The Google Phone: Risks, rewards and wild cards

The fabled Google Phone made an appearance over the weekend and it's another iPhone killer, grand experiment for the search giant or a way to rewrite the wireless pecking order. Here's a look at the risks, rewards and wild cards.
Written by Larry Dignan, Contributor

The fabled Google Phone made an appearance over the weekend and it's another iPhone killer, grand experiment for the search giant or a way to rewrite the wireless pecking order. Here's a look at the risks, rewards and wild card associated with Google's phone, dubbed Nexus One.

First, a little background (Techmeme). Google on Saturday said on its mobile blog that is handing out a snazzy phone loaded with an uncompromised version of its Android
operating system. The move was all about Google eating is own Android dogfood. The device combines "innovative hardware from a partner with software that runs on Android to experiment with new mobile features and capabilities."

It didn't take long for pictures of this Google phone to hit Twitter. The Wall Street Journal then followed up with a few more tidbits. Among them:

  • Google's Nexus One will up the ante vs. Apple;
  • HTC will make the device;
  • The device won't be tethered to any carrier and Google will sell it online;
  • Google wanted to control the hardware, software and user experience completely.

So what is Google up to with Nexus One? The answers are a little fuzzy, but here's a crack at Google's calculus behind launching a phone that could alienate partners, drive wireless innovation and alter the competitive landscape among other things.

Also: Google to launch unlocked Nexus One Android smartphone in 2010; disrupt mobile industry · All Android content · Android email alerts

The risks:

Carriers and handset makers. The biggest risk for Google and its Nexus One effort is that it could alienate partners. Google is now aligned with Verizon Wireless to take on AT&T and the iPhone. Motorola, the manufacturer behind the Droid, is also a key partner in forming an Android army to attempt to topple Apple's iPhone. One partner that looks tighter than ever with Google---HTC. The wild card: How will wireless partners react to Google selling a phone on its own, offering carrier choice and potentially trumping features on its other Android phones?

The price. You can't talk about carrier risk and Google's plan to sell an unlocked phone without mentioning price. Unlocked devices---if Sony Ericsson and Nokia are any indicator---are pricey. Like $500 to $600 pricey. Without a two-year contract and subsidies from carriers, smartphones are expensive. Too expensive for most of us to be carting the latest greatest device around. Google's Nexus One may be priced out of the game right away without a subsidy. The wild card: Will the average bear pay up just to have Google control the hardware-software experience?

The profit hit. Barclays Capital analyst Douglas Anmuth wrote in a research note: "We believe this issue is important to investors because potential phone subsidies could impact Google's overall cost structure. We believe the industry subsidy per device is typically $200-$300 and is usually paid by the carriers." The wild card: Would Google pay the subsidy that carriers usually pay for market share?

The unlocked phone approach. Riding shotgun with the pricing discussion is the fact that Americans just aren't used to buying unlocked phones. Google, with its brand and market heft, will need to alter behavior with the Nexus One. The wild card: Is this Google phone good enough to change behavior?

Bernstein analyst Jeffrey Lindsay noted in a research report:

We think the strategy is risky because all previous attempts to sell directly to the consumer in the U.S. have thus far have been an abject failure. Specifically we note the low appetite of American consumers for an unsubsidized phone, and the huge acceleration in iPhone sales when Apple lowered the (subsidized) retail price of the iPhone from $399 to $199 suggesting that Americans still seem to have an insatiable appetite for handset subsidies.

What if Nexus One flops? Few are even entertaining the thought that price and lack of truly whiz-bang features could result in a flop. Google is looking at Nexus One as a grand experiment, but it's worth at least mentioning the flop factor. The wild card: Expectations are already probably too high.

The rewards

Google could accelerate Android adoption. Google could head off the iPhone at the pass. Yes, Google could annoy partners but it has six months to deliver a body blow to Apple. If Apple took the iPhone to Verizon its market clout would double. "Google is also undoubtedly aware that Apple's exclusive arrangement with AT&T expires in June 2010 and that an iPhone on Verizon's 3G network would strengthen Apple's first mover advantage, giving it formidable market power," said Lindsay.The wild card: Could consumers really resist an iPhone on Verizon?

Google can put forward its vision of smartphones and Android without compromises. Google doesn't have to worry about wireless carriers and their approach to apps like Google Voice. Google can make the hardware and software experience seamless. With Nexus One, Google controls its destiny in the smartphone race. Sure, Google may annoy partners, but Nexus One is quite an experiment. The wild card: Will carriers accept Google's Android vision if Nexus One takes off?

The splintering may end. Google would slow the splintering of Android. "We think Google's motivation is to create a "pure" Android phone giving a display of strength that will eliminate further splintering of the Android code base that has been frustrating app developers to date," said Lindsay. The wild card: Android is open sourced and Google can't completely control the operating system.

The international play. Google may face tough sledding trying to convince Americans to buy an unlocked device, but the international reception will be far easier. While Nexus One may be an experiment in the U.S., it could be a beachhead abroad. The wild card: Will global customers fall for Nexus One?

Google can manage pricing. Yes, unlocked phones are expensive, but Google could sell the Nexus One at a loss. Why? Google can make up the difference on advertising. Instead of signing on to a two-year contract with a carrier you're basically swapping your data to be delighted. The wild card: Would Google take a hefty loss to get consumers to buy Nexus One?

Nexus One becomes exhibit A in Google's lobbying efforts to rewrite the wireless industry. Google has been trying to break carriers' chokehold on services, contracts and what devices are sold to consumers. With Nexus One, Google will be able to show the Federal Communications Commission what it envisions for the wireless industry. If the Google phone helps convince the FCC to open up cell networks and unused TV spectrum to mobile players the effort will be worth it. The wild card: Can Google's lobbying efforts compete with the entrenched players?

The conclusion

Overall, Google's Nexus One effort makes sense. Sure, there are risks, but the potential upside is there. Meanwhile, Google has already lined up a bevy of partners for Android. Those Android plans will proceed no matter what Google does with Nexus One. In other words, partners may be annoyed about Google selling an unlocked phone, but they are already locked in with the search giant. Add it up and Google may have little choice if it wants to dent the iPhone's momentum before it comes to Verizon.

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