Fear the power of the Google Effect

Google began as a clever search system but could extend into telecommunications. Picture / Bloomberg

Google was born as a stack of computers running an innovative internet searching process from the university dorm room of one of its co-founders.

Who would have guessed that eight years later that rack of scavenged PCs would have grown into a global empire powerful enough to make the mighty Microsoft shudder?

And shudder Microsoft has.

When it announced last month it was throwing hundreds of millions of extra research dollars towards its battle with Google, investors panicked. Microsoft shares plunged 11 per cent, wiping almost US$32 billion ($51.3 billion) off the value of the company.

This type of corporate hair-tearing that Microsoft has had to endure now has a name: the Google Effect.

"The Google Effect is really about fear driving internal change in other players like Microsoft," says Chris Loh, a senior telecommunications analyst with research firm IDC in Auckland.

"The thing there is that Google's brand, the obvious innovation inherent in its services, and the depth of its financial position mean that everyone is watching it - especially the telcos - and they're trying to act pre-emptively where possible."

In Microsoft's case, its announcement that it will double its research and development spending on web technology around its MSN search portal - to US$1.1 billion over the next year - signals a desperate desire to win a bigger share of the booming international web advertising market, now dominated by Google.

Ad-supported web-based technology is widely picked as the next big thing.

George Colony, founder and chief executive of research company Forrester, told the Australian newspaper last week that even business software would become free in the future, and would be funded by advertising.

Colony predicts that by 2012, 14 billion devices - both PCs and mobile devices - will be connected to the "extended internet".

"Google could be the centre of the extended internet," he told the paper. "Google could do to software what Apple has done for hardware."

Like its shareholders, Colony worries about Microsoft's answer to this.

"Vista [Microsoft's soon-to-be-launched new operating system] had better be good," he said.

But Microsoft isn't the only company trembling at the prospect of suffering a severe googling. The company seems to instil fear into any industry it sets its sights on, from email to mapping to book publishing to video delivery. Google is even starting to send chills down the collective spines of telecommunications companies.

That particular fear began with rumours last year that Google was about to start buying up "dark fibre" in America and Europe. Dark fibre is unused fibre-optic cable, laid liberally in the ground during the free-spending information technology infrastructure building era before the bursting of the dot.com bubble in 2000.

In New Zealand, Telecom, TelstraClear and Vector have significant fibre networks. All are in use, although industry estimates are that only 10 per cent of these networks' capacity is being used.

Google world domination theorists speculate that acquiring a fibre network and combining it with voice-over-internet (VoIP) applications and wifi networks would make the company an instant telco heavyweight.

That shake-up became more pertinent to New Zealanders a fortnight ago when the Government announced regulatory reforms aimed at opening up Telecom's hold over broadband access.

The reforms include forcing Telecom to provide "naked DSL": a broadband connection into the home or business without an associated phone line rental.

This would allow competitors - and perhaps new non-traditional telco investors - to sell customers competitively priced VoIP services.

Sydney-based analyst Paul Budde estimates that less than 1 per cent of calls in New Zealand are currently made using VoIP services such as Skype.

But with unbundling and naked DSL, Telecom's competitors will be able to sell broadband and VoIP packages, bringing VoIP into the mainstream.

"So while it's not big now it will grow quite substantially and in five to 10 years' time all our calls will be over VoIP," Budde says.

Loh says the arrival of a viable VoIP alternative will put about half of Telecom's revenue at risk - the approximately $2 billion a year it earns from line rentals and long-distance calls.

"Until now line rental has been locked in there, but now naked DSL means this can be bypassed, so up to 50 per cent of Telecom's revenue is under threat from other providers, both locally and internationally," Loh says.

Telecom said last week that its senior management were working a strategy for the company's "new direction" in the unbundled environment.

This would include "implementing voice over internet options for business and residential customers", the company said.

Matt Crockett, general manager of Telecom's wired division, says the company realises there is a big market for VoIP.

"Globally there are many providers of internet-quality voice services and a number of telcos have partnered with them to offer their services - an example being BT, who have partnered with Yahoo to provide internet voice."

Crockett says there are a wide range of services that telco companies can deliver through partnerships with internet application providers.

"Our MSN relationship is an example of this type of arrangement, and numerous providers around the world can demonstrate successful partnerships like this," he says.

Google itself is getting into the VoIP game with its Skype-like Google Talk application, released last year. The company is expected to add video calling to the software, much as Skype has.

Additionally, Google is in the process of introducing free wifi internet access in San Francisco and other US cities - a move it could choose to duplicate elsewhere.

A source inside the company said Google was using any networks it had acquired for internal purposes, but it had no plan to offer direct services to the public.

"We need the capacity to make our stuff work and we can't really have a mix of public and internal traffic in the same system. To achieve performance levels, we need direct control of all traffic sources on our internal network," the source said. The source did not, however, rule out that Google could at some point offer internet access services to the public in some form.

Loh says a prime opportunity exists for Google around the hugely popular web community sites such as MySpace, which was bought by Rupert Murdoch's News Corporation for US$580 million this year.

The business model could include delivering content, paid for by the user, into these communities and it would be very easy to include VoIP applications as part of such a package.

"It will basically mean that every computer in the world that is connected [to the internet] can act as a communications platform.

"It will really shake things up," Loh says.