But the only way to enforce a contract is the early termination fee (ETF). Only way to justify an ETF is if the phone company subsidized your phone.
So at the end of the day, this still doesn’t look too different than any other subsidy other than the fact that you might have 2 GSM networks (AT&T and T-Mobile) that you can choose from.
The current subsidy system is effectively a cell phone loan. Consumers get a fancy $600 phone for $200 up-front in exchange for committing to a 2-year contract. This business model is successful because this is what most consumers want. People like having a fancy phone without paying much up front.
@Justin James
“AT&T can block any app they want, or any traffic they want. Apple can block any app they want.”
AT&T has ToS restrictions against applications that bring down the network. We’re talking applications with high duration and high packet-per-second rates. They also have ToS restrictions against tethering on their $30/month data plan, but if the new FCC NPRM regulations outlaw these restrictions (which they seem to do in current draft state), then the only option left for consumers would be the $60/month data plans that do include tethering.
George, those that are open to paying full price generally don’t, because they still pay the same monthly price as those that got a subsidized phone.
Think about, if I pay full price for a Hero on Sprint, I get no discount on my monthly plan and I can’t take that phone to another carrier either, so I’m effectively locked into Sprint either way.
But I will admit that you’re correct that most wouldn’t pay up front, even if the MRC was discounted.
It’s not just the phone companies fault. American consumers are generally dumb when it comes to cell phone plans. I’m constantly amazed at the things they’ll put up with. I’ve seen a 10% fee charged for paying cash, and the consumers continue to do it, even though they could save that fee by making a small change (buy a gift card and then pay online…and there are computers where they could do that in the store).
@notgonnatellya
Same is true of a lot of things, and businesses cater to the majority of their customers. When you buy a hard drive, you’re forced to pay a few extra dollars for an OEM copy of Acronis true image. Those of us who use it benefit from everyone else chipping in, most never benefit.
Buy a computer, and Windows comes with it even if you want to install Linux and have no plan to install Windows.
But a DVD drive and it comes with an OEM copy of some DVD movie playback software.
The point is that a lot of things are bundled in this world.
“American consumers are generally dumb when it comes to cell phone plans.”
Who is to say what’s dumb and what’s not dumb? People like the predictability and convenience and they’re willing to pay for it. Why is it dumb? People waste a lot more money leaving their lights on and wasting power. A lot of people spend $400 a month on heating or cooling for winter or summer while I spend about $100 per month. But I have to pay for other things that offset this.
Can I just jump in and say that I do not believe in the concept of “neutrality” in any shape or form. Perhaps the want to give the impression of “neutrality” but in reality they will hope to expand the number of people who use the Google Phone and also the amount of money that they will pay as well as limiting the costs to the provider. Profit Maximisation is the bye word.
If you’re paying $1200/year for a phone (made up number) instead of 600, because one month out of the year you’ll pay more than the MRC for overage, that’s dumb. It’s not a trade off, it’s an inability to do basic math.
I’m not sure I understand your other examples. I’ve never gotten software with an OEM HD, and I’ve only gotten software with 2 optical drives. One I paid for (first drive I bought) and the other came with a replacement HD-DVD/BD drive last year, but that was either a gift from, or a mistake made by, Newegg. I definitely didn’t pay for the OEM power DVD software (which actually plays back 5.1).
@notgonnatellya
That’s your problem, you made up a number. Nobody forces you to pay $1200 a year for phone/data service if you buy an unlocked phone, there is no contractual obligation. There are plenty of pay-go services that are between $0.10 to $0.20 per minute with no contractual obligations. You can buy pre-paid data as well without a contract. The key point is that you can go and buy one of those expensive plans if you like, but you’re not forced to and you have other cheaper options.
The software with OEM hard drives doesn’t ship on media, but you’ve already paid for it and you can download it from the manufacturer’s website. You’ve already paid for the OEM license.
I haven’t looked at the Pay-As-You-Go pricing, but I’d be sure that for most folks I know with BlackBerries (they love to hook ‘em up to Twitter and Facebook for constant feeds all day long), the $99/month unlimited plans are a cheaper option. Most of the folks I know who do the PaYG phone route have their phones disconnected half the time. I remember dating a girl who did that, I bought her a phone card for $40, and at 40 cents/minute (or whatever it was), we burned through it in a day or two, just chatting.
J.Ja
@Justin James
There are pay-go options that are one quarter the rate that you cite. Of course that assumes you buy in blocks of $100.
If someone is buying in blocks of $100, and need that much time, I think the $99 unlimited plans are a better buy.
J.Ja
Justin,
This is one of your finest pieces. You have written and distilled the essence of what is at issue here in the U.S: Telcos have ‘controlled’ the Wireless cellphone market and unfortunately it has been done at the customers’ expense.
