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Summary:

Is Google opening itself up to a potential revenue loss as carriers cut Google services from Android? Perhaps, and one way to address that risk is by building a Google phone, says ZDNet. It didn’t work with the Nexus One and it won’t work now.

Nexus One featured

Here in the U.S., there have been high hopes that Google’s Nexus One might break the control of the wireless carriers. That didn’t happen for many reasons, however, and now James Allworth at the Harvard Business Review suggests that Google faces the risk of its Android cash cow running dry. Phone makers and carriers are stripping Google’s revenue opportunities from the platform by choosing different search engines, for example. Allworth points to a potentially dire future for Google, even though the search giant recently reported mobile search revenues topping $1 billion:

It won’t be long before Google’s “allies” in the Open Handset Alliance — the manufacturers making Android phones — realize that Google needs them a lot more than they need Google, and auction off the default search services on the phones they ship. Google may have no choice but to buy their support, too. And it surely won’t come cheap.

Dana Blankenhorn, a ZDNet writer covering Linux and open source, agrees with Allworth, but takes the conversation one step further by suggesting that Google revisit building their own handset. I applaud this idea, and in fact, had hoped Google would begin to loosen the grip that carriers have over U.S. consumers with the Nexus One. But the reasons why he suggests this could happen with a second effort aren’t very convincing. Here’s why:

Going it alone hurts hardware partners. For Google to succeed in this vision of the future, it needs to build the best, most appealing Android phone on the market. To do that, if it were even possible to do, would be a stab in the back of the very hardware partners that have helped make Android a success: Think Motorola, HTC, Samsung, LG and others. If Google were a hardware company, it might take that risk, but Google isn’t a hardware company. Simply put: Google needs hardware partners.

Forget the carriers and their networks. Blankenhorn suggests that Google skip the cellular networks and “organize every Wi-Fi network” it can with “Super WiFi antennae from your points of presence (those Google-in-a-box units at phone offices around the country) and enable people to switch the SIM card easily.” If it were that easy these days to divorce phone service from the cellular networks, wouldn’t Apple have already done that with the Wi-Fi-capable iPod touch? Wi-Fi is more of a localized connection, not a national network. Had Google nabbed spectrum for WiMAX a few years back, this approach might have been feasible, but still challenging. That didn’t happen though, so Google’s best chance for creating its own network from auctioned airwaves is behind it.

A Google MVNO or regional partners? An interesting suggestion from Blankenhorn is to have Google partner up with regional carriers to create an ad-hoc network. He specifically mentions MetroPCS, which is a good example. But MetroPCS doesn’t even have a 3G network of its own; it’s a value carrier that focuses on offering low-cost voice minutes and messages. The carrier is just now rolling out an LTE network, but it’s very limited in terms of coverage and likely more comparable to current 3G network speeds. (Note: I’ll be reviewing the MetroPCS LTE network next week.) Without a fast network, a Google Android superphone is far less useful to customers and therefore, less of a revenue generator for Google. And guess where some of those other small carriers get their network capacity from? The big four carriers such as Sprint, whose wholesale network business is thriving. Carriers still use different technologies and frequencies too, adding more complexity for choice among networks.

Forget the subsidy. Blankenhorn thinks Google should charge the full price for its magical phone and bypass any carrier subsidies. As someone who paid the full $529 price-tag for a Nexus One, I can see how that might work, but then I’m probably in the minority. Like a drug, U.S. consumers are addicted to lower-priced handsets because they can’t fathom spending $500 or more for a phone. Handset subsidies are part of the economic mindset here, and if you don’t believe me, just ask Nokia; with few subsidized handsets available, Nokia smartphones are all but absent outside of tech circles in the U.S.

The “Last Device You’ll Ever Need.” The last suggestion sounds good on paper: Create the phone with hot-swappable parts. Figuring that data can be synchronized with Google, the idea is that a higher up-front cost would be depreciated over time because the handset can be upgraded. That’s intriguing, but would require hardware expertise for a modular design. Of course, Google would have alienated itself from any potential hardware partners by going it alone, so who’s going to engineer such a beast? And will consumers want to swap out the 5 megapixel camera sensor for one with 8 megapixels? Some may, but phones are becoming viewed as consumer electronics devices: people want to turn them on and have them simply work.

Again, I’d love to see Google reduce carrier control, both here and abroad. And there’s some merit to the thought that Google’s openness for Android distribution could hurt the company financially, especially if bidding wars ensue on which search engine appears on what phone. But the fact remains that Google has already gone down this path once and it didn’t make a dent in the control exerted by carriers. To think it can do so the second time around is naive.

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  1. instead selling a top of line phone they could also succeed by selling an insanely cheap unlocked android handset that was more middle of the line.

    by selling a really cheap handset it would get widespread appeal including from people who are not yet looking at smartphones.

    also i would like to see google tap the market for GSM unlocked with SIM card service for talk and text but wifi only for data. there is a really large number of people would move to smartphone if they did not have to sign up for a data plan. an unlocked device not purchased from a carrier is the perfect way to do this. than just grab a cheap prepaid SIM and drop it in for talk & text. data would be free but limited to wifi.

