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Experts question Google phone business model

Nancy Gohring | March 5, 2010
While the idea is admirable, it's probably not possible to execute in the U.S., they say

SEATTLE, 4 MARCH 2010 - When Google introduced its Nexus One phone in January, it unveiled a whole new business model in the mobile phone market.

But it has become clear that the business model is based on a vision that isn't currently possible in the U.S., experts say.

"Google was initially saying it wanted the Nexus One not to be tied to an operator, to be open and free for anyone to buy it and use it," said Allen Nogee, an analyst with In-Stat. "It seems like a great philosophy. The problem is in the U.S. the operators have built a web in such a way that's impossible to do."

Google's recent response to the U.S. Federal Communications Commissions' questions about early termination fees points to the disconnect between Google's vision for its phone business and the current reality of the mobile business, Nogee and other experts say.

In a letter to the FCC, Google describes its new business model.

Simply put, empowering consumers to pair a mobile device such as the Nexus One and additional devices in the future with the users' choice of operator and service options is a new model for selling mobile devices in the United States, one that we believe will maximize consumer benefits, Google wrote in the filing.

But unless Google plans to offer essentially a universal phone, it will be doing nothing different than the many third party phone retailers in the U.S. that already sell a variety of phones that are tied to a specific operator.

The issue that Google faces is that operators in the U.S. use different technologies and frequencies. Phones are typically built to run on one particular network in the U.S. In order to let users pick a phone and then a network, Google could try design a phone that runs on all the relevant frequency bands and technologies, "but it would cost $2,000," Nogee said. Google is likely unable to do such a volume business in that kind of universal phone that it could drive the cost down, he said. That means Google is in the same position as any other third party retailer: it must sell phones that are purpose-built for individual carriers in the U.S.

A Google spokeswoman declined to comment on whether Google planned to sell a universal phone or simply sell different models compatible with different networks.

It is now offering a Nexus One built for T-Mobile's network and has said it is working on one for Verizon Wireless. That means "they're not really doing anything new and innovative, said Andy Castonguay, an analyst with the Yankee Group.

Many other companies sell phones online, including Walmart. Some, like Wirefly, let people choose a phone and then choose an operator that has already approved the device.

 

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