I own a Nokia N95 and although it was pricey at the time, it fit with my view to what customers should have unfettered access. It still, although 2 years old, has many many features that just work that the popular iphone does not support to date.
You are correct in observing that for all intents and purposes Europe and Asia are far more ‘advanced’ and ‘open’ in what customers can or cannot do with their cell phones or smartphones.
Nokia’s philosophy for the N series smartphones has been: Open to Anything.
People at times ‘kick around’ Google for various reasons but underlying it all, their is a ‘philosophical strong undercurrent’ not seen on the surface but is present in all that they do, and it is centric to the internet user: providing genuinely useful services to society with no impediments.
Thanks for highlighting this very important event.
Well done Justin!
–Dietrich
@Justin James
For people who don’t need unlimited calling, $99/month unlimited plan is not a great deal. $100 per 3, or 6, or 12 month on a pay-as-you-go plan works a lot better. If you talk endlessly on the phone per month, the unlimited monthly plan makes a lot of sense. But my wife uses maybe 100 minutes per month on the cell phone. I have an unlimited $24/month VoIP plan for my land line and she uses that most of the time.
Agreed, it all depends on the usage. Another solution is to get a phone on the same network. My wife makes 95% of her calls to other Verizon customers, which saves a TON of minutes.
J.Ja
@George Ou
Thanks Dietrich!
You are right about Google having an underlying philosophy above and beyond “making money”. There’s a whole post or two in my about that subject. Beleive it or not, I used to LOVE Google. I was using Google so long ago, you could still pay with a check on a lot of Web sites. I used to tell everyone about Google. Many of the people I knew from those years got switched on to Google by me. In some ways, my attitude towards them is more that of a jilted lover, or someone who discovered that their favorite athelete has been taking steroids, and freely I admit that I allow my personal feelings to color my analysis of them (true for anyone, but I admit it
).
Maybe I’ll write about this topic tonight, because I think that it is an important one to understand. It’s much more complex than where or not “Google is evil”, that’s for sure!
J.Ja
@Justin James
“You are right about Google having an underlying philosophy above and beyond “making money”.”
Their actions certainly don’t say this. If anything, their actions have consistently said money first and philosophy second. When Google was criticized for laying off workers and said that those workers can find other work. When Google’s child care expenses were too high, they wanted to raise it thousands of dollars per month. When it came time to being responsible about the environment, they bought the world’s biggest private jet. When it came time to take a stand in China, they bent to the will of the communists.
@George Ou
Google ‘bent’ like many growing trees that live to become tall.
Google’s internal matters aren’t relevant here.
They bought a private jet big enough to accommodate their needs because ‘they can’.
Lets get rid of all of the jets, mmkay? And there would still be a host of environmental problems that are being addressed.
Try not to nitpick.
@Dietrich Schmitz
Typo:
“Lets get rid of all of the jets, mmkay? And there would still be a host of environmental problems that are[not] being addressed.”
When I was a kid, I worked at Staples while MSN was running it’s three hundred dollars off the price of a new computer if you sign up for two years of MSN dial up. Those deals died in no small part because the service stank (in no small part because the customer base was locked in for two years). I don’t see why that can’t happen with cell phones. Operation Chokehold may be a joke, but there are plenty of people who are really angry at their cell service (in particular anyone who’s used a phone in almost any other country). It’s easy to see how popular a big dumb pipe could be. What is Sprint doing (besides dying) that it couldn’t try this model?
There are multiple “philosophies of Google” at play. One of them, is a very liberal, “beyond progressive” view of the relationship between the company and its employees and society at large. That’s the Google that talks about environmental stewardship, tries to provide top quality, free child care, lets pets come into the office (I think that’s one of their polices, at least), has bikes to get around campus (again, I may be mistaken on this one), and in general, reminds one of a Suburu ad combined with a PETA ad. This is the same philosophy that gets sold out on a regular basis, when it is economically unfeasable (like the child care) or simply inconvenient to the head honchos (the corporate jet).
There’s another philosophy underneath Google though, and that’s the one which Dietrich alluded to, and it is *central* to their financial health. When you see the edges of it, it feels very cynical, like their stance on Net Neutrality. Their approach to that topic, while working well with their principles, also “just happens” to dovetail in with their business strategy very well while punishing their competitors. Ditto for their approach to open source; many FOSS advocates are rather furious with Google for being quite probably the largest single deployment of open source on the planet, but so few (relatively speaking) of their internal improvements to things like Linux, Python, etc. ever make it back into the GPL pool, because it is not necessary.
