Why Nexus One Will Make Money for Google

Google, it seems, is having some teething problems with its foray into the topsy-turvy world of mobile handsets. From unhappy partners to unhappy customers, the search giant has been having a rough time with its Nexus One, currently the best Android phone on the market. So much so that GigaOM Pro Mobile curator Colin Gibbs wondered if it was time for Google to kill Nexus One. (Related from GigaOM Pro, sub. required: Google’s Mobile Strategy: Understanding the Nexus One.)

On the opposite end of the argument are analysts from Citigroup, who think that the device could be a monster hit and sell somewhere between 1 and 3 million units. It would become a massive revenue generator, Citigroup analysts including Internet Mark Mahaney predict. In a research note this morning, he writes:

Based on its first week sales traction, our review of comparable 1st-year SmartPhone unit sales, and input from CIRA Wireless Handset Analyst Jim Suva, we estimate Nexus One could potentially see between 1MM and 3MM unit sales in 2010, generating between $500MM and $1.6B in incremental revenue (3% to 8% accretive).

For additional context, we note from Kevin Chang, the CIRA Analyst who covers HTC Corporation, that HTC has build plans for 700,000 Nexus One units in Q1:10 and approximately 1.2MM for H1:10. This would seem to suggest a reasonable Year 1 range of 1MM to 3MM…..based in part on Chang’s analysis, we believe the Nexus One may generate a 10%- 15% operating margin, which implies that 1MM to 3MM Nexus One unit sales could generate between $0.12 and $0.55 in incremental ’10 EPS (0%-2% accretive). Finally, we note that given the relatively low Nexus One margin structure, every 1MM units sold would reduce GOOG’s overall operating margin by 1%.

And fourth, there is the obvious opportunity for Google to generate a sizeable new revenue stream in terms of handset sales. We offer our estimates later, but as quick comps, we note that the Motorola Droid is expected to sell almost 8MM units in its first year and that both of the iPhone 3G versions sold or are on track to sell well over 10MM units in their respective first years. Hypothetically, 10MM units of a $529 phone would generate $5.3B, which would be very significant for a company that generated approximately $17.4B in net revenue in 2009. Of course, the incremental operating profit would be much less significant, given the relatively much lower margins of handset sales vs. Google’s core business.

I find these estimates to be way too optimistic. The smartphone market continues to be very dynamic and fluid. The analysis also assumes that Apple and RIM are going to stand still. Other members of the Android ecosystem are going to do their best to keep Google at bay.

Now I’m not one to argue against Google’s capabilities, but we need to temper our enthusiasm around the Nexus One. Also we have to remember the reality: 20,000 Nexus One handsets were sold during the first week it was available, while Andy Rubin, head of Google’s mobile efforts, said he would be happy if Google sold around 150,000 of them.

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Related GigaOM Pro Research: Google’s Mobile Strategy: Understanding the Nexus One

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