The mobile phone industry has changed forever. The recent launch of Google’s Nexus One isn’t about the phone, but of the Google Operating system, the Android. The Nexus one is Google’s Concept Car, something that will stir the blogosphere, dominate the Twitter trending topics, and be one of the most searched terms, based on Google trends. As two CEOs of top manufactures (HTC and Motorola) stood with Google for the Nexus event, we all should realize that the industry will never be the same. Google has the leverage over the carriers, and has the manufacturers kowtowing to them. Google’s distribution approach has the potential to accelerate disruption in the mobile phone market where the power once was held within the carriers and retailers. Now, that power resides in the software and app producers.
To see the carriers go from a place where they adamantly defended their turf, to these days of embracing frenemies needs to be a business school case study. Several years ago, the industry was quite different. The iPhone shocked the world, to the extent where folks flocked to AT&T, just because of a phone. We paid far too much in extra charges, all so we could have an iPhone. This shifted an extraordinary amount of power to Apple because they had complete control over the hardware and software, as well as switching costs created by the App store. You can’t take your apps with you to other carriers, just as before, you couldn’t take your phone number with you. People started to use the web on their phones, which is why AT&T hasn’t been able to keep up with the demand for data on it’s network. This resulted in people (like myself) moaning and groaning on a consistent basis, not to mention the constant barrage of commercials by Verizon on the “coverage maps”. Moving forward, phone users will have significantly increased demand for data on their phones, and AT&T was in the drivers seat, but has failed miserably.
I must admit that I’m not a big Google fan. Most of their highly anticipated launches generate all the buzz and then fizzled out as another underfunded and underdeveloped project (see Google Knol, Google Lively). My main problem with those projects are that they weren’t strategic. It was not an opportunity to leverage their massive capabilities, but seemingly a fun project to compete with all of the fad products (i.e. Second Life). The Nexus One launch is the birth of a frenemy turned foe to the mobile industry. With the iPhone, Apple created a product that all U.S. carriers intensely craved. As a result, Google was able to pull a genius maneuver, utilizing it’s core competencies to effectively change the game with Android.
Google broke all the unwritten rules of being a frenemy. It’s almost (gasp!) Microsoft-ish. After backing and marketing the Droid, they unveiled their own superior device rather quickly. In the Nexus One event, they overwhelmingly suggested that the Nexus is better than the Droid. It appears that they are alienating their business partners by taking an Apple-like strategy, controlling the hardware and the software. You’re competing with your partners, and it’s far too late for the carriers to develop their own operating system.
What made the Android so appealing, besides needing a quasi-iPhone killer, is Google’s platform openness, compared to Apple’s seemingly draconian rules (i.e. Google Voice). The carriers are giving away one of the last links in the value chain by allowing Google Voice. Google would now own the customer relationship and their contacts, leaving the carriers to fight over who becomes the data pipe utility. The Droid and the Google phone are tethering and VOIP machines waiting to happen. And we know throughout history what happens to those companies that are just a pipe. They fight for razor thin margins.
All we have to do is rewind the clock from when Apple almost went under. Not only did they fire their legendary leader (Steve Jobs), they insisted on selling computers and not focusing on low-cost, high margin, easily distributed software. Microsoft focused on ubiquitous software by being compatible with dozens of OEMs and hardware manufacturers. This birthed the Windows monopoly, and hit Apple where it hurt: sales, revenue, and stock price. Now it’s Google who’s bifurcating their strategy by having their own device, and having a ubiquitous software package that operates over multiple carriers and platforms. Will history repeat itself?
In Apple’s defense, they were the first-mover, and had to rely on the traditional cellphone business model. They were tied into an exclusive deal, which generated significant short-term revenue, and had the initial advantage. I believe they waited too long to adopt a different strategy, with Android in development. Maybe they couldn’t have anticipated the shortcomings of AT&T, but they should have prepared against a clever Google entry.
We have to remember, Eric Schmidt, CEO of Google, sat on Apple’s board for quite some time, which enabled him to learn a great deal about this transformative space. He was in the war room, learning Apple’s strengths and weaknesses, strategically and financially, which may have aided in Google’s brilliant entry into the space.
The possibilities for Google seem brighter than ever, to diversify their revenue streams as a company from an advertising business, to having a lion’s share of the mobile market. Right now, you can buy an unlocked phone directly through Google’s website, but tomorrow, you will have an opportunity to mix and match services, and even have data-only plans. I’m sure Research in Motion’s executives, makers of Blackberry, are having a tough time sleeping these days. As MG Siegler of Techcrunch states, “The next logical step for Google along this path is to create a device that can run on both GSM and CDMA networks, so any customers can pop in any SIM card from any carrier and use their device as they see fit….Imagine a U.S. where the carriers have to have the best network or customers will just leave and join another one as they see fit.”
I’m sure this leaves most folks wondering “How could they have let this happen?” The carriers gave away their competitive advantage and misunderstood the value of what they were providing. They gave away that power to Google because they didn’t have an iPhone, and desperately needed something. Google did a proverbial spin move in the post, capitalizing on the desperate state of the carriers, and may have bamboozled an industry. They turned the model upside down from choosing your carrier, then choosing your phone, to choosing your phone, and then your carrier. The current state is disasterous for the carriers and in the near future, they’ll realize that they let the frenemy become a foe that they’ll soon regret letting in the door.
Although this may seem like a baby step forward for Google, since the Nexus One isn’t remarkably different than the Droid in features and functionality. The main point is that this expands Google’s opportunities. Many have drooled at the possibility of a free ad-based phone, or a heavily subsidized service. This announcement was about ushering in a new era, forcing their competitors to react, and in the end, the consumer will be better served.