The Google-Verizon Deal: An 'Evil' or Pragmatic Pact?

In the decade since Google (GOOG) spread like wildfire from users at Stanford University to millions around the world, the one-time dorm-room project has become the most powerful company on the Internet -- a $120 billion public colossus with 20,000 employees. In the early days, Google's brash founders, Larry Page and Sergey Brin, were unabashedly idealistic.

"Don't be evil," Page and Brin wrote in their 2004 Founders' IPO Letter. "We believe strongly that in the long term, we will be better served -- as shareholders and in all other ways -- by a company that does good things for the world even if we forgo some short-term gains."

Page and Brin wrote that Google would aspire to be "a company that is trustworthy and interested in the public good. We believe a well-functioning society should have abundant, free and unbiased access to high quality information. Google therefore has a responsibility to the world."

Evil Deal or Pragmatic Compromise?

So what then to make of Google's recent joint proposal with Verizon (VZ) on net neutrality, the basic principle that broadband companies shouldn't play favorites with Web content -- their own or others' -- for payment? For years, Google has been the single largest -- and loudest -- proponent of net neutrality among any private company. It's not hard to see why. The company's entire business model -- it earns 95% of its revenue from search ads -- depends on users being able to access Google.com on the Internet for free.

The idea of net neutrality has generally been opposed by the big broadband providers who, after all, invested mightily to build the hardware backbone of the Internet. Why should Google be allowed to stream YouTube videos for free to millions when we built the infrastructure, the providers ask?

In practice, net neutrality already exists for the most part. In April, however, a federal appeals court said the Federal Communications Commission lacked the power to enforce net neutrality, and that ruling threw the agency's ambitious National Broadband Plan into chaos. All of a sudden, the FCC was powerless over broadband. The agency could reclassify broadband service, an idea that has run into extreme opposition in Congress. Or Congress could pass a law granting the FCC authority, which it seems to have little appetite to do, especially in an election year.

The Process: It All Started With Android

Google and Verizon came together about a year ago to find some middle ground, according to sources familiar with the matter. At the time they were already working to prepare for the massive launch of Verizon smartphones powered by Google's then-unknown mobile operating system, Android. (In one year, Android's market share has gone from 1% to about 14%, thanks in large part to heavy and effective marketing by Verizon -- and popular devices by Motorola (MOT) and HTC. Android-equipped phones now outsell Apple's (APPL) iPhone -- about 200,000 each day worldwide, according to Google.)

But Android's success didn't change the fact that the companies were on traditionally opposite sides of the net neutrality debate. So they initiated a discussion with the goal of finding a compromise on net neutrality where some progress could be achieved in the face of FCC and congressional inaction.

"Verizon and Google have had a relationship where they could trust each other and find common ground," says Paul Gallant, a telecom and media policy analyst at Concept Capital in Washington, D.C.

Google certainly wasn't going to sit down with AT&T (T), the nation's second-largest wireless carrier, which has sparred with the search giant repeatedly over the last few years. Verizon is locked in a nasty battle of its own with AT&T over wireless coverage. And AT&T is, of course, the sole carrier for Apple's iPhone.

The Proposal: Pragmatics Over Principles?

Amid all the vitriol, one overlooked fact is that a giant broadband company, Verizon, has agreed that the FCC should have the regulatory authority to enforce all six of Chairman Julius Genachowski's broadband rules, including nondiscrimination, which is at the heart of net neutrality. Public-interest groupshave been fighting for this principle for years. That's the good news.

The bad news is that the proposal wouldn't require net neutrality on wireless networks -- a concession that has bitterly disappointed public-interest groups (some of which protested at Google's headquarters on Aug. 13). Google has clearly compromised the position on wireless net neutrality it once held almost religiously. Remember "Any Applications, Any Devices"? In short, Google has rolled.

"Google knew they were not going to get everything they wanted," says Keith Kaczmarek, a veteran Washington, D.C.-based telecom executive and consultant. "I think Google knows that wireless is the next frontier, but they appear to have concluded, 'Let's not fight that battle right now. Let's see what we can get done.'"

Wireless Net Neutrality Isn't Politically Feasible

Telecom expert Hans van Rietschote, CEO of Mercury Swan Consulting in Sunnyvale, Calif. agrees. "I think Google realizes that the wireless Internet is going to be more important than fixed. But if they wanted to get net neutrality for the fixed-line Internet, they had to give up something."

