Vodafone and Telefonica are overplaying their hand with Google

By Paul Lambert

It’s unlikely that any senior Google executive will take very seriously Vodafone and Telefonica’s recent statements that they are thinking of charging search engines to use their networks.

Before expanding on this claim, let’s look at what the operators said in a little detail.

Both Telefonica CEO Cesar Alierta and Vodafone CEO Vittorio Colao – earlier this month and at Mobile World Congress in Barcelona, respectively – have said that they are thinking about charging Google and other search engines to use their networks.

Alierta implied that it was unfair that search engines were using mobile bandwidth for free while Telefonica’s operations provided the network, product sales, customer care, installation and maintenance for them.

Alierta said that he was sure this situation would change and that search-engine companies would need to start paying for some of the infrastructure, possibly through the introduction of monthly fees in accordance with the amount of data generated by each site.

Colao used his keynote speech at Mobile World Congress to say that search engines such as Google and Yahoo should pay for preferential access to the company’s networks. I’m unsure exactly what Colao meant by this statement, in particular the idea of “preferential access,” but I assume he was considering charging Google et al. a fee based on the amount of traffic they generate, perhaps in return for a prominent placing on Vodafone’s portal.

I don’t think the details are of overriding importance at this stage: The key thing is that Colao wants his firm to get more money from Google than it does at the moment, in a way that corresponds to how much traffic Google generates. According to some estimates, Google generates about 6 per cent of all fixed-Internet traffic. It’s unlikely to be this high in the mobile sphere, but it’s fair to say that Google-owned YouTube would generate much more than 6 per cent of all mobile Internet traffic.

In a further broadside to Google and Yahoo, Colao alerted regulators to the lack of competition among search engines. He said that search engines such as Google and Yahoo, which control 80 per cent of the market, are damaging for users because of the lack of competition, and he asked public authorities and regulators to take a look into the issue.

If Telefonica and Vodafone did start charging search engines for using their networks, it would be a bold new step in the operators’ attempts to profit from data traffic. The question is: Would this ever work?

Vodafone and Telefonica overplay their hand

Regardless of the details of the charging mechanism Vodafone and Telefonica are thinking of, I’m sure that Google won’t be taking these statements very seriously. For now, at least. In principle, the arguments are unsound, and in strategic terms they point to a misreading by the operators of the balance of power between Google and them.

Why? Let’s take the “wrong in principle” argument first: Why should Google pay operators to allow mobile users to access its services? And why should Google – but not the BBC, Spotify, The New York Times, Facebook, HSBC or any other content/service provider – be required to pay operators for access to networks?

Although Google, YouTube and others are more responsible for the congested networks than most, operators recoup their network investments by charging end-users to access their networks to use these services and others like them. That’s the business they’re in. Asking Google to pay to access the Vodafone network is like a TV broadcaster charging a film company to show its films over its network, or Microsoft asking Google to pay for access to Windows users.

The arguments put forward by Vodafone and Telefonica are also unsound in strategic terms. At the moment, Vodafone and Telefonica need the big search engines more than these companies need them. People expect to use Google and other popular Web sites on their mobile phones. The balance of power lies with Google and co., not any individual mobile operator. Unless Vodafone and Telefonica actually block Google and other Web sites from their networks, the majority of their customers will find a way to use them, because that’s exactly why they signed up to data plans in the first place – to use these Web sites while on the go.

I think what’s actually going on is that Vodafone and Telefonica are turning up the heat on Google and other popular content providers to prepare for negotiations down the line over the amount of money these companies pay them, especially for value-added search-generated services, such as advertising. As such, these recent arguments are the beginning of a long battle over not just which party owns the customer, but over who pays what amount to enable that customer to access popular Web sites on the go. There is also the question of who earns money from value-added search-generated services such as location-based advertising, which might use the operator’s technology.

Although Vodafone’s and Telefonica’s arguments are unlikely to worry Google et al. in the near term, it’s an open question whether they can avoid entering into some kind of close partnership with operators with a revenue-share component built in. But there’s no reason to expect that mobile operators will be able to succeed where fixed operators have failed: in getting Internet companies to pay for some of the bandwidth they use.

It’s not just that mobile operators need Internet companies much more than Internet companies need them. It’s the job of mobile operators to build the best networks they can and bill subscribers as much as they can for whatever content they use. Government policy is heading down this path in the US and Europe, and operators risk being out of step with the direction the Internet is going by publicly mulling over how to charge differential rates for certain types of content.