  2. I too paid the full price for my Nexus One – around $560, including tax. What few people realize is that over a 2-year period, my total handset cost + no-contract T-Mobile service cost is lower than if I had bought a subsidized handset from any of the carriers. So, although my upfront cost seems to be high, at the end of two years, my total expense would be lower. I did the Math and am a happy Nexus One user.

  3. The author’s argument seems correct: If Google wants to make Android a market share success they’ll have to support hardware partners. If they want it to be a financial success they must make Android support revenue-producing Google properties. There should be plenty of ways to skin these cats simultaneously.

    Google must make Google-revenue-positive configurations of Android more attractive to carriers and OEMs than the alternatives. Here, Google’s range of popular properties can provide leverage if Google can make them work better on ‘purer’ Android.

    Revenue sharing will also help – forget ‘free’, phone OS prices will effectively go negative.

    And they have to keep putting out halo products. Google was on the right track with Nexus One: Sell a deluxe phone, free of carrier interference, to support developers and show the world how good Android can be. Every Android OS goes out to at least tens of thousands of influencer-owned handsets, months before carriers get around to upgrades. Think this doesn’t put pressure on carriers and OEMs to move quickly and reduce crapware?

  4. Actually, I do think the ubiquitous WiFi is a viable long-term option. I wrote about this myself about a year ago, and I still think it could become an option to many urban dwellers. Much like it has taken until now for ~30%+ US households to ditch landlines and go mobile-only. In the next year or two we could see some people using devices like the iPod-Touch, ditching cellular network subscriptions and going WiFi only.

    For my article see:
    http://tinyurl.com/iStrategy-at-GigantiCo

    1. i agree.

      one thing that would make the ipod touch and other wifi only devices infinitely more attractive as phones is if they had speaker and microphone in the proper positions to allow them to be help to our heads just like phones.

      but i also wonder if google and even apple are concerned that the early adopters who move to wifi for telephony will all be people whom advertisers have no interest in targeting. they will after all be people who prefer not to spend money if they don’t have too.

      1. Maybe, but I’m not so sure.

        People that buy Apple products generally don’t fit that profile. Regardless of handset model; I think, at least initially, it would be a matter of early adopters… a valuable target.

  5. Have felt Google’s blown it for a very long time. The execs there don’t seem to have long-term strategic vision. They’re not good at chess I’d suspect.

  6. I’m happy with the Nexus One because Google (and my carrier) seem to favor updates for this phone more than any other phone out there. Maybe Google can extend this preferential treatment to any OHA manufacturer that does not de-googlify their Android OS installation.

  7. Post’s title is a blanket statement, ignores the margins and gaps – which is where innovation and disruption germinate.

    Google Voice number portability has to happen first. Then the current dust-up over Consumer controlled SIMs ( Gemalto/Apple ) needs to be resolved, second. Finally the ENUM or something similar has to be forced upon the carriers by the FCC.

    Once that sequence is complete, let’s revisit this subject.

    Ref.

    http://arstechnica.com/business/news/2010/01/enum-dragging-telephone-numbers-into-the-internet-age.ars

    1. Hey Todd, thanks for sharing the ENUM backstory. Good read.

  8. That Harvard guy is wrong. As Android becomes a more ubiquitous platform, Google’s power will increase. Google won’t depend on a single carrier in a single country anymore or on a single big manufacturer to promote its platform.

    As for the search thing, I hardly see it as a big problem for Google revenue wise. Yes they will make slightly less than they could’ve been, but how much money do you think Google makes from ads on mobile searches? I don’t know th numbers but I doubt they are making that much to begin with. The real revenue source will be ads in apps. And we know Google acquired Admob which is the preferred ad network for developers. They’ve already made 1 billion in revenue from Admob since they acquired it like 6 months ago.

    I think going forward we will start seeing more stock Android phones because most if not all manufacturers won’t be able to keep up with Google’s speed in developing of the platform.

    As I was saying, they will depend a lot more on Google in the future, not less.

    1. Hmmm – The Harvard guys thoughts sound more plausible to me than your counter.

  9. Metro does have it’s own 3G network and infrastructure

    1. metro’s 3G is very limited. they do have 4G in a few cities though and plan to have it in all markets by the end of the year.

      they basically are skipping 3G and going straight from 2G to 4G.

      but their 4G phones are limited functionality feature phones not smartphones and they have stated they have no plans to offer smartphones.

  10. Why not just buy T-Mobile from D-T or enter into a very weighty partnership. (the Feds would let it happen) Sure they would have to play nice with the other carriers but Google would also be carrying a stick.

    Just curious – I don’t pretend to be an expert – just a consumer who likes innovation.

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