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Google it: Project Fi

Home / Perspectives / Google it: Project Fi

Mitch Reznick, CFA, Co-Head of Credit and Head of Credit Research
23 April 2015

Yesterday, through its blog, Google announced the launch of an entirely new kind of mobile service in the US called Project Fi. What differentiates Project Fi from any other wireless service is that, through a new technology, it allows people to use their devices to talk, text, browse, stream and send instant messages seamlessly between Wi-Fi and 4G LTE networks. Because Google does not operate a mobile network of its own, it is partnering with Sprint and T-Mobile USA to provide the 4G LTE services required. In this way, Google can provide nationwide service by allowing its mobile customers to jump from over 1m free Wi-Fi hotspots and its partners’ networks.  The benefit of using this service versus one of those offered by US mobile carrier is cost—it is a low-price option—and it provides more access to fast networks. Google describes this leap in wireless service as “a program to explore this opportunity by introducing new ideas through a fast and easy wireless experience”.  So, although Project Fi is a mere “program” and very small in scale as it starts with only one phone, the Nexus 6, the significance of the ability to jump between LTE and Wi-Fi networks is not to be underestimated.

For sure, the immediate impact on the credit profiles of the four wireless players in the US will be de minimus. However, in an industry characterised by profound structural change, this service represents a sharp turn in a new direction for the industry for a few reasons.  First, because users can use their mobile phones between Wi-Fi and mobile networks, it will lower the cost of mobile services. This could compound the already re-priced market – which is mostly driven by T-Mobile USA and Sprint. Additionally, it will also force carriers to reconsider the way they provide and allocate data services. Setting the significant technology disruption aside, let’s consider what this means for new entrants. As long as the technology is out there and proliferates, and as long as there is a willing reseller, barriers to entry into the mobile market will fall. Cable companies and start-ups can join in. Indeed, Cablevision’s Wi-Fi-only mobile service, Freewheel, relies on more than 1m of Cablevision’s hotspots in the New York metropolitan area. What differentiates Project Fi from Freewheel and others is that Freewheel is Wi-Fi only. But how long before it and, say, Comcast develop or obtain a similar technology to Google’s and launch their own mobile service that will operate between Wi-Fi and LTE? As we have already written about in one of our Spectrum newsletters and previously on our blog, voice is dead, and mobile is becoming the new cable, and developments along this frontier are drivers of firm value. Mobile service providers must look for ways to leverage their data networks, and one of those is by using content. Like cable and satellite companies, mobile service providers are now compelled to source and provide content that will differentiate their services from others.

Following the innovation of Google by offering a Wi-Fi-to-LTE mobile service may make sense for carriers as well. In this way, mobile carriers need not swim against the tide. Although the barriers to entry have been lowered and prices could continue to migrate south, Wi-Fi-and-LTE hybrid mobile service need not be a complete threat to mobile service operators, as demonstrated by Sprint and T-Mobile, which will generate revenues by leasing some of their excess capacity. But if mobile service providers embrace this change and see Wi-Fi hot spots as being complementary to their own networks, they too can offer similar services that benefit both the revenue and cost sides of the income statement. At the end of the day, regardless of whether or not this little “program” stumbles out of the gate or not, the genie has been let out of the bottle and we are likely in the early days of what will certainly be a new kind of service to be launched on a global basis over time.

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Mitch Reznick, CFA Co-Head of Credit and Head of Credit Research Mitch joined Hermes in February 2010 as head of research on the Hermes Credit team. Prior to this he was co-head of credit research for the global credit and hybrids team at Fortis Investments. Other roles at Fortis included portfolio manager of European high yield funds, based in London, and senior credit analyst, based in Paris. Before this he worked as an associate analyst in the leveraged finance group at Moody’s Investors Service in New York. Mitch earned a master’s degree in International Affairs at Columbia University in New York City and a Bachelor’s degree in History at Pitzer College, one of the Claremont Colleges in California. He is a CFA charterholder; a member of the Capital Markets Advisory Committee of the IFRS Foundation, the Association for Financial Markets in Europe High Yield Investor Committee, and the Credit Advisory Committee for the PRI; and a workstream member of the UK-China Green Finance Task Force.
Read all articles by Mitch Reznick, CFA

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