The world's most famous Internet company uses the annual conference of the company that practically invented the Software-as-a-Service industry to announce that Google's next business move is manufacturing telephones.

While everyone is running around with "software prohibited" buttons pinned to their sky-blue lanyards – get it, clouds in the sky? – one of the industry leaders in no-software applications is talking about making actual stuff.

Let that sink in.

There's certainly a message here. But not necessarily one that the boys – and I do mean boys, but more on that some other time – in Cloud Cukooland think they're hearing.

In other words, as more and more people attempt to do things "in the cloud," the Next Big Thing is making appliances that connect to it. Like, for example, telephones. Or e-readers.

Consider the Amazon Kindle. Remember Steve Jobs' remark when the Kindle was introduced, "The whole conception is flawed"?¹ Four years later, Amazon's success with the Kindle is beyond doubt. In 2010, the Kindle eclipsed "Harry Potter and the Deathly Hallows" as the Amazon's single best-selling product. And that year e-books outsold physical books for the first time.²  

Why is this? Simplicity.

Google has expressed itself very clearly on this point in the past:

"Google doesn‘t set out to create feature-rich products; our best designs include only the features that people need to accomplish their goals… Google teams think twice before sacrificing simplicity in pursuit of a less important feature. Our hope is to evolve products in new directions instead of just adding more features."³

And this is an argument that it's time to get back to basics. Certainly, Salesforce.com's own success grew from its simplicity. Salesforce.com did one thing, was simple to start using, and the initial investment – money, time and effort – was low.

Something like a telephone.

References:

1. Cnet Reviews: Fully Equipped, "Steve Jobs meets the Kindle," David Carnoy, Feb. 5, 2009. 
2. Amazon Q4 2010 report, Amazon 2009 Annual Report. 
3. www.google.com

The reality is that nobody stays in business selling something for less than it costs -- despite the self-indulgent fantasies of dot-com startups. And in the brave new always-connected world, devices (other than Apple products) to connect may be dirt cheap, but the infrastructure that makes it all work is anything but. AT&T isn't the first carrier to observe that more is less when it comes to iPhone profits. As smartphone subscribers eat up rich media and interactive content, operational costs grow faster than ARPU.

Selling the iPhone hurt Southeast Asian carrier SingTel's operating margin by about 4%, the company told Reuters a year ago. Scandinavian carrier TeliaSonera reported a 20% decline in Danish ARPU (average revenue per user) in the two years since introducing the iPhone -- from US$38.35 to US$30.39 - according to the same report.  

AT&T's move points to the future. Once upon a time, minutes were a relevant measure of telecommunications infrastructure cost. When minutes became irrelevant, that didn't mean that the infrastructure was free. Today bandwidth is the meaningful measure of infrastructure cost and average profitability per user (APPU) is more important than ARPU. The pricing model will change simply because businesses that can't sell their services at a profit won't be in business to offer high quality all-you-eat data plans.  

And that will have another impact. When network operators' returns match investment, the infrastructure business - the pipe - is going to be a lot more attractive. Which, no doubt, is part of the reasoning behind Google's 1-Gbps FTTH network "experiment" that the Internet giant announced last February. Certainly, Google stands to benefit from increased use of its Web-based applications, ad revenue from the new network, and control of the  underlying delivery  infrastructure.  

But the bottom line is that Google sees a business opportunity in becoming a traditional telecommunications company.  And why not? One of the greatest beneficiaries of VoIP disruption of voice communications business was Comcast Cable - now the 3rd largest US telephone company.  

For more analysis of AT&T's new pricing, read media sociologist Shelly Palmer's June 6 post, Understanding AT&T's New Limited Data Plan.