The company that controls the end-user relationship, dictates the market. Steve Jobs learned this when he first tried to make a phone and it resulted in the execrable Motorola Rokr. Jobs learned from that experience that he needed to find a mobile carrier desperate enough gain market share that it would let him make the phone the way he wanted, and Cingular was that phone company. Only after the iPhone threatened to eat the entire mobile market did the other carriers turn to Android to stave off irrelevancy.
Well it's happening again, only this time Google has found desperate partners in T-Mobile and Sprint. Where the iPhone was Apple taking control over the user interface and hardware design, Google Fi takes control over the billing relationship and decides which wireless connection to route data over. It moves the control of tech companies deeper into the device, to the layer of the firmware and the SIM card itself, essentially pushing the mobile carrier off of its toehold in the device market. Going forward, the mobile carriers will get revenue when Google Fi decides to route traffic to them, and not otherwise.
With Google Fi, Google controls the wireless service that the user is getting data from, and much becomes possible in the near future. Google Fi will be able to easily integrate future networks, like Google Loon, the SpaceX-Google satellite initiative, or even whitespace or mesh networks. Google will also be able to intelligently route data over multiple networks using Multipath TCP so that Google Fi will (from the end-user's perspective) be faster than any one of the networks that it is made of. Software innovation the carriers never bothered to implement will be allow user-controlled settings to prioritize price, bandwidth, or latency, even routing different services over different networks so that data backup uses whatever is cheapest while gaming uses whatever has the lowest ping.
And that software/firmware-enabled flexibility is the key. Carriers today thrive on locking up users for years at a time. On Google Fi the carriers will have to compete every second of every day against the auction process embedded in Google Fi's firmware layer. And not just compete against each other, but also other forms of transit such as the Wifi, Facebook's drones, and the balloon and satellite technology mentioned above. Every ounce of margin is going to be sucked out of their business, eventually resulting in lower prices for consumers. And of course Google's partners Sprint and T-Mobile have to know this, but at this point they've got nothing to lose.
Eventually the carriers as they exist today will die away as consumer-facing brands. They might hold on to enterprise service business, or they might not. Hard to say. The network of towers they've build though will slowly become the dumb pipes that they are, and subject to unrelenting moment-to-moment competition. Depending on how Google Loon, SpaceX, or Facebook's drones interact with Bitcoin-powered mesh networks I'm not even sure they'll survive as firms. The "bright side" scenario for them is that mesh networks don't succeed and they become business-facing network managers who only earn whatever profits their spectrum ownership allows for. The "not as good" scenario is that mesh-networks do succeed, and they transition to an existence similar to Linksys or ASUS, just selling rebadged OEM hardware to end-users.
Expect Apple and Microsoft to eventually make similar services for iOS and Windows. Apple loves controlling the consumer experience, and this will only make it easier. Microsoft will eventually follow Google and Apple to maintain feature parity, as it usually does in mobile. At that point the mobile-OS companies will have taken full control of their customers, the orifices will be declawed, and consumers should win in the sense that they'll get more bandwidth for less money.
UPDATE: Byrne Hobart sent me the link to this Joel on Software Strategy Letter V. A key quote from the letter is:
Smart companies try to commoditize their products' complements.
Indeed. Google's key product is Search (Advertising), and its complement is bandwidth. The profitable mobile carriers (Verizon and AT&T) are resisting being commoditized, but Sprint and T-Mobile are willing to risk it. Google Fi, by making bandwidth "just work" for the consumer commoditizes the connection. Google Loon and the other initiatives mentioned above will continue that trend.