There’s a chicken/egg situation here… does Google hold this view of the world because it is beneficial to them, and “keeps the power base energized” like it would in politics? Or does it truly shape their policies, but bend when it is financially better to bend? To be honest, I think that a core group of people, notably Brin and Page really, truly try to adhere to these principles, and it’s the Schmidt gang that couldn’t care less about it, because those guys are business people. Brin and Page really are “nerds’ nerds”, and fit right into that culture, and I beleive that they really do fit the political stereotype of West Coast geeks to a T.
J.Ja
@George Ou
George, I never said anyone was twisting their arm. I said, wireless customers are dumb.
However, the idea that buying a phone outright gives you freedom is misleading. Most carriers will not let you activate your old sprint phone on their network. If you go with a prepaid plan and you decide you don’t like the service, you’re stuck with a phone you can’t use somewhere else.
And
@notgonnatellya
Why are people “dumb” just because they don’t subscribe to your idea of what’s good? Most people don’t subscribe to my philosophy of personal computer and they don’t build their own computers like I do. Does that mean they’re “dumb”? I don’t think so; I think people have better things to do with their time.
You can take your old phones to different carriers if the phone is unlocked. If the carrier won’t do it for you, there are alternative ways to do it.
@Justin James
“I think that a core group of people, notably Brin and Page really, truly try to adhere to these principles, and it’s the Schmidt gang that couldn’t care less about it,”
Are you sure about that? http://online.wsj.com/public/article/SB115222788536400097-i72SXBBTMX_EPvtfDIn9uNjtiss_20070707.html?mod=blogs Sure doesn’t sound like Bring and Page are running on “principles” when it comes to the environment.
You’re right that Google’s position on Net Neutrality is both self serving and harmful to Google’s potential rising competitors. http://www.digitalsociety.org/2009/11/fcc-nprm-ban-on-paid-peering-harms-new-innovators/
You didn’t follow my post 100%. When I was referring to “these principles” it meant the ones from the paragraph before (the stuff like Net Neutrality), not the ones from the first paragraph, which I clearly labelled as “disposable” and called out the environment and the plane specifically.
J.Ja
First off, a disclaimer: I work for a big wireless carrier, with most of my experience in RF performance engineering (ETL, data warehousing, reporting, etc). Take this as either “I’m biased” or “I know what is going on in the inside”.
When you have a problem with your mobile phone service where do you go? To the service provider. The vast majority of the problems customers encountered with the service is related to the phone, with the service provider being the first (and second) layer of support for another companies product. (note: obviously not all problems are the phone, but the problems that cause a customer to call into a service department).
Beyond the typical “cool factor” for a phone being in the providers offerings, there is the “quality” issue. Any phone that shows up on the shelf to be sold has gone through the carriers own testing, both in lab conditions, and in the field by a testing group using the phone. A lot of phones never make it to the shelf. You might think that it’s an easy thing to just “slap a phone” together, and I would hope that it is, but when it comes down to it, apparently its harder than it seems.
Now, what happens when you have a phone untested/unsupported with a carrier? You split the support provisioning into two. Even worse you probably increase the support problems the customer experiences. What happens when you have 2 different vendors that have to work together providing a service? They generally blame each other’s equipment, software, etc.
Now who do you blame when a problem exists? Customers always blame the service, even when it’s not the service that is the problem. Add to that the idea of law suits when a service provider tells a customer that “phone X” is a poor product because of all the problems with it?
This is the world you are advocating by your blanket support of “net neutrality” in the wireless/mobility network.
@DEK46656
Yeah, what you’re talking about isn’t too different from what we have now with home computers and consumer broadband, in terms of “you bring the equipment, we bring the connection”. You are right that it is fairly sloppy in terms of support. You have a problem and call the carrier, they claim that you have a virus on your PC and need to clean it off first (I love how the ISP always says that I have a “virus” based on the fact that my Internet connection is down…). Then they give you the “reset the equipment” runaround, followed by the obnoxious “plug the PC directly into the modem” trick. Eventually, after you’ve spent 3 hours proving that none of your equipment is faulty, they spend 30 seconds running a DOCIS query and finding out that your modem is faulty, or they finally realize that there is an area-wide outtage.
Yeah, that’s not a scenario that is particularly great, and I agree that equipment is all too often the issue with poor cell phone service. I’ve had some phones slowly lose the ability to make clear calls, I’ve had phones that never made good calls, I’ve had phones that made good calls but their Bluetooth radios were dying, which gave the impression of poor call quality when using a BT headset, and so on.
On the one hand, divorcing the phone from the carrier would hurt even more, since you wouldn’t be able to bully the carrier into giving you a new phone at “new contract price” every 9 months like some folks do, because the calls stink. On the other hand, customer service would become much, much more important. It seems like Verizon is the only wireless carrier who cares about providing that right now.
