Has Google found its true calling?

January 20, 2010: 10:54 AM ET

Search giant Google keeps offering telecommunications services. But does that make it a phone company?

By Beth Kowitt, Writer-reporter

Google Voice consolidates all your phone numbers into a single point of contact.

Google (GOOG) is an online advertising company, but it has been inching toward disrupting the telecommunications industry for some time.

In 2006 it launched free citywide Wi-Fi in its headquarters town of Mountain View, Calif., as a not-so-subtle jab at traditional broadband providers such as AT&T (T) and the cable operators.

In 2008 it expressed interest in acquiring wireless airwaves - typically used by traditional wireless operators such as Verizon (VZ), Sprint (S) and others - from the government. (Google ultimately backed out.)

More recently, its Android operating system and Nexus One phone have made the company a bona fide player in the world of mobile devices.

So it really was only a matter of time before the search giant tried to shake things up in the world of traditional phone calls.

Google Voice is what Fortune's Apple 2.0 columnist Philip Elmer-DeWitt has called "the universal telephone number and voice mail system the telcos should have offered us years ago."

So why on earth would Google want to be in the completely unsexy – and highly regulated - world of phone calls? How Google and the government define the product (is the service a de facto telecommunications carrier or just a useful Internet service?) has broad implications for Google, and whether it continues to pour more resources into its fledgling telecom operation.

One number. Many ways to sell you stuff.

A quick review on how the service works: To start either keep an existing mobile number or choose a new one from Google's directory. A new number allows you to manage your different lines by having just a single number for all your phones.

That means your mom doesn't need to worry anymore about whether to call you at home, on your cell, or at the office. She can just call your Google Voice number and set your account to have all your phones ring. The call is converted into IP, which allows Google to determine if you set rules for a caller (i.e. I'm avoiding my boss so send her straight to voicemail). Note that although it converts to IP, Google still uses your phone carrier to connect calls.

Both users who keep existing numbers and those opting for a new one can personalize voice messages depending on the caller. You can also have voicemails transcribed and sent to you as email as well as SMS to your mobile.

Voice was developed by a startup called GrandCentral, which Google bought in 2007 and left dormant until transforming it into the invitation-only free service.

Google says it "isn't monetizing" Voice, so why then is the company even bothering to offer it?

One possible answer is advertising, as it almost always is with Google, says Forrester Research analyst Charles Golvin. The more Google knows about you, including what your friends write in texts and leave as messages, the better it can target ads, he says. But Google Voice currently doesn't display any advertising. While GrandCentral co-founder Craig Walker says he'd never say never, he does offer that there currently are no plans for ads on Voice.

Some analysts point to another tactic: Google could eventually make Voice part of its subscription-based Apps Premier Edition for businesses, or possibly charge these companies more for extra features like Voice.

Another point of entry into Googleworld

But Walker, who now works for Google, gives a very Google-esque response to what's motivating the company: Along with trying to give away as much as possible for free, he says, "Our goal is to have a whole host of happy users who are in love with the Google Voice service." It's difficult to buy completely into the Google benevolence argument. Google, after all, pulls in almost $22 billion in revenue annually.

But part of what Walker says likely is true. Google wants happy users, but partly for strategic purposes. "The more Google does to get users on and living in a Google ecosystem, the more money they're going to make on their core products such as search," says Edward Jones analyst Andy Miedler.

But isn't Google Voice ultimately a phone service? Google may not be providing the connectivity between callers, the way local phone operators AT&T, Verizon, Qwest and others do, but communications services' move to the web has raised identity issues for traditional telcos as well as web companies.

By giving you a new number that's not attached to a provider, Google decouples your phone number from a carrier in the same way that your email address is no longer attached to your Internet provider. The result: it weakens customer loyalty to any particular phone company, says Forrester's Golvin.

To regulate or not to regulate?

And some traditional telcos are not happy. AT&T has been trying to get the Federal Communications Commission to pay attention to what it says is Google's violation of basic telecom or Net neutrality rules. At the basis of AT&T's claim is that Google Voice has not been connecting calls that go through some local rural carriers that charge higher-than-normal rates to connect. AT&T, however, because it's a common carrier, is required by the FCC to connect all calls no matter the cost.

AT&T argues in a letter to the FCC that the same rules should apply to Google "to level the playing field." The telecom giant writes: "Google Voice is far more than just a software application" and is "nothing more than a creatively packaged assortment of services that are already quite familiar to the Commission." Therefore, it thinks the same rules that apply to AT&T and other telecom providers should apply to Google Voice.

Meanwhile, Google wants to stay as far away as possible from being labeled a carrier. Its response to AT&T: It doesn't play the same role as an AT&T. It's free, you still need an underlying carrier to use it, and (perhaps its weakest argument) the service is exclusive. (It is available only to those who are invited to join, and it reportedly has about 1.5 million users.) It also says it now restricts calls only to numbers that it believes are involved in "traffic-pumping schemes" like adult chat lines.

But Google's foray into the world of the telephony does pose a risk for the Internet darling. "The more they move into Google Voice and the Google Phone, the more they start looking like a phone provider, and that could bring it into the regulatory sphere," says Stifel Nicolaus analyst Rebecca Arbogast.

In other words: Is Google an Internet company that offers voice service, or a voice company whose calls originate over the Internet?

The FCC hasn't yet jumped to reign in Google Voice. But Google and companies like it represent a different kind of beast for the commission—they morph and change too quickly for regulation to keep up. By the time the FCC makes a call on Google Voice the company may have come up with a different mode for delivering the service. Or it might have moved on to disrupting another industry altogether.

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About This Author
Stephanie Mehta
Stephanie Mehta
Deputy Managing Editor , Fortune

Stephanie N. Mehta is the deputy managing editor at Fortune, overseeing technology coverage for Fortune. She also is a co-chair of the annual Brainstorm Tech conference, an annual gathering of tech and media thinkers. Previously, Mehta spent seven years as a tech writer at Fortune covering the telecom and media industries. She also has worked for the Wall Street Journal and the Virginian-Pilot in Norfolk, Va.

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