Google Can Do Well With Its New Communications Products, But Only If It Acts Like a Genuine Startup

Brian Fung tells us that Google is making a “serious play in the communications space,” featuring an aggressive strategy that includes rollouts of new products like ultra-fast internet service, new smartphones, and even wireless service:

Google’s investments in telecom pit the company against some of the largest voice and Internet providers around. But Google has a key advantage: It doesn’t make its money from Internet service subscribers. That’s why it will be able to drive down prices for consumers, to adopt business practices that would be unsustainable for other carriers and to influence Washington policy debates in surprising ways.

“This is a multilayered strategy,” said Harold Feld, senior vice president for the consumer group Public Knowledge. “Even if Google only makes 10 percent profit margin on its fiber and wireless offerings, that’s enough for it to be successful and to achieve the desired result of driving more use of its applications.”

This isn’t quite right. Or maybe I should say it’s only half right. It’s true that these new services will probably help Google increase sales of its core products, thus offsetting low margins in the communications space. But that’s not the real reason Google can afford to do this. The real reason is that Google is a new entrant, which means that entering these new businesses doesn’t force it to cannibalize any of its current businesses.

This is the key problem that kills old companies when new technology hits the street. Every cheap new widget they sell means one less expensive old widget they sell, and very few companies have the stones to just accept reality and really dive into the new widgets regardless. So they sell the new widgets, but only half-heartedly. They defeature them. They limit their sales channels. They don’t spend enough on marketing. Meanwhile, a startup with no such issues eats their lunch because their new widgets are their main business and they just sell the hell out of them.

That’s Google’s big advantage in this space. The fact that entering the telecom business might—might!—boost sales of other Google products is great, but it’s just a bonus, and not one they should be thinking too hard about. In fact, if their new products are tailored too tightly as mere helpers for their old product lines, they could end up in the same position as all those old dinosaur companies that couldn’t quite put their hearts into new tech. That road is well trod, and it’s usually a pretty grim one.