Who Pays For Google Voice?

The FCC should not undermine one company's business model in support of another's

There is one question that needs to be answered in the Federal Communications Commission’s investigation of the wireless industry: Who is paying the network cost to support Google Voice?

Google Voice is an iPhone application that, for all intents and purposes, allows users to make free wireless calls. Apple, the iPhone manufacturer, recently decided to block the application. Some critics have suggested that AT&T, Apple’s partner for iPhone sales and service, was behind the ban; however, Apple denies this and there is no concrete evidence to support the charge.

Apple’s decision to ban Google Voice is the peg on which the Federal Communications Commission (FCC) has hung its plan to investigate whether there is enough competition in the wireless industry and whether service providers like AT&T and Verizon Wireless wield too much market power.

For the FCC and its new chairman, Julius Genachowski, proving that the wireless industry lacks competition is going to be an uphill battle. Five or more wireless companies serve most markets, and consumers have countless cells phones and wireless plans to choose from-free cell phones, phones offered under contract, prepaid phones, phones that record and play video, phones that incorporate music players and GPS receivers-all at a variety of makes, models and prices. The FCC’s own data shows that in 1994 the average cost-per-minute was 48 cents and average monthly use was 100 minutes. By 2006 average per-minute cost had dropped to 6 cents and average monthly use had risen to 800 minutes.

The Google Voice issue, however, strikes a nerve. On the surface, it does appear to be a case of one player, in this case Apple (and indirectly AT&T), using its clout to unfairly keep another player, Google, from offering a competing service.

Google Voice is a Voice of Internet Protocol (VoIP) application. It converts voice signals into digital bits and transmits them by the same means as text messages and other digital multimedia applications that have become common on cell phones. Calls made this way do not register as standard wireless calls, typically billed in minutes. Instead, like text messaging and wireless Internet service, they are measured in kilobytes of data use. Since VoIP uses comparatively small amounts of data, with Google Voice, higher “voice” calling costs can be avoided and, with the proper data plan, can even be free.

From a technical perspective, Google Voice is not much different than Vonage or Skype. However, as broadband-based services, Vonage and Skype do not rely on the conventional landline phones. Google Voice, on the other hand, requires an iPhone and the entirety of the local, national and international wireless network infrastructure in order to function. Therefore, before reaching a conclusion about whether wireless service providers are acting illegally by blocking Google Voice, the question of whether Google is offering service providers adequate compensation for use of these facilities needs to be answered.

While Google has the right to seek new ways to use technology to deliver inexpensive voice services, AT&T and Apple also have the right to protect their investments. A free market allows me to open a discount clothing store to compete with a high-priced boutique. But it does not allow me to open my store in the boutique’s storefront without paying any rent. To claim that I was offering clothing at half or one-quarter the cost of the competition, thereby “acting in the interest of consumers,” is no defense against my transgression.

The Google case is difficult because it comes at the intersection of traditional common carrier rules and the privatization of telecommunications. But there are at least three facts to keep in mind.

First, common carrier law has always allowed for just compensation. Trucks, trains and telephone companies have to accept all traffic, but customers still have to pay the fare.

Second, from its inception, U.S. wireless network was built with investor dollars, not public funds. Few of the facilities-and virtually none owned by the major wireless carriers-were subsidized to the degree that landline networks were. Nor did wireless carriers benefit from a legacy of government-regulated monopoly. They were initially set up as separate subsidiaries that were competitive from day one. It is not the case that wireless infrastructure is a “public good” subject to special rules permitting free access. The majority of wireless networks in the U.S. are private property built with private funds.

Third, Google’s business objective is not to be a competitive wireless service provider in the vein of AT&T and Verizon. Google is remarkably skillful at creating an exploiting “mash-ups” that combine two or more Internet applications to create a third, value-added service. These mash-ups fuel Google’s primary revenue stream, which is Web-based advertising. Google Voice is such a mash-up. It uses the iPhone and AT&T’s wireless network as a means to Google’s end-more ad dollars.

Just as in any situation where an individual requires the use of the property of another in pursuit of a profit, wireless carriers are entitled to choose whether they allow their property to be used in such a way and, if they do, to collect compensation. If the FCC sides with Google, they would fly in the face of this principle.

It may be true, as Andy Kessler noted last week in the Wall Street Journal, that the comparatively low cost of VoIP approaches like Google’s will cause VoIP to ultimately replace wireless voice technology. It’s up to the marketplace to hash out the costs and contracts that will make this transition happen. The FCC should not be in the business of protecting business models, and that is not what I’m advocating here. But, it is equally wrong for the FCC to use its regulatory power to forcibly undermine one company’s business model in support another’s.

For argument’s sake, let’s say the FCC requires AT&T to support Google Voice without condition. If a majority of consumers were then to adopt the application, would the very wireless networks on which Google Voice depends become financially unsustainable? Would other carriers be interested in bidding to sell new versions of the iPhone if it meant allowing an application that would cost them business?

A healthy business relationship is symbiotic. Both parties see mutual benefit. The danger of Google Voice is that it could be parasitic. Google drains revenue from AT&T and Apple, but fails to make clear what monetizable benefit it offers in return. Until that benefit can be shown, Apple and AT&T have a right to say no.

Steven Titch is a policy analyst at Reason Foundation.