Google, the Telephone Company? - The Google Guys

The Google Guys: Inside the Brilliant Minds of Google Founders Larry Page and Sergey Brin

Chapter 11 Google, the Telephone Company?

A little sincerity is a dangerous thing, and a great deal of it is absolutely fatal.

—Oscar Wilde

For a while, Chris Sacca seemed to be turning Google into a phone company. A lawyer by training, he’s a former Google manager whose specialty was “special initiatives.” He had been hired to handle negotiations and legal work as Google went about buying up fiber optic cables laid by telecommunications companies in the late 1990s, and lying fallow since the dot-com crash.

A few years ago, he got himself into trouble with another group at Google. Google has been creating applications for cell phones for several years, but has been having trouble getting cell carriers to allow customers to install the apps on their phones. During a lecture at Oxford, someone asked him why his wireless carrier blocked customers from using Google Groups on their cell phones. It hit a sore point for Sacca. He had grown weary of the fact that most cell carriers were so resistant to change. Mostly, they want to dictate what applications people were allowed to use, and they prefer to dictate that customers use applications that the cell carriers themselves create, even though they’re invariably inferior to those created by independent software companies. It’s an extra source of revenue for them, and they hate giving up any control to outsiders. Sacca sympathized with the questioner, and complained that Google had even gotten letters from telephone companies telling Google to prevent people from using Google’s free apps on their phones.

The media picked up on his comment and it spread. Google was at war with the cellular providers. Very soon, the mobile group within Google, which made the applications for mobile phones, complained. The group was wary of alienating the telephone companies, because it was trying to persuade them to work with Google. “The Google Mobile business got incredibly mad at me,” says Sacca. “They even wrote a letter to get me fired. We’d been bullied into not saying anything.”

Sacca has since left Google, but he was not fired. He left after his stock options were vested, and decided to take a break from the nonstop treadmill of working as an entrepreneur. He still praises Google’s culture. “It was an exciting entrepreneurial time,” he says. “We were flying under the radar. That was really fun. We were dressed in jeans and sweatshirts and moving millions of dollars around.”

Sacca took his problem with the telephone companies to Larry. Fortunately, Larry had other ideas about the uproar. Recalls Sacca: “Larry’s attitude was, ‘Look, what we’re saying here is entirely true. The wireless carriers are trying to get between us and our users. If we try to appease them, we’ll lose our identity in the process. Or we can stand up and try to evolve this space into what it should be.’ ”

Larry’s response about changing the cellular industry, in fact, was to become even more aggressive. He encouraged Sacca to pursue a bid for a wireless spectrum that the U.S. government was offering to sell to phone companies. “Larry gave me a push, to figure out how to be more of a catalyst, to help shape the wireless space.”

Google the Catalyst

The role of industry catalyst has become a huge one for Larry. It explains some of the company’s most confusing moves. It also causes a lot of animosity among the companies being catalyzed.

Telecommunications is Larry and Sergey’s current favorite because in this area they see a picture out of whack, like a framed photograph cracked and misaligned after an earthquake. The Internet is the earthquake, and Google is the fixer trying to bring the two halves back together. On one side is the public, ready to embrace the cheaper and more robust capabilities of the Internet, the philosophy of open standards rather than closed systems controlled by large corporations, the luxury of freedom of choice. On the other are the telephone and cable companies, unwilling to reach across the chasm and embrace the changes the Internet offers—including cheaper or free services.

With that philosophy, Sacca, who is known as a ruthless negotiator, got top management to approve a bid of up to $5 billion to buy the rights to the 700 MHz wireless spectrum.

In pursuit of that goal, the bid came with a caveat. Google would bid only if the FCC stipulated that carriers keep the system “open,” including a requirement that the winning bidder of one coveted section of the spectrum—known as the C-block—allow all cell phones, not just its own, to operate in the spectrum. That ensured that if another company won the bid, Google cell phones and mobile applications would still work in the spectrum.

With that move, Google started a telco war. Verizon Wireless, which has been the biggest holdout in allowing Google applications on its phones, filed a lawsuit against the FCC to try to eliminate the open-access rules. Google argued against it, and one cellular carrier, Frontline Wireless—whose board includes former FCC chairman Reed Hundt and former assistant secretary of commerce for telecommunications policy Janice Obuchowski—even asked the FCC to ban Verizon Wireless from the auction.

In the end, the FCC decided to adopt some of the terms Google was pushing for. As long as the winning bid for the C-block was at least $4.6 billion, those cell phones would also be allowed to let customers download applications created by outsiders—including Google. “When your mission is sincere, it’s easy for employees and users to get behind it,” says Sacca, who ran the Alternative Access Group. “We ask what we can do to increase access.”