At least for now, Google, Verizon, AT&T and Genachowski seem to have come to roughly the same conclusion, if for different reasons: Wireless net neutrality isn't politically feasible right now, and may not even be technically possible as mobile broadband usage explodes in the next few years. That said, there is nothing in the Google-Verizon proposal that would preclude applying net neutrality principles to wireless broadband sometime in the future, according to an industry source.

Everyone talks about auctioning off more spectrum -- and Verizon is preparing to open the huge 700Mhz "C" block it won three years ago -- but other than talk about it, the FCC hasn't made much progress on freeing new spectrum. Meanwhile, the controversial "D" block, which was supposed to help create a state-of-the-art national emergency communications network, years ago, remains on the back burner.

What, Exactly, Is "Managed Services"?

The first two components of the deal -- net neutrality for wired networks, no net neutrality for wireless networks -- are fairly straightforward. But it's the third component, the mysterious "managed services" provision, that has proved most confusing and has the most controversial and potentially long-lasting implications.

In essence, Google and Verizon are proposing a separate network apart from the "public Internet," where nondiscrimination wouldn't apply and where wealthy companies would be able to buy huge chunks of bandwidth and superfast connections. Some of the benign-sounding uses Google and Verizon have mentioned are things like medical data that need a fast, secure network, or low-latency networks for hardcore Internet gamers. Managed services would be a faster, paid alternative to the public Internet, kind of like ultra-premium cable.

"Managed services is an area where companies like Comcast (CMCSA) and Verizon could prioritize traffic for paying customers," says Gallant of Concept Capital. Cash-rich Google could, for example, pay either of the broadband giants under managed services to ensure that YouTube videos are delivered faster than other content. But Google denies this will ever happen. CEO Eric Schmidt went on the record last week saying emphatically that Google remains committed to the public Internet and doesn't intend to use managed services. But then, two years ago Google also supported wireless net neutrality.

In short, many questions remain about managed services. Among them: Does this mean that more investment will go toward the managed-services Internet -- and if companies will pay for access to that market, why not? Will it become a better place to do business than the public Internet? Will the public Internet as we know it today become a slower alternative to a managed-services network for those who can afford to spend more, thereby shutting out start-ups -- maybe the next YouTube or Twitter?

Google Always Thinks Two Steps Ahead

The FCC's follies and congressional gridlock haven't stopped Google from hedging its bets in case its relationships with the carriers sour or there's a threat to its ability to operate. That's why Google has bought up thousands of miles of so-called "dark fiber" -- the underground fiber-optic cable left dormant after the first tech bubble burst. And it has used that fiber to connect strategically positioned data centers and server farms at key peering and co-location facilities, which give Google the ability to physically connect with important telecommunications companies. Google is also a key partner in the Unity undersea communications cable that stretches from California to Asia on the Pacific Ocean floor.

Google's dark-fiber network is one of the company's most closely guarded secrets, but one thing is virtually certain: Google now controls the largest private global computer network in the world. "Google is building its own Internet so that if push comes to shove, they can say goodbye to the other guys," van Rietschote says. "Since Google owns their own fiber, they can control what content runs over it."

"Google is essentially building a hedge so that no one can kick them off the Internet," van Rietschote adds. "Owning their own network also gets them a seat at the table so they can help influence policy."

Once Personal, Now Business

Gallent agrees, though he's hesitant to use the term "hedge" -- and dismisses theories that Google wants to begin offering nationwide Internet service in competition with the existing carriers, despite its recently announced plan to experiment with ultrafast broadband to cites around the country. That move is generally seen as an attempt to nudge the big providers into increasing their speeds.

Rather, Gallant thinks Google's huge network adds to its muscle in Washington and with the telecoms. "It reduces Google's dependence on the carriers that obviously still have some power over its ability to provide its services," says Gallant. "Google can't reach all of us without access to the pipes, and so they're going to build around the Bell companies as much as they can."

In the meantime, given Google's investment in Android, it's no surprise that Google is cozying up to the biggest wireless provider in the country. And if that means cutting a deal, so be it. A Google spokesperson declined to comment.

Google has changed. It's no longer a starry-eyed startup that could pledge with naive courage not to be evil -- as if good and evil were as clearly delineated as on and off. Google is now a $120 billion public company and is highly profitable, but it's long since ceased posting triple-digit growth and is looking more and more like a one-trick -- search -- pony. From China to privacy, and now net neutrality, Google's idealistic founders Larry Page and Sergey Brin are learning that whether in Washington or Beijing, the world operates in sometimes ambiguous, often compromised states.

Read about how the FCC's bungling paved the way for the Google Verizon deal.

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