Google's Nexus One strategy
Tuesday, January 12th, 2010
The Google Phone is here: the Nexus One. It's faster than the fastest iPhone with a better display, new Android software, a 5 mpx camera, etc. etc. etc.. It's an impressive and very sexy piece of hardware.
Background
Google is selling it directly at google.com/phone. You can buy an unlocked version (and not have to sign a two-year contract with those blasted wireless carriers) for $529. While a common practice in Europe, most Americans aren't used to the concept of getting a phone without a carrier. (You can get a subsidized version of the phone at T-Mobile for $179 with a two-year contract.)
Questionable strategy
Google wants to get its Android operating system onto as many phones in as many people's hands as possible which is why they're giving it away free to phone manufacturers (whereas Windows, for example, charges phone manufacturers to put Windows Mobile on their handsets, similarly to how they charge Dell to put Windows 7 on their computers). This makes sense because:
The more people who have an internet-capable phone, the more time they spend on the internet.
The more time people spend on the internet, the more time they spend searching on Google.
The more time people spend searching on Google, the more ads are clicked on and the more money Google makes. So why are they charging so much for the phone? It's reported that it costs Google $174 in hard costs to make the Nexus One. Of course, there are other costs involved but the full retail price for one is still $529. Why? Shake the industry If Google really wanted to be disrupt the market it would sell the phone without a contract at $199. What iPhone? They still break even on the handset – the real money comes from ads on the sides of mobile search results. Google brings a lot of people into its ecosystem and does what it does best: brings the price of something down so low it's basically free (at $199 it could be free after carrier subsidization) and forces the industry to respond. Despite what the current price of the Nexus One would suggest, Google isn't in the hardware business. Google had a net income of nearly $5 billion last year. They don't need to charge $529 for a phone. So why do they? Preserving distribution Ask most people on the street if they've heard of the Nexus One and most people will say no. And a fraction of those people will know they can get it directly from Google. At this point, Google needs Samsung, LG, Motorola and others to be putting its operating system on their phones – its reach is too small with mainstream consumers (as far as tangible products go) to do it alone. And if it undercuts those partners by giving away a high-end piece of hardware they'll stop using Android and perhaps even threaten wireless carriers who allow the Google Phone to operate on their networks. Conclusion
The more time people spend on the internet, the more time they spend searching on Google.
The more time people spend searching on Google, the more ads are clicked on and the more money Google makes. So why are they charging so much for the phone? It's reported that it costs Google $174 in hard costs to make the Nexus One. Of course, there are other costs involved but the full retail price for one is still $529. Why? Shake the industry If Google really wanted to be disrupt the market it would sell the phone without a contract at $199. What iPhone? They still break even on the handset – the real money comes from ads on the sides of mobile search results. Google brings a lot of people into its ecosystem and does what it does best: brings the price of something down so low it's basically free (at $199 it could be free after carrier subsidization) and forces the industry to respond. Despite what the current price of the Nexus One would suggest, Google isn't in the hardware business. Google had a net income of nearly $5 billion last year. They don't need to charge $529 for a phone. So why do they? Preserving distribution Ask most people on the street if they've heard of the Nexus One and most people will say no. And a fraction of those people will know they can get it directly from Google. At this point, Google needs Samsung, LG, Motorola and others to be putting its operating system on their phones – its reach is too small with mainstream consumers (as far as tangible products go) to do it alone. And if it undercuts those partners by giving away a high-end piece of hardware they'll stop using Android and perhaps even threaten wireless carriers who allow the Google Phone to operate on their networks. Conclusion
Google is in a position to turn yet another industry completely upside down. All they need is a little more market share (which they'll get thanks to the hardware manufacturers and wireless carriers who are out promoting their product) and to put some polish on the Android user interface. Then, instead of people getting a free cheap-o flip phone when they walk into T-Mobile they get one of the most powerful handsets on the market and go about their happy lives doing Google searches on their Android phone. Because Google isn't in the hardware business. It's in the advertising business. And the more eyeballs it can get the more money they make.
There are lots of different ways this could be looked at. Google might be completely fine allowing hardware partners to push out overpriced handsets with their software. But if Google wants (fast) widespread adoption of people using the web from their phones they may not want to wait for their handset partners to bring their costs down while everyone buys iPhones for $99.
Thoughts?