Google did bid in the spectrum auction, but did not win. (Verizon Wireless got the C-block, with a bid of $9.4 billion, while AT&T walked off with another section of the spectrum, for $6.6 billion.) But Google had achieved its goal. It took on the phone companies and won concessions that forced Verizon Wireless to allow Google’s Android-based cell phones and applications—and those of others—to use the spectrum.

Even without winning the bid, Google managed to change the mobile phone industry. Says Google executive David Girouard, “It’s all about the choice available to consumers.” Some critics have speculated that Larry was never really serious about the bid, since Google got what it wanted without spending a penny. Sacca insists that this is not true. “Even a company as exciting and creative and maverick as Google can’t throw five billion dollars around willy-nilly,” says Sacca. “This was not a game or a bluff.”

Google looks like a competitor to telecommunications companies. It owns thousands of miles of fiber optic cable, has dabbled in setting up free Internet access, has created an array of programs for cell phones, and has designed a free cell phone operating system called Android. The first phone based on that system, the Google G1 phone, was announced in 2008 from handset manufacturer HTC, running on T-Mobile’s cellular service.

This game can be costly to Google. In 2007, its executives were in negotiations with Verizon Wireless to get the cellular company to adopt Google’s mobile search application on its cell phones. But Verizon Wireless executives are not keen to take on a thorn in their sides as a partner. In early January 2008, Verizon Wireless signed a five-year deal with Microsoft, a distant third-place runner in the search engine race, to provide its mobile search and advertising services. Verizon also reportedly passed on the opportunity to be the first carrier to use the G1 phone.

Smartphone maker Nokia has reached deals with both Microsoft and Yahoo to provide search services, but not with Google. So far, Taiwan-based HTC, Sony Ericsson, Motorola, LG, ASUS, Samsung, and Toshiba are releasing phones based on the Android system, but only T-Mobile has agreed to use the phones on its service. Most telecommunications companies are reluctant to deal with Google.

Says Google CEO Schmidt, “We are critically dependent on the telco people. We also don’t like closed networks, but a significant amount of their money is made that way. Android is a reminder of the potential competition, but is also an example of the way to do it right. It’s a complex relationship which we’re okay at but do not excel at.”

One bright spot is Google’s relationship with Apple. At the company’s annual meeting a couple of years ago, Larry emphasized, “We love Apple. Expect us to work with them in the future.” Schmidt is also on Apple’s board. Steve Jobs persuaded AT&T to allow applications by third parties to run on the iPhone, and Google’s apps are available on that phone.

This business is critical to Google’s future. In many ways, smartphones are the new PCs. They are steadily and inevitably becoming the world’s Internet devices. Google executives have said that searching and advertising are destined to become even bigger businesses on smartphones than on computers.

Getting People Online

Google executives insist the company is not really trying to become a phone company. “Owning fiber doesn’t make you a telephone service provider,” says Sacca. “We’re pushing a lot of data between data centers, sometimes across oceans. It brings down latency.”

But given Google’s technological prowess, it could do so. The company’s increasing moves into the telecommunications business are focused primarily on another need. Telcos (and PC makers, book publishers, Hollywood, and other industries critical to Google’s success) are simply not moving fast enough for Google. Larry and Sergey want to hurry them along.

This is not pure altruism, of course. One big problem blocking Google’s future is the ability to get people online. Google benefits from any move that gets more people online with faster communications, since the company currently makes all its money online. But Larry and Sergey are also trying to force the world to change, to conform to their vision of what the Internet should be: opening up the wireless spectrum, lowering the cost of cellular access, breaking down barriers that block the adoption of free ad-supported applications, and speeding up Internet communications. Google the catalyst is dragging the telecommunications industry into the Internet Age.

In the United States, this means goosing the Internet service providers, or ISPs—the telcos, cable companies, satellite networks, and others that connect people to the Internet. That is a much-needed role. The United States ranks nineteenth in the world in Internet access per capita, and U.S. “high-speed” Internet access is embarrassingly slow compared with that in such countries as Japan, Korea, and several European nations that have built out their telecommunications infrastructure to accommodate the potential of the Internet.

One can only wish that Google would become an ISP. Unlike most technology businesses, prices for Internet access have not dropped. The telcos and cable companies have little competition, because they own regional monopolies. In one of the biggest technology debates facing Congress today, Google and other Internet companies are fighting the ISPs over the subject of “net neutrality.”

As it stands today, once a consumer pays for Internet access, the amount of data he ships back and forth between his computer and the Internet cloud is unlimited. Start-ups rely on this fact to create new online businesses. But ISPs, led by the telcos, argue that in order to handle the increased traffic, they need to upgrade their networks, as other countries have done. And in order to do that, they say they need more revenue, or they can’t afford to spend the billions of dollars necessary to make the upgrades. In other countries, governments have covered the costs as an expense that improves competitiveness. The telcos want Google, Yahoo, and other large online businesses to pay for it.

