Analyst Says iPhone Success Guides Google's Nexus One

The unstoppable success of Apple's iPhone has pushed Google to create Nexus One, a smartphone based on the Google Android operating system whose software and features Google has built from the bottom up on hardware from HTC. So claims one analyst.

Nexus One, which Google employees are testing, is expected to come to market early next year, possibly in January, and allegedly with support from T-Mobile USA. However, the device will be based on GSM technology and will be unlocked, meaning users can pick their carrier to power it.

Bernstein Research analyst Jeffrey Lindsay said in a research note that the phenomenal success of the iPhone, nearly 10 million units of which will ship through 2009 and whose Apple App Store offers more than 100,000 applications, has forced Google to take actions into its own hands in the smartphone market.

"Specifically, we think Google is anticipating the expiration of Apple's exclusive arrangement with AT&T reportedly in June 2010 (although never confirmed by either side)," Lindsay wrote. "This would open the possibility that Apple could get access to Verizon's superior 3G network, challenging the Google/Verizon Droid initiative directly, and forcing Google's hand to get more involved in the mobile data hardware space."

This means the iPhone might sell 12 million to 24 million units total on both AT&T's and Verizon's networks next year. The Android-based Motorola Droid is expected to sell 8 million to 9 million units in 2010, which is respectable but no match for the iPhone running on the nation's top two wireless networks.  

Google, Lindsay added, wants to create a "pure" Android phone based on Android's 2.1 build that bests the iPhone user experience to obviate the fragmentation of the Android ecosystem. Currently, there are three Android OS iterations kicking around for development—1.5, 1.6 and 2.0 (powering the Motorola Droid).

However, Android developers are plagued by getting apps to work on all Android OS' across about 15 Android phones. Apple has one proprietary OS, and applications that make the cut in its App Store are tightly controlled. For the iPhone, fragmentation is not an issue, though disappointment among app developers who find their apps rejected for not meeting Apple's strict regulations is.

Nexus One would ideally be a smooth, polished build that withstands fragmentation. However, offering it unlocked is a gamble. U.S. carriers subsidize mobile phone costs to make them more affordable to consumers.

If unsubsidized by Google or a GSM carrier such as T-Mobile, such a device would likely run $500, out of the price range of the common consumer. But that seems to be what Google is doing to ramp up Android sales versus the iPhone.

"We think the strategy is risky because all previous attempts to sell directly to the consumer in the U.S. have thus far have been an abject failure," Lindsay wrote. "Specifically we note the low appetite of American consumers for an unsubsidized phone, and the huge acceleration in iPhone sales when Apple lowered the (subsidized) retail price of the iPhone from $399 to $199, suggesting that Americans still seem to have an insatiable appetite for handset subsidies."

BroadPoint AmTech analyst Ben Schachter had a different take in his Dec. 14 research note, noting that Google wouldn't do this if it didn't think it would disrupt the mobile phone market.

"We do not expect just another smartphone to compete with the iPhone. We think Google will try to change the current model and influence the development of the mobile Web in a more fundamental way. That could be through some sort of advertising supported economic model, a mobile device more focused on data than voice, the unlocked feature, etc.

"At the end of the day, this will not be a phone in the traditional or 'smartphone' sense. We think it will be a mobile device that tries to challenge current business models, notions of data versus voice, and how consumers should pay for mobile services."

In controlling all of what goes into Nexus One, Google could create a mobile ecosystem where all of its various services/applications run without breaking from fragmentation. This would include tighter integration with Google Voice, GPS-enabled directions and mapping, location-based mobile advertising, and mobile searches.

Schachter said that while it is too early to predict how these models will evolve, Google might be able to make a lot of money from ads associated with mobile Web services, which would help it fully subsidize the cost of the phone for users.