Google wants smartphone carriers out of the way – including Telstra: Kohler

When Telstra’s share price fell to record lows last week the talk was all about the NBN, but perhaps the real source of Telstra’s woe is that it’s being trampled in the elephant fight between Google and Apple.

The NBN is worth 90c per share for Telstra and provides a clear future for the most difficult, shrinking part of its business – fixed lines. CEO David Thodey no doubt wishes Malcolm Turnbull would just shut up and pass the legislation.

But the bigger problem may lie in the more important, fast-growing Smartphone market: carriers like Telstra are being cut out as Google and Apple fight it out for the future.

The latest battleground is China, where there are 800 million mobile phone users. On Saturday Apple launched its iPhone 4 in Beijing and Shanghai for $A795 each and immediately sold out; the cheaper Google Android phones have been selling like hotcakes for a while, and apparently activations for both platforms have been running neck and neck.

At this stage the carriers, including Telstra’s Hong Kong unit, CSL, are getting a share of the action, but watch this space…

Telstra has known for 15 years that the future of telecommunications lies in content, but it never really knew what to do about it. For four years it looked at taking over John Fairfax, but that idea was eventually knocked back by the board, and then it just concentrated on owning half of Foxtel and building BigPond.

And then Steve Jobs came along with iTunes and all the carriers went: “Oh, so that’s what content means!” Apple sold the devices with an operating system inside, and then added everything else: music, movies, books, applications, games, ringtones, you name it. Carriers were put in their place.

As a result Apple became the world’s second largest company with a market capitalisation of $US267 billion – much bigger than BHP Billiton and breathing down the neck of Exxon Mobil to become the biggest.

Meanwhile Telstra has shrunk pitifully, and has become just a mobile ISP – selling phones and carrying the data bits. Mind you, that’s been a pretty good margin business and has been replacing the revenue lost on the fixed line network.

But now Google has arrived with another disintermediation – Android, the open source operating system for Smartphones. There are now scores of devices being sold with the Android system on board, while there is only one (admittedly pretty good) iPhone. Android’s market share in the US is already greater than the iPhone’s.

So far Google and the makers of Android phones have been working with carriers to sell their devices and Telstra has seen an explosion of Android devices this year, while also selling a lot of iPhones.

But this month the Taiwanese maker, Acer, is launching a new range of Android Smartphones with full qwerty keyboards and a retail strategy that bypasses the carriers. It means consumers can’t get them for $0 on a plan but will buy them direct from retailers and then choose their carrier.

Jean-Louis Gassée writing in the Monday Note says: “Google’s intent is clear: they want carriers out of the way.

“Schmidt, Brin, Page, and Rubin all think carriers are greedy bumblers, short-term thinkers, technically and culturally incompetent in matters of Smartphone OS and applications.

“Google wants to see Smartphones priced at $79, without subsidy, thus taking away the carriers’ opportunity to dictate features. At $79 and no contract, consumers can change handsets and carriers at will. This frees Google to have a direct relationship with the consumer, allowing their money machine – advertising today, entertainment and business services tomorrow – to run unimpeded.”

The Acer devices to be launched this month will start at $399, so not exactly 79 bucks yet, but prices are coming down and the Android phones are clearly undercutting iPhones. It’s no doubt only a matter of time before Android overtakes iPhone in Australia, and carriers here are further disintermediated.

The key to all this is content, as Telstra recognised but failed to act on so long ago.

To that end Google is now working on its own version of iTunes.

It already has an Android apps market (with 40,000 apps versus Apple’s 180,000 apps), but earlier this month Billboard magazine carried a story that Google is well advanced on an iTunes-style music store that would operate on an annual subscription.

The world is moving very quickly to one where all the value is captured by Google and Apple and the carriers just work for them on low margins.

Telstra was right: it was all about content.

This article first appeared on Business Spectator.