Cable companies have already gotten into trouble with federal regulators for slowing down Internet service to customers who download a lot of data. The ISPs now want to make it legal to charge online companies that send around a lot of data, acting as toll roads for big data hogs. This would end the neutrality of Internet access. Google argues that a company such as YouTube could never have gotten started if it had to pay telcos for transmitting its data at a time when it had no revenue. Most of Silicon Valley backs Google’s view.

Sergey himself has traveled to the nation’s capital to argue the point before regulators, largely unsuccessfully. In one hastily organized trip in the summer of 2006, dressed in blue jeans, a black T-shirt, and silver mesh sneakers, he failed to get meetings with key senators, including then–Senate Commerce Committee chairman Ted Stevens (R-Alaska), whose committee has huge influence on telecom legislation. The trip “wasn’t very well organized,” Sergey sheepishly told the Washington Post. “I apologize. It was a last-minute trip.”1

On the other hand, the telcos have strong lobbies. On Sergey’s trip to D.C. in 2006, he was surprised to learn that a lobbying group backed in part by AT&T had run newspaper and television ads warning that Google might “blow up” legislation designed to increase choice on cable television. “I am probably naïve,” he said. “I was very surprised to see this.”2

Google is trying to become a better Washington lobbyist. It hired people away from MCI and other telecommunications companies to help with its arguments. It’s also trying to come up with alternative ways to increase telco revenue, such as locationbased advertising programs when people use WiFi connections. Says Sacca: “If there are players who don’t play nice with us, we ask, ‘Can we incent them to do the right thing?’ We want to grow opportunities for carriers to monetize their services.”

Google is also investing in other companies that may provide more competition in the Internet access business. It has invested in wireless access companies, satellite companies that may be able to provide Internet access and even a company called Current Communications, which is trying to build broadband Internet connections that operate over existing electric wires in homes. “Google needs to deeply understand wireless, broadband over power lines, satellite—anything to eliminate the barriers to cheap access,” says Sacca.

But Google is still a lousy lobbyist, and does a poor job of winning allies.

Free WiFi, Anyone?

Sacca came up with another idea to help people get online. What if cities themselves were to start offering free wireless access, or WiFi? After all, it would be a great incentive to offer companies considering opening offices in a city, ensuring that workers could get online even when out of the office. Sacca decided to see if he could kick-start the idea. “It started with just me. Like most things at Google, you just start it and don’t ask for permission.”

Sacca saw the resistance from ISPs as a dangerous trend. “There was a lot of saber rattling from the ISPs. We had a layer between us and our users. It scared me and concerned me. We spent time thinking about how do we respond to this? Policy? Sure, but we were still young in D.C.”

Since San Francisco mayor Gavin Newsom is good friends with Larry and Sergey and a big fan of Google, he seemed like a good place to start. Sacca talked with the mayor in the summer of 2006 and got his approval. Google offered to install the WiFi transceivers and operate the system for free, although it would cost Google $8 million to $10 million to install it. Who could turn it down?

San Francisco could, as it turns out. Google announced that it was planning to start the system, and immediately other telecommunications companies complained. Why couldn’t they bid to install the system? Perhaps they could offer a better deal, such as a service that did not include any advertising. So the San Francisco board of supervisors decided to put it up for a bid. Several telcos put together partnerships to offer the service, and Google teamed up with Earthlink. A city employee was assigned the task of reviewing the bids.

The results of the bidding were not surprising. The Google/ Earthlink bid was zero dollars, and the board of supervisors announced that the team had won. But even a free system was not good enough for some supervisors. Two of them, Chris Daly and Jake McGoldrick, began asking why Google was being given free access to San Francisco citizens, who would have to look at ads when using the service. Besides, Google would have to install the transceivers on city-owned light poles. Shouldn’t it pay rent for the privilege? They began to make more demands. Google came back and sweetened the offer: it would pay the city $1 million over the first few years of the contract.

Supervisor McGoldrick complained that this was not enough. After all, Google had a profit of hundreds of millions of dollars a year. It could afford to pay more. Other groups also weighed in. Telcos and consumer advocates complained that the service would cause interference with other WiFi services. Others worried that it would produce harmful radiation. Sacca pointed out that the radiation produced was one thirteen-thousandth the level of that of a typical cell phone. He offered to get community organizations involved with free services, and to hire San Francisco workers to install the system. Some telcos sued to stop its implementation.

“We thought, we have a lot of smart wireless engineers here, what if we built one of these wireless networks to see if it works?” says Sacca. “Incumbents were saying it would never work, entrepreneurs were claiming it could do everything. I thought we could buy the equipment, hang it up, and see if it works.”

