According to a mainstream business publication, Google (GOOGL) is preparing to launch a consumer wireless service as a mobile virtual network operator, running on top of the networks of Sprint and T-Mobile US. There has been no formal announcement by any of these three parties. While a new consumer service could provide some interesting revenue growth potential for Google, we believe the Internet giant faces several hurdles in launching and growing a mobile offering. We are sticking with our fair value estimates and moat ratings for each of these firms.
We believe Google will need to provide something unique beyond basic wireless connectivity in order to attract a meaningful customer base. We doubt that an offering differentiated by cheaper pricing alone would be enough, either. Although we've seen other MVNOs (notably America Movil's Tracfone) attract millions of subscribers, they have primarily attracted price-sensitive users. To disrupt these inexpensive alternatives, we believe Google may have to undercut these formidable MVNOs. We are sceptical that the firm can effectively compete with AT&T and Verizon Wireless, at least in the short run.
We believe it is likely that Google is testing its power with consumers in an effort to lessen its reliance on carrier partners. One such path could involve using the existing wireless networks as a starting point toward developing a network of its own, perhaps using Wi-Fi hotspots and unlicensed spectrum.
Although we believe significant financial upside is unlikely, we also see limited downside and recognize that these moves may also help to support policy issues such as net neutrality. Still, the long-term impacts are even less obvious. Google's mobile presence today supports our wide moat rating, and this presence depends on the partnerships with handset manufacturers and wireless carriers. Google already has a much larger reach into hundreds of millions of consumers through its Android smartphone platform, and its hold on these users is critical to support continued mobile advertising growth.
Lastly, the lack of control over mobile assets (sufficient spectrum, wireless infrastructure) may be the ultimate limiter for Google. Sprint and T-Mobile US may be willing to resell excess capacity to Google, but we think this contract is unlikely to support tens of millions of MVNO subscribers. The last thing Sprint or T-Mobile wants, in our view, is to build network capacity to serve customers loyal to a powerful brand like Google only to face unreasonable terms or outright loss of the business at contract renewal time. Regardless, we think the move is shrewd and relatively low risk for Google.
The potential for a well-capitalized player with strong mobile assets has been a persistent threat to the wireless carriers. Still, we continue to believe that AT&T and Verizon enjoy a relatively strong competitive position with respect to delivering wireless coverage and capacity at relatively low cost. Sprint and T-Mobile, in their current forms, are unlikely to overcome the disadvantages that come with their lack of scale over the long term. Should Google seek to acquire one of these two weaker players, our view on the industry may change. At this point, though, we don't believe Google is likely to pursue that course.
