Why you should worry about the "Google phone"

One of the worst kept secrets of the past year has been that Google intends to create a new model for mobile phone users. Pundits expect to see something available in early testing stages from the company as early as a year from now.

Initially, this seems like great news, right? Not necessarily.

Google businesses are generally based on using what is known as a disruptor strategy, i.e.: the commonly accepted business model used by others already dominant in a given field is totally disrupted by the newcomer or new approach. Usually developed based on a sound understanding of the target customer, these new approaches end up creating entirely new profit models as well. The way the existing enterprises make money is no longer relevant, and the newcomer gains customers while making a profit in a different fashion then used by incumbents. This makes it really hard for them to counter the new competitor's actions.

Years ago, I was one of about 8 senior executives who founded DIRECTV. Our model was premised on using technology which didn't yet exist (compressing video signals digitally) to provide more channels to TV watchers at a lower price than they were paying existing cable company service providers (at the time literally hundreds of local companies). We could do that, in part, because we weren't going to incur a lot of capital expense for things like trenching cable around the customers' homes, buying set top boxes to "lease" to the customer, or building customer service operations in each community.

Customers loved it. It's now the second largest video provider in North America.

As a result, most of our competitors folded quickly over the coming years. The larger, better financed ones, lasted longer but ultimately realized they couldn't make the requisite investments year after year while their customer numbers were diminishing. So they sold out to the big public companies like Time Warner, or Comcast. An industry that was conceived by entrepreneurs - who were mostly engineers - was decimated. And each one of those companies had a lot of engineers employed by them. Most were forced to find work elsewhere. The ripple affect then started: Individuals employed by suppliers to all those cable companies were no longer required, affecting sales, customer service, IT, operations teams. Our model of providing a better product at a lower price with better service worked just as it should.

I think Google's will in the same manner:

According to leaks and statements from suppliers, the Google phone model will probably make its money from ad sales. Their loose network of providers is expected to offer a customer who can have a phone that is less expensive to purchase, doesn't need to have a contract with a single service provider, can be used almost anywhere with no additional charges for things like text messaging. Did I mention the goal is for it to be a free service? The networks would be local wifi signals not cellular or PCS which have cost the incumbents billions of sunk cost?

If all this occurs, customers will leave the cellphone providers in droves. They consistently get bad reviews for their lack of customer care and too high prices with increasingly more drop offs and fade.

And then, watch your butt.

Those huge companies will try to counter attack but fail because their business models won't be able to withstand new big expense lines. So they will start cutting contracts with vendors rippling through many seemingly unrelated industries. Employees and management will become unemployed.

Are you secure?


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