Nexus One: The final chapter in an antiquated mobile phone business model

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.

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20 responses to “Nexus One: The final chapter in an antiquated mobile phone business model

  1. Nice post. All of the major players in the business should have seen this coming though. It was only a matter of time after they dipped the billion dollar hand into the 700mhz wireless spectrum auction. http://www.google.com/intl/en/press/pressrel/fccspectrum_20071130.html

    Google has the money and power to make a move into any market which I believe is good so it makes “the other guys” work harder for our business and to develop better phones, services, etc…

  2. Chris, excellent point! At that point, they can almost give away the phones for free. More web usage = more web searches = more revenue for Google. And with the addition of the revenue possibilities of Android, this is another blow to the carriers.

  3. Nice article, though I do think far too much is being made of this particular Nexus device. It’s not much different from Google partnering w/ HTC on the original G1 with TMO. The only difference here is that Google is also selling the device directly, and selling it unlocked so it can be used on either TMO or AT&T. Of course Google’s goal is as you said to break us from this process where we buy from the carriers, which itself would reduce their power, ultimately to the dumb pipe you mentioned. But that’s nothing new really – all manufacturers sell their phones directly to consumers today, but consumers don’t go that route b/c a) it’s not what they’re used to and b) phones are too expensive to buy outright without the subsidy. Carriers aren’t going to be freaked out by the Nexus becuase it’s still $529 via google.com today.

    However… wait until Google finally delivers the promise of the Android platform: advertising. THEN, they can sell you a phone online that costs $529 but still only charge you the subsidy rate of $179, because they’ll be making you agree to banner ads or whatever they ultimately push to your phone. For that agreement, you get the subsidy rate and no carrier contract whatsoever. People will sign up like crazy as long as the ads aren’t too intrusive, and Google’s the expert with that.

    Also just to clarify a couple things about Google as compared to either Apple of Microsoft. Google does control what manufacturers can do with the software, but it’s very, very limited, and only to keep the platform from fracturing. Beyond that, manufacturers can go nuts, and consumers can go even more wild with downloading any old thing they want, either through the Market or any other method (e.g. download from a website using a PC and then transfering to the phone via the SD card). It’s the polar opposite of Apple with their intense ecosystem lockdown. There I agree with you that Apple really is riding out this iPhone App Store frenzy a bit too far. They better hope the iSlate is as incredible a draw as the iPhone has been in order to keep the iTunes lock-in money-making racket intact. It’s hard to imagine how they’ll keep the interest of iPhone with the inevitable version 4 they’ll release this summer – it’s practically amazing consumers haven’t given up on iPhone today given how quickly consumers turn from envy to disgust (see RAZR).

  4. Peter, great comments! I was trying to allude to many of the points that you made, and I’m going to edit the post to be more explicit. Thanks for stopping by! Especially from a big-time Motorola employee : )

  5. The term “frienemy” is overstated. Google never sought out to destroy or even challenge apple, they are just looking for new ways to allow avenues for advertising and real time search, if anything they are competiting with Twitter and Yahoo. The only issue I have with the droid is their intial partnership with T(rash)-Mobile, the name says it all.

  6. EJ, thanks for your comment and for stopping by. You bring up some interesting points. I do think that Google sought to go after Apple, because it is a platform battle of who owns the mobile operating system. Whomever owns that, owns the ability to provide advertising (or not to provide advertising). I think it’s an inevitable convergence since we’re going from a place of having multiple devices, to having one central device. I think it initially transformed from a defensive move by Google, to an offensive, as the stakes have increased.

  7. Also interesting is that AT&T announced that they will be showcasing 5 android phones in the first half of 2010.
    http://edition.cnn.com/2010/TECH/01/06/att.android/

  8. From Facebook:

    Chris Liu: Very insightful i’m not very informed on all the phone gadgets cause i don’t think any of the new ones can survive as many times i drop mine.

    i look at it like they are selling newest video game consoles tho.

  9. Great post (per usual). I find it interesting how, in this regard, Apple was the first-mover, which opens the door for competition, and now (despite others efforts) this buzz has Google pegged to bring ‘real’ competition. I’m anxious to see how this all plays out.

    I commend Apple for exploiting their first-mover advantage, and it worked out extremely well. Even now Apple STILL is considered unconventional, & has a cult-like following. I’m an Apple fan, but not of their carrier subsidy. I definitely agree that Google is the game-changer here – and the consumer will be happier.

    Who knows, maybe now the networks can focus entirely on being fast and RELIABLE, seeing how the consumers will have more purchasing power.

  10. Antonio, I think you said it best. At the end of the day, these carriers need to improve significantly to tackle the demands of consumers for faster, more robust data. We haven’t even scratched the surface of what can happen if we can live stream video at a much higher quality than what we have now. It’ll be interesting to see what Flip video does to try and protect it’s turf.

  11. I’m just getting around to checking it out, I know I’m a day late and a dollar short Emile. This was rather one of your better ladened posts. You’re a very passionate writer like myself, so often we tend to impede a pieces overall thought, by overlaying our own in tone and dynamically chosen wording.

    However, it took you almost “offering your first born to the Gods,” to show your true literal genius. I know how much you have dis-stain for Google, however your approach to the how-why-ought-oh’ness of how this story is unfolding is brilliant. I argued with a friend of mine the other day, wholeheartedly that the guys behind Google aren’t special talent geniuses by any stretch of the imagination.

    [hear me out]

    However in fact, they are geniuses that hit the proverbial ‘GRAND SLAM’ with a product that revolutionized not their industry, but THE industry. Search runs what the ‘common user’ thinks is the internet. And because of their, albeit not unfair monopoly, of everything ‘search’ they thus have a monopoly of said ‘internet.’ Allowing them to attack other portions of the pie, and see if they can use the legions of hungry mouths to devour another portion of said ‘pie.’

