Let’s start with what Google Voice is: Grand Unified Telephony, as in physics Grand Unified Theory. Imagine all your phones (home, mobile, work...) linked together to one number, and all data (calls, voicemail and SMS) also “webbed” together.  Add a few wrinkles such as transcribing your voicemail into text, personalized greetings for your mother or the boss, when different, conferencing, cheap international calls and you have a quick list of Google Voice’s features.  For more, see David Pogue, the NYT’s always articulate and fun gadget exper. More official: Google Voice’s “About” page with many example while we wait for the service to open to all comers “in the next few weeks”.

A few examples. You call my new UGV (Unifying Google Voice) number, all my phones ring (if I told the system to do so), I pick up my home phone, get a voice menu of choices such as taking the call, sending it to voice mail or even blocking it, that is making it sound like my number has been disconnected.  The possibilities for social un-networking...  Even more practical: the call is taking more time than expected, I need to go, I switch it to my mobile phone and walk out.  Or log on my account from my smartphone and forward a voicemail message to a colleague.  We’ll have to see how it works in reality, on a large scale, and how it integrates with other Google services.

One will quickly note that many if not all these features are available from various carriers, services, handsets or software providers. Somewhat true and not very relevant as Google Voice’s point is to provide them all in one place, for free – mostly.  You still have to pay for international calls and/or use your cell plan’s minutes.  We’ll get to that point, the importance of the “last mile”.

Before we move to answering today’s question, a tip of the hat to Grand Central’s founders Craig Walker and Vincent Paquet. Before selling Grand Central to Google 20 months ago, they founded and sold another VoIP company, DialPad to Yahoo!  Note the experience: DialPad went bankrupt, Craig Walker led it out of bankruptcy, the company became very profitable before its acquisition by Yahoo! in 2005.  DialPad, itself, was a USA spinoff of a Korean telecom outfit...  As we say in VC Gulch, they have “domain knowledge” and “they’ve been at it for a while”.  Their vision of unified telephony through the Web is about to be realized on the grandest of scales with Google Voice.

Now, in the usual and often useless blinding retrospective flash of the obvious, isn’t Grand Central/Google Voice a straightforward consequence of the all-digital telephone system, wires or no wires?  Before Google built the largest server farm (probably 1.5 million machines) on Earth, telephone companies such as AT&T were kings of computing.  For geeks like me, central exchanges, the famous switches were among the most beautiful computers ever made: huge bandwidth, switching thousands of call per second, (almost) infinitely reliable, interconnected in a web, before the Web, covering the planet.  This was when Bell Labs and Western Electric were held in awe. Telephones companies have/had the computers, the money, the brainiacs – and the customers.  Why hasn’t AT&T or anyone of its competitors come up with something like Grand Central, with a unified (digital) telephony system?  Why have carriers, instead, left the initiative to repeat entrepreneurs and to Google?

Since the answer can’t be a lack of brains or money, it must be culture. Culture as when culture processes data, sensor inputs, without our being conscious of it, like taste buds getting used to tripe (I’m French...).  Or culture as in trouble with cannibalism -- cannibalism of one’s business model, that is.  Admittedly, building a new business to compete and, perhaps, finish off your existing franchise is extremely difficult, often impossible.  You’re the CEO of a publicly traded company, Wall Street analysts are scoring your every move and insisting on more profit every quarter.  How, under these conditions, do you sell the idea of a temporary low in earnings as your company makes the transition between the old and the new?  Netflix walked such line as they made public their decision to move from their prosperous mail order DVD rental to Net downloads, a success. Newspapers, on the other hand, as amply documented by Frédéric Filloux in these very Monday Notes, have a terrible time with the ineluctable transition to the Net.  Students of SEC filings will remember that, from the very beginning, Google made clear its profits would go up and down, that it would sacrifice the short term for the long view and that it wouldn’t give “The Street” any “guidance”, that is any forecast for future revenue and profits.  For the record, Google stated they might have to undergo painful, costly transitions in order to stay ahead.

This said, I’m not sure how good an explanation the “trouble with cannibalization” is. Here’s why.  A while ago our venture firm invested in a company called Ribbit, in many respects a cousin of Grand Central, a little less ambitious on the unification side, more so on the programmability angle, a sort of Skype with an API (Application Programming Interface).  Said API helped integrate telephony in desktop applications such as CRM (think Salesforce.com).  Last year, Ribbit was acquired by British Telecom.  I’m not privy to what BT wants to do with Ribbit’s technology, but a good guess is they plan to muscle it in order to achieve something like Google Voice.  At the time of the Ribbit transaction, Google’s acquisition of Grand Central was known and well publicized.

Other explanations?  The “last mile” is a good candidate, meaning carriers bet they’ll keep making money because they own the wire or wireless connection to our homes and pockets, pardon the pun.  Think of the hundreds of billions needed to duplicate what already exists: coaxial cables, a pair of copper wires, fiber, or cell towers.  Those billions act as an effective barrier to new entrants.  And they lead us to the carriers’ default strategy: being providers of IP (data) pipes, static and mobile.  The good news, for them, is the oligopolistic (a very small number of competitors) nature of the business.  Economic theory and observation agree: most often, a small number of suppliers, two, three or four leads to the equivalent of price collusion, even when there isn’t any illegal agreement between the players.  Without fear of a race to the bottom, of a price war for the “last mile”, carriers could let Google come up with as many free services as they want, email or voice, as long as the traffic goes through the toll booths on their data pipes.

The next question becomes: What happens if Google decides to get in the “last mile” business?  Not very likely, the margins in their core business are so much better than the carriers’, why would they get into a people and backhoes business offering smaller earnings?
Therefore, the answer to our first question seems to be: Carriers do the local dirty work, Google runs the nobler, more global service... -JLG

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