Google (NASDAQ:GOOGL) (NASDAQ:GOOG) plans to launch a wireless service this Spring. "Nexus," as Google is calling it, will utilize both T-Mobile's (NASDAQ:TMUS) and Sprint's (NYSE:S) networks along with WiFi hotspots to make calls and deliver data. Of course, in order to hand off the signal between networks special hardware is necessary, so Nexus will only work with the latest model of the Nexus 6 handset designed by Google.
Indeed, Google Senior Vice President Sundar Pichai said that the company doesn't intend to compete with the big four wireless carriers in the U.S. Instead, similar to its efforts with Google Fiber, the Internet giant simply wants to demonstrate technical innovations that carriers could adopt.
What kind of change though?
Before Google introduced Fiber, gigabit Internet in the home was impractically expensive. After its introduction, a gigabit connections still costs a lot, but it's more accessible. More importantly, the average Internet speed has increased measurably in the last four years. That's an obvious boon for Google, which makes more money from faster page loads and increased YouTube viewing.
With Nexus, Google's goal is similar. Google aims to route data and voice connections via the most efficient means in order to make everyone's experience on the network as smooth as possible. It will accomplish that task by constantly monitoring both Sprint and T-Mobile's network as well as available WiFi connections. It won't always choose the fastest connection -- sending an email doesn't require a fast connection -- but the most efficient for its network.
By operating more efficiently, Google may be able to drive down the cost of data, which it's hoping will drive an increase in data usage. That means more ad impressions and Google Play downloads for Google.
For the major carriers, it's a bit more risky. While more data usage could offset a decline in data pricing, there's a risk that if pressure from Google drives down data prices too much to offset the decline it could result in lower operating profits.
Do we really need special hardware?
While Google's Nexus will only work with the upcoming Nexus 6 model, it seems like most of what Google wants to accomplish can be done with many existing high-end handsets.
The iPhone 6, for example, is already capable of WiFi call handoff, which seamlessly transfers a call from WiFi to VoLTE without dropping the call. Only T-Mobile supports the feature, but AT&T (NYSE:T) and Verizon (NYSE:VZ) are working to implement it this year.
Google's service likely only works with the Nexus 6 due to the fact that it uses both Sprint and T-Mobile's networks, which use different channel access methods to connect to their respective networks (CDMA and GSM). Therefore, it's necessary to have special hardware that can connect to both. A regular carrier wouldn't have this problem.
Still, the features that Google would like to see implemented across the industry aren't exactly basic, and they require hardware and software engineering in order to pull off. While Google could help on the software side, these features will remain largely relegated to high-end phones if and when the industry adopts similar data funneling methods. While that's not a big issue in the U.S., if Google wanted to try a similar strategy in other markets, it might not work as well.
Good for Google, but what about carriers?
Limiting the service to just Nexus 6 purchasers means Nexus will have a minimal impact on the big four wireless carriers. Its predecessor, the Nexus 5, only sold a few million units.
While Google has enough cash to fund high amounts of data usage on Sprint and T-Mobile's networks for a relatively low monthly price, its planned network efficiency only works at scale to actually make the efforts profitable -- scale that can't be delivered when it's limited to a single handset model. The fact that Google made deals with Sprint and T-Mobile means that its network will theoretically work with phones sold by any carrier (they will just have access to only one wireless network). That means Google could potentially extend its network to other compatible phones capable of WiFi handoff.
If Google goes that route, it could have a much larger impact on the wireless carriers, pressuring prices down even further in an industry that's already feeling price pressure. That risk is especially pronounced for Sprint, since the carrier largely competes on price. While T-Mobile also competes on price, it works to provide a valuable customer experience through its Un-Carrier initiatives.
With the build-out of Sprint and T-Mobile's networks nearing those of AT&T's and Verion's, both of the larger carriers may have trouble maintaining pricing as the smaller carriers as well as Nexus become more viable options throughout the country.