911 for 411

Google's new free directory assistance is sure to be popular with consumers, but it means trouble on the line for the big phone companies

by Olga Kharif

The days of paying north of a buck for directory assistance over the phone may be coming to an end—at least if Google and a gaggle of startups have anything to say about it. One little-known company has already grabbed 5% of the business by offering free service. Now, the Web search leader is going public with its own version that lets callers search for business listings from a land-line or mobile phone. Google (GOOG) will even connect the call and text the number to the user's cell phone—all for no charge.

That's likely to be music to the ears of the millions of 411 users who, according to consultancy the Pierz Group, pay an average of $1.28 a pop for assistance over a regular phone and a whopping $1.57 for each such call via a cell phone.

Market Share

Google's service, still in testing mode, will probably cause static for the big phone companies that now dominate the $8 billion U.S. directory assistance industry, and add to the disruption it's already causing, along with Yahoo! (YHOO) and Microsoft (MSFT), elsewhere in the directory assistance business.

Just last month, Microsoft acquired Tellme, which provides automated directory assistance services to telcos such as Cingular/AT&T (T) (see BusinessWeek.com, 3/15/07, "Microsoft's Expansive Plans for Tellme"). Tellme is testing a free 411 service of its own.

In just a year and a half, Jingle Networks has used its free service to nab 5% of the directory assistance market. The company says it has forwarded more than 200 million calls, resulting in $400 million in savings for customers. Free 411 services from the likes of Google and other new entrants such as cable companies could garner 15% of the market in four to five years, says Daniel Phibbs, an analyst at the Pierz Group.

Easy Add-ons

Here's how free 411 works: By and large, the services are paid for by advertisers that insert a short marketing message at some stage of the call. "The advertiser community has really embraced this channel, because they reach consumers at the point of purchase," says Lyn Chitow Oaks, senior vice-president of marketing at Jingle. The company's advertisers include McDonald's (MCD), 1-800-FLOWERS (FLWS), and CBS (CBS).

The company has yet to turn profitable—it expects to reach breakeven in 12 to 18 months—but Jingle has had no apparent trouble raising funds from investors like Goldman Sachs (GS) and Comcast Interactive Capital, an investing arm of Comcast (CMCSA), the largest U.S. cable provider.

Directory assistance is just one of many ways search engines like Google can bring the Web to mobile phones. Once they've served up a number, why not also shoot over directions to the business? Tellme provides stock quotes and weather updates. Google and Microsoft could find any number of ways to generate ad revenue by reaching more of the roughly 235 million Americans with cell phones.

Don't think Big Telecom hasn't noticed. In December, AT&T began testing free 411 calling in three markets: Bakersfield, Calif.; Oklahoma City; and Columbus, Ohio. "411 isn't going away, but big companies are certainly taking a very long look at this free business model," says Phibbs of the Pierz Group. Callers get their listings for free in exchange for listening to two 15-second ads, one at the beginning and one toward the end of each call. In the next several months, the company plans to expand the trial to other metropolitan areas, says AT&T spokesman Fletcher Cook. "There's been high interest in the markets we've trialed it in," he says.

Free Jolt

As disruptive as free 411 may be, its success isn't assured. First there's the matter of making money from it. "For the economics of free directory assistance to work, you have to control costs very well," says Laura Marino, director of product management at Tellme.

Free directory assistance also can be glitchy. Most free 411 services, such as Google's, rely on voice-recognition software and don't use live operators; as a result, they fail to complete many calls, says Phibbs. Google's service hung up on a reporter requesting a number for a coffee shop in Portland.

Ultimately, free 411 may expand the market. Today, fewer than 10% of Americans actually know how much they pay for 411 calls, according to the Pierz Group. Many free callers may have never even used directory assistance before, Phibbs adds. Free 411 could reenergize an industry where sales growth has been stunted by increased reliance on Internet-based directories. For consumers fed up with high phone bills, that's one very good call.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.