Google Takes on the Phone Business

What companies can learn from Google's efforts to reshape the U.S. mobile communications business

The peripheries of the global business world are the spawning grounds of new innovation. In these vital locations edges emerge and consolidate before giving rise to new edges of their own. Executives who stay mindful of these dynamics can make the most of their innovation strategies.

The telephone business provides a classic example. Two decades ago, wireless telephone networks created a vibrant new edge to the wire-line telephony business. Many analysts at the time viewed mobile phones as a fringe event, something that would never take hold in the mainstream telephone business, except perhaps as a status symbol among the very wealthy.

Twenty years later mobile telephones are ubiquitous in the U.S. despite continuing challenges in service coverage, particularly in buildings. In many other parts of the world, these devices have replaced the old wire-line phone as the primary means of communication. What was on the edge has now become the core.

Google initiative

While highly innovative in many dimensions, the mobile phone business in the U.S. in at least one respect represents a curious throwback to a previous era. In 1968 the Federal Communications Commission issued a landmark decision known as the Carterfone ruling, deciding that any communication device could be connected to the wire-line phone network as long as it did not damage the network.

But no such ruling applies to U.S. wireless networks, where service providers retain the right to determine which mobile devices are permitted to connect to their networks. The edges, in this case represented by mobile device manufacturers, have remained tightly controlled by the core. This stands in sharp contrast to another major wireless telephone market, China, where the freedom to connect into wireless networks has spawned rich innovation by device manufacturers.

China's mobile network operators were responding to the proliferation of bootleg phones connecting to their networks without authorization. Without any effective ability to enforce restrictions on mobile device manufacturers, the network operators decided that it would be better to let these devices hook up "legally" rather than simply have them "steal" bandwidth. This choice, born of necessity, opened up a flood of innovations, including robust audio short message service (SMS), and multiple screens both within and outside a phone to allow selected information to be displayed without opening the device, and private information to be displayed within.

A player from the edge of the communication business is now challenging this anomaly in the U.S. through a series of innovative initiatives. Google (GOOG), a highly successful Internet company but a novice in the phone business, has decided that the mobile communications business will become much more innovative if device manufacturers can be freed from the control of network operators.

Coming together

In a bold effort to reshape the mobile communications business, Google has harnessed a series of edge plays. First, it has targeted the 700-megahertz portion of the wireless spectrum that had been allocated for use by television stations and will now be made available for mobile telephone service in an auction scheduled for Jan. 24.

In an effort to influence public policy, Google indicated it would be prepared to bid for this spectrum if the FCC would agree to a number of rule changes, including the requirement that any mobile device manufacturer would be able to freely connect into services provided over this spectrum. Google did not win all it wanted in this initiative but it did win acceptance of this key provision. The edge, including such nontraditional telecom players as computer manufacturers and game console manufacturers, will be free to innovate without the control of network service providers.

But Google's edge initiatives don't stop there. With the Open Handset Alliance, Google is seeking to mobilize a broad set of companies to join together in creating a robust software platform (known as Project Android) for a new generation of mobile phone devices. In designing this mobile phone software platform rather than focusing on the core of the mobile phone industry—voice communication—Google seeks to unleash the edge by focusing on innovative data communication services as broadband wireless services become more ubiquitous.

To catalyze this innovation, Google is going to the edge of the software industry. Rather than developing a proprietary software platform for mobile phone devices, Google has chosen to adopt an open source development and licensing model under the sponsorship of a broad industry consortium including Sprint Nextel (S), T-Mobile and Samsung Electronics. In this way, Google is inviting software developers around the world to supplement its own commitment of software developer resources and help deliver innovative functionality to mobile phone users.

Obviously these initiatives are still at their earliest stages, and it is far from clear how successful they will ultimately be (yesterday's shuttering of Frontline Wireless, a high profile candidate expected to be a key player in the government auction which had nonetheless failed to attract the necessary funding to take part, is just one indicator of the field's complexity). Nevertheless, executives can begin to draw important lessons regarding innovation:

• Don't get distracted by your existing competitors

Look for players on the edge of your traditional markets who have the assets and incentives to disrupt the industry. And don't forget to scan the startup world: Google is highly visible and well-known, but other disruptors may not be.

• Look beyond product innovation

If Google succeeds in its wireless plans, it won't be just because of product innovation. In fact, the success of any product innovation will hinge upon the broader efforts by Google to shape public policy and to mobilize creative talent through innovative institutional arrangements.

• Mobilize others in support of your innovation initiatives

We are too often influenced by the stories of heroic individual entrepreneurs. We often forget that, in this increasingly connected world, some of the most powerful innovations will come through distributed innovation involving hundreds, if not thousands, of independent participants.

• Don't be deceived by theoretical concepts like "emergent" and "self-organizing."

Mobilizing large numbers of participants requires deep insight into their motivations and thoughtful structuring of coordination and governance mechanisms to focus and amplify the efforts of individual participants. These distributed innovation initiatives rarely, if ever, happen on their own. They require shapers who understand how to strike the right balance between self-organization and leadership.

• Target the edges

When focusing your innovation initiatives, find relevant edges that deliver greater value to customers. If the value can be demonstrated on the edges, participants in the core will adapt over time. Change is always easier to accomplish on the periphery, rather than by directly confronting large entrenched players with deeply held beliefs in the core.

The mobile phone industry in the U.S. provides a graphic example of the role of edges as seedbeds for innovation and for reshaping industries and markets. As what was once edgy become core, new edges emerge to begin the process all over again.