    Google has hit the biggest market to date that they had no strong hold in. They have taken the Google ideals of search, and done the EXACT same thing to mobile phones and carriers. With Google Voice, they will be able to change the entire structure of WHO you get the phone from, WHERE it works (clouds).

    The largest controller of data, has seen the next war of where gaining the eyes to collect the data will be. By slowly implementing a long-tail approach of taking over this industry, it’s my belief Google has set themselves up to do exactly what they did to search online, which at the time – was the ‘next frontier.’

    Everyone talks about mobile being the ‘next big wave.’ And to all of the estimation I can elude to, Google seems to have placed itself, data, name and positioning on mobile usage to the head of the class.

  12. Ryan, thanks for stopping by and I agree with you 100%. The Google guys are very gifted, don’t get me wrong, but they haven’t shown any ability to tackle another market other than search. With all of that power and influence, they should have done substantially more to change the game, and in many ways, it’s a major disappointment to me. And you’re absolutely right, they tackled THE industry with what comes natural when 99% of people go to the Internet: search. The Google Voice combined with Android is a killer positioning, and I think we’ll see soon how smart they were to attack this area. Remember, Xerox created the first mouse, but were outdone by everyone else, because of poor implementation. This could be history repeating itself.

  13. Pingback: Nexus One: The final chapter in an antiquated mobile phone business model « These two cents by Emile Cambry Jr « Real Life Hitch

  14. Emile, excellent thoughts. Thanks for writing this, and thanks for inviting my comment. In my view, Google is making a bold move, but this is just one step along the way.

    What I’m most excited about is that the market is being turned on its head by companies like Apple and Google. I’m less concerned with who will win out in the end. Apple’s rabidly loyal following (I skew toward fanboy myself) will secure a significant and profitable marketshare. Google may end up with more share because of their platform independence.

    An interesting twist here is that ultimately, Microsoft could be the one getting squeezed along with the carriers. Google will be pushing ChromeOS, and Android will certainly be used as a lead-in to build loyalty and convert Windows users over to thin-client toting, cloud document storing ChromeOS users. We’re really seeing a convergence of communications across all form factors, with Mobile leading the way.

    Last fall I had dinner with an acquaintance in the Valley who handles M&A for Adobe, immediately following attending iPhoneDevCamp. The next day I had lunch at the Google campus. Conversations there focused on former allies making measured withdrawals from each others’ camps. Eric Schmidt had just stepped down from Apple’s board. Apple and Adobe have been at increasing odds (think Flash on iPhone). Traditional software companies like Adobe and Microsoft were starting to talk about remaining relevant with the cash cows of big-ticket graphics software and enterprise technologies. Literally, everything that’s built how we communicate via computers (in data centers, on desktops, and in the palms of our hands) is being re-thought.

    2010 and beyond will be fascinating. And full of opportunity for software developers. 🙂

    P. S. Here’s a short post I wrote for KeyLimeTie on NexusOne and the focusing of the app market onto the Android and iPhone platforms: http://keylimetie.com/blog/2010/1/6/google-releases-nexusone-adds-momentum-and-focus-for-app-developers/

  15. Tim, you bring up an excellent point! I should have mentioned that MSFT is getting beat badly. They had been pounding the Windows Mobile platform for such a long time, and have yet to make any inroads in the way that Apple and Google have done. They didn’t have the killer app to drive adoption, and in many ways, it was bad timing. The marketplace and technology wasn’t up to par with what they were offering. It will be interesting to see how this plays out. Possibly acquiring Research in Motion? But as you mention, 2010 will be a defining year for technology of the next 5-10 years. It will be interesting to see how this all plays out

  16. From Facebook:

    PW: Yeah it’s definitely an interesting time for mobiles! Another one I think about a lot is Nokia and what they must be thinking. Symbian is all but about to die if they don’t get on it (the world does not need so many platforms (iphone, android, webos, rim, winmo, and finally symbian and old school java midlets).

    Interesting … See Moreresponse from MS: http://arstechnica.com/microsoft/news/2010/01/microsoft-googles-nexus-one-will-hurt-android.ars

    If MS really believes that, they’re nuts. Manufacturers know what’s up. Google already showed strong preference to HTC before Nexus b/c HTC was their first and strongest partner. HTC would get API changes and knowledge not available to others. I’m 100% sure MS does the exact same thing for HTC and not other licensees b/c HTC is their strongest partner too. So the true threat manufacturers feel is due to the OS vendor showing preference to one licensee, regardless of whether they are also involved in the hardware sales. That’s normal business and won’t impact licensee use of the OS (other than maybe making the weaker ones try harder to become a stronger one).

  17. Somehow they manage to run GoogleVoice break-even by excluding the service to those in rural areas. I wonder how the mobile phone industry will be when they offer you a data plan and VoIP.

  18. Sorry I am late to the party Emile. Great post, so I wanted to add my “2 cents” (you are close to having a dollar on this post).

    The tech industry is rooted in gold rush hysteria (I blame San Francisco), resulting in an onslaught of competing products whenever a successful product is launched. So, the Nokias, MSFTs, RIMs are probably waiting now to see the size of the actual nuggets. Interestingly, the platform/carriers/subscription wars are being fought at a corporate level. Will be interesting when scrappy startups enter the picture and longer have to fear denial from the App store or legislation of behemoth carriers. The teens will be an interesting decade for telecom.

  19. Andy, I definitely agree with you. With everything happening so quickly, it will be very interesting to see how this all unfolds. The shots have been fired, so we’ll see how everyone responds.

  20. Good read! Some useful info you have there! Thanks!

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