Google Inc Could Wreak Havoc on Its New Wireless Partners

By Markets Fool.com

If you're looking to switch wireless carriers, you may soon have another option.

Continue Reading Below

Google is reportedly working on a mobile virtual private network, or MVNO, that uses access to theSprint and T-Mobile wireless networks. While the agreement with Google will generate additional revenue for the wireless carriers, it represents a serious threat to their core businesses.

With a price war already in full swing among the major industry players and the cost of airwave spectrum rising well above expectations, Google could cause more headaches for Sprint and T-Mobile than it's worth.

Selling excess capacity
MVNO agreements are typically very valuable for carriers, as they can sell excess capacity and achieve high margins without the need to do any sales or marketing work -- this Google deal is no exception. Macquarie Securities analyst Kevin Smithen believes the search giant could pay out $1 billion in service fees to the carriers in 2018.

Both companies have plenty of spare capacity, too. T-Mobile CTO Neville Ray told investors earlier this month that it has more spectrum per subscriber than both of its largest rivals. Sprint, however, has even more excess capacity, which leads Smithen to predict it will take about three-fourths of Google's MVNO business.

Those revenues will allow Sprint and T-Mobile to reinvest in their networks, which will help attract new customers and prevent current customers from leaving. On the flip side, any improvements to their networks will also improve the Google service making it even more attractive.

Continue Reading Below

And there lies the big risk
While Google's plans are still extremely vague, it seems like the biggest goal is to make wireless data networks fast and cheap. To that end, it makes sense for Google to offer a high-value option through its MVNO, similar to what it has accomplished with the rollout of Google Fiber.

Google can afford to offer things like unlimited high-speed data at near cost -- the company is expected to pay $2 per GB -- because it makes money almost any time a smartphone user accesses the Web.Google took an estimated 37% of total mobile ad spending last year, so it stands to gain from making data access as inexpensive as possible.

While Sprint and T-Mobile have done a good job undercutting the competition on price, Google could do so even further.

The risk seems greater for Sprint, which appears to have little to compete on besides price. T-Mobile is more focused on providing a valuable customer experience for its subscribers with the Un-Carrier initiatives to differentiate itself. Of course, there is little holding Google back from offering similar perks as the Un-Carrier (potentially with a focus on Google services like YouTube and Google Play).

The Wall Street Journal reports that Sprint has put limits in place to prevent the Google MVNO from growing too large. That should be a smart move considering the carrier is likely to lose at least some customers to the new service. There is no indication, however, that such a stipulation exists in the T-Mobile agreement.

Still, if Google hits that volume trigger, there is little stopping the company from licensing capacity from another network. And there is no guarantee that if Google's network coverage suffers, customers will leave for Sprint -- the company is best off renegotiating at the best rate it can get at that point.

A prisoner's dilemma
With significant risk involved in allowing Google into the wireless market, the only explanation for why Sprint or T-Mobile would agree to license their capacities is that Google played one off the other. Thinking it would be better to at least get something out of the deal than to just lose customers to another Google upstart, both companies agreed to a deal. The fact that Google will rely on their networks should neutralize most of the potential impact from the new service.

The article Google Inc Could Wreak Havoc on Its New Wireless Partners originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.