5 reasons why a Google MVNO would fail

Phil Goldstein

Google's (NASDAQ: GOOG) rumored MVNO service with Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) is still just a rumor for now. According to reports from The Information and the Wall Street Journal, Google apparently wants to upend the stodgy wireless industry, which it sees as moving too slowly. And a fresh report from the Journal says that the service, which could launch nationwide in the first half of 2015, would hunt for the best available cellular or Wi-Fi signal to route voice, text message and data traffic.

But is an MVNO from Google really going to disrupt the industry? There are a lot of factors working against Google. Below are five of them.

(To be clear: this analysis is based on the few tidbits that have been reported so far. At this point Google has not confirmed it is launching an MVNO. And we don't know what Google's go-to-market strategy would be or how much money it would invest.)

Nonetheless, we do have some outlines of how and why Google would launch a wireless service, and so far it does not seem that promising.

  1. Engineering phones and networks is difficult. Google has experience designing mobile software, and has proven adept at partnering with OEMs and carriers to make its Android platform the most ubiquitous smartphone operating system in the world. But that doesn't mean it has a great deal of experience in designing mobile phone radios or architecting wireless networks. If the Journal is right and Google's wireless service will be able to find the best and most reliable cellular or Wi-Fi signal, that will either mean one of two things: One is that the phones for Google's service will have all of the radios for all of the bands Sprint and T-Mobile support (though there is a precedent for this; one example is the Motorola-made Nexus 6 smartphone from Google, which supports all of the LTE bands for Sprint and T-Mobile, and there are other phones that do so as well, including unlocked iPhone 6 variants); or the phones will support only Sprint or T-Mobile, and not both carriers' networks (which would make the service somewhat unremarkable). Even if Google did manage to cram all of the radios for both carriers into a single phone, that phone would likely be bulky and overheat often as a result. Further, how would Google determine which network signal is the best to switch to? It's unclear at this point, but presumably it would require deep integration with carriers' networks, something Google isn't known for.   
  2. Google would need to set up customer service centers and retail distribution, which are not its core competencies. Something else that Google doesn't specialize in is customer service and retail distribution. Google sells Android devices through its Play store and also has its Nexus line of gadgets, but it does not operate customer service call centers for wireless service, which it would either have to set up itself or outsource to a third party. Either way, it's something almost all MVNOs do. (Google was blasted for providing minimal customer service for its Nexus device offering.) It's also unclear if Google will set up physical retail sales channels for a wireless service, but if it did that would be another challenge to overcome since Google doesn't have much experience in operating retail stores or training others to sell its services. (Remember how well the "Google Barge" technology showrooms worked out? They never opened.)  
  3. Incumbent wireless carriers spend billions on advertising and have inherent advantages. Google is a behemoth of a company, with $59.82 billion in revenue in 2013. However, Google doesn't spend a lot to advertise its own products and services (though Google has conducted campaigns for Chrome and, more recently, its Nest smart thermostats). Conversely, wireless carriers are big ad spenders--the Tier 1 carriers dropped a combined $8.4 billion on U.S. advertising in 2013, according to the Ad Age DataCenter. Does Google have the wherewithal to compete in that market? Does it want to? Again, it's unclear. Moreover, carriers have other inherent advantages over upstarts because they own the networks and spectrum their services run on, and have spent years building and fine-tuning those networks. They have hundreds if not thousands of employees devoted to marketing, public relations, customer service and retail operations. They know their customers well and do a lot to keep them. Google may think carriers are lumbering giants ripe for disruption, but they are still giants.
  4. The service would be undifferentiated, and the target audience is unclear.  If Google's big play in wireless is that it will let customers switch between cellular networks and Wi-Fi networks to find the best signal, that's pretty weak beer. Lots of services, including Sprint MVNOs Republic Wireless and Scratch Wireless, do that already and fall back to cellular when Wi-Fi is out of range. One option for Google to spice up its wireless service would be to discount it if customers also bundled it with Google Fiber home Internet and a Nest thermostat, offering a complete package of services. However, since Google Fiber is only available in a handful of markets across the country, that wouldn't be a viable nationwide option. It's also unclear who Google would be targeting with an MVNO: Millennials, those who want lower prices, or someone else entirely?  
  5. A lack of scale could push Google to pull the plug. This could just be an experiment for Google and the company certainly has enough cash to give an MVNO a try for a while, but I can't imagine Google would continue to invest in a business that wasn't gaining meaningful scale. TracFone Wireless has grown into the nation's largest MVNO with more than 25 million customers through deals with all four Tier 1 carriers, acquisitions, multiple brands, low prices and expansive distribution. In a country of more than 300 million people, an MVNO with 10,000, 50,000 or even 100,000 subscribers isn't going to shake up the market--which is what Google reportedly wants to do.

If Google wants to fundamentally alter the wireless industry, there are other things it could do besides launch an MVNO. BTIG analyst Walter Piecyk recently noted that "buying T-Mobile and Dish (NASDAQ: DISH) would put Google on the map overnight in the wireless industry, but would likely cost in excess of $120 billion. Alternatively, Google could offer Sprint $5-$10 billion as an upfront payment for future data capacity, with the stipulation that the money would be committed to accelerate the roll out of fat channel TD-LTE networks on Sprint's ample 2.5 GHz spectrum."

Google could also zero-rate mobile access to its services, or it could expand the calling and messaging services available through Google Voice and Google Hangout. Google could even use 3.5 GHz spectrum to launch an innovative wireless offering--the company has been lobbying the FCC on doing just that. Finally, Google could work with a carrier, perhaps T-Mobile, on deploying LTE Unlicensed service, perhaps to increase competition even more in the home broadband market.

There are lots of opportunities for Google to transform telecommunications. An MVNO doesn't seem to be one of them. --Phil

Article updated to note that the Nexus 6 supports all of the LTE bands of Sprint and T-Mobile. Article also updated with 2013 U.S. carrier advertising figures from AdAge.

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