The Google phone: What the heck?

January 5, 2010: 6:00 AM ET

Becoming a mobile-device maker seems like madness, but Google's not crazy.

Why on earth would Google (GOOG) want to go into the business of making cell phones?

CEO Schmidt presides over an increasingly mobile-oriented Google. Photo: Google.

By now most followers of tech news are aware that the company has been testing a product dubbed the Google Nexus--the highly anticipated "Google phone" set to be launched today. But does Google's move into territory dominated by specialists like Nokia (NOK) and Motorola (MOT) and consumer electronics stalwarts like Apple (AAPL) and Samsung make sense?

Google is an Internet advertising company, after all, trafficking in search terms and text ads. The company has partnered with myriad handset makers and carriers to bring its Android operating system for mobile devices to consumers. Why would it ever want to bypass its partners, putting out its own phone?

It's simple: Google is seizing an opportunity to speed up innovation. "No one is going to be able to innovate as quickly as Google can with all these fantastic engineering resources they have plus lots of cash in the bank," says Forrester Research's Charles Golvin. "They're doing this to light the way—to say, 'here is everything Android can do."

Nexus = razor blade, Android = razor

There is much excitement about the snazzy Android operating system. It holds the potential to support all kinds of services. Developers are watching it carefully and have plans to create applications for it in the future. But with limited resources, many have not actually abandoned the platforms they're developing for currently. Says one Boston-based developer, "We're keeping an eye on it. But we're sticking with Apple, RIM and Microsoft for now."

As of third quarter, Android-supported phones only accounted for 5% of the market according to IDC. Compare that to Apple's iPhone, which has 29% of the market, or RIM's (RIMM) Blackberry devices, which collectively dominate with 44% of the market. And though developers are excited by the future prospects of Android, many report Apple's closed platform still makes for a more elegant application—with a lot more potential users. And RIM is the key to the corporate user.

All bets are on Android to catch up over time, but time is a luxury that Google can't afford in this fast moving market. Sure, dozens of Android-supported phones are being developed, but they are often produced by hardware makers, not software companies. Google has partnered very closely with a number of these companies to bring new features to consumers. Motorola's Droid, for example, runs Android 2.0 and includes a full GPS system. But they're not moving fast enough for the Internet search behemoth. By revealing a new device with a speedier response and a number of upgrades, Google shows off what is possible with Android and encourages its partners to adopt the technology.

Going with the Flo?

It's a familiar play among large tech companies. Consider what the chipmaker Qualcomm (QCOM) has done with FLO TV, a business that aims to provide live television to cellphones. Visit the San Diego campus, and you'll be given a tour of the television studios that bears a striking resemblance to GE's CNBC. Qualcomm makes chips and licenses software. It has no interest in getting into the TV business, but CEO Paul Jacobs understands that if his company can seed a TV business on mobile devices, then device makers will buy the special chip required to air the network. Result? Qualcomm sells more chips.

Of course if Qualcomm ends up in the TV business, the company won't turn down the revenue. And by the same token, it could very well be that Google one day makes so much money off advertising on mobile platforms that it can afford to subsidize devices itself, bypassing the carriers entirely. But a move that disruptive is a long way off. First, Google has to convince an iPhone-obsessed nation that there's an app for that—on Android.

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About This Author
Jessi Hempel
Jessi Hempel
Senior Writer, Fortune

Jessi Hempel is a New York-based technology writer for Fortune. She has written extensively about digital media, online advertising and social networking. Before joining Fortune in July 2007, Hempel worked at BusinessWeek and most recently served as their innovation department editor. Hempel is a graduate of Brown University and received a Masters in Journalism from The University of California at Berkeley.

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