Finally, Sacca decided to meet with Supervisor Chris Daly to argue for the system. There are poor neighborhoods in San Francisco where people have no Internet access, some of them in Supervisor Daly’s constituency. This would be big political capital for him, Sacca argued. Google would be sure to give him credit for making the system happen. But there was another sticking point: political rivalry. Daly is one of the supervisors constantly at war with Mayor Newsom.

Sacca says Daly flatly refused to back the initiative and ended the meeting by saying, “Now this is where you just get the hell out of my office.” Adds Sacca, “It was fascinating and disheartening. I was so upset, I just fumed in the lobby. I didn’t want to leave the building.”

San Francisco still does not have a citywide WiFi system, although Mayor Newsom has managed to install smaller WiFi networks at city housing projects under a grant from AT&T.

In the meantime, while this controversy was raging in San Francisco, Google got a similar proposal to fly through the government regulators in its own town, Mountain View. That system has now been up and running for over a year, and Google says the interference concerns have not panned out. “The experience in Mountain View was really fulfilling,” says Sacca. “We did community meetings entirely in Spanish” to promote the idea. “The usage was concentrated most heavily in the poorest parts of the town, including some Hispanic neighborhoods. For some of these people, it was their lifeline.”

Google still wants to see more WiFi across the world. It funded and helped launch a company called Meraki Networks, which makes wireless transceivers that people can buy not only to create a wireless connection for themselves, but also to offer their WiFi connections to others. Some do it for free, but others can charge for the access, using an online billing system provided and run by Meraki. The system is gaining popularity in San Francisco.

But Google never saw this as a new business opportunity. It was mainly interested in the catalyst role—getting local municipalities to start thinking about the possibilities. “The goal wasn’t to build WiFi in every town,” says Sacca. “Just one or two. Hopefully, cut them some air, act as a catalyst.” And this did happen. Many cities started installing municipal WiFi systems, including Philadelphia, New Orleans, Houston, Chicago, Atlanta, Portland, and Boston. In many of these cities, existing ISPs sued to keep it from happening. After Verizon Communications and other ISPs lobbied the Pennsylvania state legislature, it passed a law forbidding any city in that state to build any WiFi network without giving the private sector first crack at it.

The idea of free WiFi as proposed by Google is now effectively dead. It’s been hard for companies to create an effective advertising model that would support free WiFi. If anybody could have done so, it would have been Google, but the company says it’s through with experimenting with the concept. Earthlink, one of the companies trying to make a business out of municipal WiFi, is facing financial troubles and has decided to get out of the municipal WiFi business. As a result, Philadelphia is shutting down its Earthlink-based WiFi system, and others are following that lead.

Perhaps it was a bad idea to begin with. The old WiFi technology that’s been used so far was inadequate, since the signals cannot pass through walls or other obstructions in cities. Craig Settles, a municipal WiFi consultant at Successful.com, believes Google did a disservice to the concept by leading cities to believe they could get WiFi for free. In retrospect, Sacca believes he offered too much up front. He should have first offered to install the system for a few million dollars, then negotiated down. Mayor Gavin Newsom believes that everything fell apart because the city didn’t simply jump on Google’s offer immediately and instead let too many other companies get involved. “If we had just worked with Google, it would have happened,” he says.

Google is getting better at the political game, and it still has a chance to make change happen. There are new alternatives on the rise. One is the “white space” between broadcast TV channel frequencies—buffer zones created to keep one channel’s signal from interfering with the one next to it. As broadcast TV goes digital, the FCC has decided to open up the frequencies for other uses, including WiFi. These signals can pass through walls. It was controversial, with broadcasters and entertainers lobbying against it, saying there would still be interference, and Google and others lobbying for it. This was one of Larry’s pet projects. After testing, the FCC has decided that interference won’t be a problem, and it approved its use. Larry couldn’t help getting in a dig at his opponents in a posting on the company’s blog: “As an engineer, I was also really gratified to see that the FCC decided to put science over politics,” he wrote. “For years the broadcasting lobby and others have tried to spread fear and confusion about this technology, rather than allow the FCC’s engineers to simply do their work.”

Another is a proposal by the FCC to auction off a 25-MHz swath of spectrum in the 2,155-MHz band, with the requirement that the winning bidder use some of it to offer free WiFi across the country. Even Settles believes this proposal could work.

Google has not given any indication of how it might participate in these new proposals. But given its vested interest in getting more people online cheaply and without restrictions, it’s highly likely that it will participate in some way. The moves and lobbying Google has already done “will ultimately lead to more Internet access,” says Sacca. And, as he notes, “Google has staggeringly high resources to be applied to the world’s biggest problems.”

Google may yet look more like a telecommunications company in the future. And, once again, people will scratch their heads and wonder why Larry and Sergey wanted to get involved in something so far removed from the search business.