J.Ja
@Justin James
I don’t have the numbers, but what percentage of DSL “fixes” occur when the customer does follow the directions (reset the modem, direct connect to the PC, etc)? I’m of the opinion that it is very high; I’ll confess that I was fixed by one of those once when I thought I had already ruled them out.
As to Google Voice and such, if a company attempts to be a “phone service” provider, then they should be constrained by the laws surrounding that service. From what I understand, Google Voice was “blocking” access to some rural areas due to costs; it would have cost them to complete the call versus “free” for others numbers. Unfortunately I don’t have the specific’s at hand, but I did read about this a few months back.
This is not really covered in the scenario of the post; the phone is the “portal” to the service. Google Voice is a service, but they were not constrained by the same access rules as the “traditional” providers. How does that get addressed in this situation?
So what ends up happening is there are (in fact) 3 distinct factions: the pipe, the device, and the content/service (VoIP is simply real time QoS data). At the moment all of this is provided by the wireless mobility companies. You can’t really break just one of them away, either all 3 have to be completely integrated, or completely separated. Then the existing rules need to be separated to each provide (as based on the part they provide) and new rules regarding integration of these separate providers as well (maybe some “standard” relating to customer data that all 3 can use).
Now you have 3 different customer service issues instead of 1 or 2.
@DEK46656
You are right that there is a very, very blurry line between many applications and things that are the domain of much more highly regulated industries, and that makes things tricky.
At the end of the day, I think it is good that someone is introducing this kind of model to the market. I’m glad that neither model is being forced by government regulations! While I am not as “free market minded” as George is, I do beleive that this is one scenario where having two competing business models is a great idea. Let the folks who prefer the low up-front cost of a subsidized phone in exchange for the various drawbacks take that route, let the people who don’t mind the higher up-front cost and possible support headaches buy a phone and plan seperate.
J.Ja
@George Ou
You’re assuming that most people want a subsidized phone because that’s what most people buy. It completely ignores the reality that until very recently, all carriers offered one price for service whether or not you got a subsidized phone or brought your own. There was no incentive to buy a phone that was not subsidized because no money would be saved. It also ignores the fact that most phones were locked to one carrier.
If you look at T-Mobile, you’ll find two pricing tiers for their unlimited plans. One has a 2-year contract for subsidizing a smart phone and one with no contract for bringing your own phone that has a lower per month price. If you do the rather simple math, you can see that buying a phone outright will save money over time. The time frame for that point is somewhat less than two years for most smart phones.
Having said all that, it does bring up the point of whether or not people can afford to buy the phone up front. For those that cannot, subsidizing a phone may make sense. After the contract is up, they can go to a lower priced plan even if it costs them more in the long run.
@L
L, you just answered your own question. If T-Mobile is giving people a choice (not to mention lower rates), then people should be jumping at the chance to have lower total cost of ownership by paying for the phone up front. But it doesn’t seem like people are doing that, so that pretty much confirms what I’ve been saying.
The economic equation is fairly simple : each company want to be the one making as much profit as possible, and more tomorrow than yesterday. This is true for the phone maker, the phone OS editor, app editors, telco, web site editors…
In a non biased classical liberal economy, the higher the added value, the lower the competition, the higher the profit.
This means companies dwelling in standardized generalizing non innovative grounds will see their profit evaporate, while companies with innovative, uncommon, fast evolving markets will have high margins and increasing market values.
It happens that the pipes are common, standardized highly competitive but slowly evolving grounds. pipes owner will see their profit diminish, and they don’t like the idea at all. What they will try ( and what they already try ) to do is capture part of the profit of the new evolving market by taking a fee on either the consumer or other companies for allowing these services on their pipes. They will always serve you with network management Technics arguments, but the fact that paying is allowed non paying prohibited, independently of the impact of an application on the network is prove enough that this is only a matter of profit and not of Technics…
But in the end money will flow to added value. either the telcos find way to provide innovative services, or they will become mere pipe helders with the profit it deserves, no more, no less…
@George Ou
I posed no question.
It might not seem like people are buying their own phone to save money. But what seems to be and what is aren’t necessarily the same. Unless T-Mobile chooses to break out information showing how many people go with with what plan, you and I have no way of saying that people are or are not choosing to just buy a phone outright.
The plan differences are new, so many people either don’t know about them, are locked into an existing contract. Also, T-Mobile is third or fourth for size in the US, and as far as I know, Verizon and AT&T don’t offer different prices if you bring your own phone.
Saying that most people buy subsidized phones is more of an observation of how phones are sold than how people want to buy them. Other than the iPhone, people generally select a service provider and select a phone sold by the provider to use that service. The iPhone is different in that people wanted the phone and were willing to switch service providers.
From personal experience, I can say that 100% of the people in my family that use T-Mobile have purchased their phone outright in order to save money.