Civitium's Weblog

First, the airline industry provides some useful insight.

In the late 1990s, five airlines controlled about 80% of the air travel market in the U.S.; roughly an $80 billion industry. These airlines had become frustrated by the rise of online travel agencies such as Expedia and Travelocity, who had in a sense begun to insert themselves between the airlines and consumers, and the top airlines decided to do something about it by forming their own online travel agency; Orbitz. Rather than paraphrase a well-documented case study, I’ll provide an excerpt from Wikipedia.

Orbitz constituted the airline industry's response to the rise of online travel agencies such as Expedia and Travelocity, as well as the continued increase in [reservation system] fees, and trailed its major competitors by several years. Continental Airlines, Delta Air Lines, Northwest Airlines, and United Airlines, subsequently joined by American Airlines, invested a combined $145 million to start the [Orbitz] project in November 1999. It was code-named T2 — some claimed, meaning "Travelocity Terminator" – but adopted the brand name Orbitz.

As this article states, "Orbitz began selling tickets in June and by February it had topped $1 billion in revenue. By contrast, it took Seattle-based Expedia, which debuted in October 1996, about four years to reach $1 billion in annual revenue. It took Travelocity, which debuted in March 1996, about three years."

To make a fairly long story short, Orbitz was challenged on anti-competitive grounds by almost every industry and government regulator imaginable, but in the end, it went public in 2003 (the airlines held 70% of the outstanding stock and over 90% of the voting power.) It was acquired in 2004 by Cendant for $1.25 billion, and later in 2006 by The Blackstone Group, a private equity firm, for $4.3 billion. It is generally assumed that Orbitz “did what it was supposed to do” for the airlines; it leveled the playing field, some would argue even too far in its own favor.

What does this have to do with Google? Well it spells out one strategy that Google could adopt to deal with the wireless carriers. In this scenario, Google would partner with companies who share its goal for open, high-capacity wireless networks that don’t favor the network owners’ software and services (Apple comes to mind of course) and create or acquire the assets needs to create a viable alternative. Om Malik’s post just this morning of a rumored Google acquisition and spin-off of Sprint is a great example of this option. The airlines demonstrated that you don't have to "get into the business" of providing online travel services; you just have to make sure that someone if in the business of doing it the way you want it done.

Another case study highlights a second strategic option; Wal-Mart and the credit card industry.

Since the 1980s, Visa and MasterCard have accounted for 70 percent of the credit card market, and some argue that these companies have controlled their payment networks to advantage their bank members. In the 1990s, some merchants became large enough to exert their own leverage on these payment networks. For example, Wal-Mart, Sears and Safeway joined forces to eliminate fees and rules imposed on them by MasterCard and Visa. In 2005, Discover and Wal-Mart (the nation’s largest retailer) launched a new credit card.

Again, the relationship between Wal-Mart and other retailers’ strategic response to Visa and MasterCard, and Google’s strategic options to deal with the wireless duopoly are clear. A credit card payment network is akin to a wireless network. Visa and MasterCard are AT&T and Verizon; and Google is the Wal-Mart of the Internet search and content business. Google says to AT&T and Verizon, “if you keep controlling consumers over your network, in a way that disadvantages my content and services, I’ll have no choice but to build an alliance to finance an alternative to your networks.”

Despite the similarities, this option is fundamentally different from the airline industry’s response to Expedia and Travelocity. If Google were to use the Wal-Mart strategy, it would likely involve forming a strategic partnership with a wireless carrier. Ideally this would be a third-place, underdog player who is struggling to compete with the big-two players, but who has certain useful assets (licensed spectrum and tens of millions of consumers.) Once again, Sprint comes to mind; but of course T-Mobile could be a powerful ally as well.

So, will Google “be like Wal-Mart” and do a strategic deal with Sprint to prop up its apparently weak investor sentiment for WiMAX, or “be like United Airlines” and join forces with Apple and others to acquire and spin-off Sprint into the model of what it wants a wireless operator to be? Or is Google truly different; will it do something brilliant and without precedent? Who knows, but the Google-speculating that has become a national pastime is sure to continue.