Many analysts view Google’s Nexus One as a vehicle that will enable the company to reach millions of users of the smartphone with mobile search text and display ads, and possible even click-to-call ads.
BroadPoint AmTech analyst Benjamin Schachter is one of those analysts. Schachter has a hunch that, while the search giant won’t admit it, Google hopes to actually build up a mobile hardware business around the Google Webstore it uses to sell the Nexus One and future Android-based devices.
Consumers can’t walk into a retail store and buy the Nexus One at present. As the merchant of record, Google is selling the HTC-built, Android 2.1-based Nexus One online through its Webstore for $529 unlocked and unsubsidized, or $179 for a two-year contract with T-Mobile. Hardware parts for the Nexus One cost $174.15, according to iSuppli.
Noting that the Nexus One smartphone is the first of what could be a slew of mobile devices Google sells, Schachter said in a Jan. 6 research note, “We think that Google’s unstated goal is to potentially build its mobile hardware business into a meaningful revenue driver.
“Mobile is a big enough market to move the needle for Google, and we believe success here may encourage the company to introduce more hardware such as netbooks, tablets, and other devices. In our view, yesterday was quite literally day one for Google’s long-term mobile ambitions.”
However, during the question-and-answer session at the Nexus One launch event Jan. 5, Mario Quieroz, vice president of product management at Google, said that while the retailing aspect is important, it’s “another channel” and not intended to replace other channels.
Andy Rubin, vice president of engineering for Android, deflected questions about Google trying to make money on the HTC-built hardware, noting that while there is some opportunity to make some margin on the unit sales, “that’s not what we’re trying to do here.”
“Our primary business is advertising,” Rubin said. “This superphone category is just a great way to access the Internet and along with that comes our normal business model of advertising. … If you want the best possible Google experience, you’ll come to the store, grab the device, and [the Google] advertising model takes off.”
Google Quiet on Hardware Ambitions to Stay Alive
So why isn’t Google coming clear about its alleged mobile hardware ambitions? Self-preservation. Schachter said it will not state this goal because it fears damaging the precious, powerful brand Google has cultivated over the last 11 years if the company fails.
Indeed, there are always risks when companies, particular software-driven businesses, double as purveyors of hardware. Jefferies Research analyst Youssef Squali wrote in a Jan. 6 research note that Google’s retail model could depress margins:
““We believe that as the ‘merchant of record,’ Google is likely carrying the inventory risk for a business that’s likely to generate profitability that is substantially below the company’s traditionally 60 percent-plus EBITDA margin.”“
Yet Schachter sees another silver lining in the Webstore. He believes that by offering the Nexus One and other devices through its own store, Google could diffuse some of the fragmentation plaguing Android, for which multiple operating system versions-1.1, 1.5, 1.6, 2.0 and 2.1-exist.
He said that by infusing its smartphones with the most current software, Google can encourage other carriers and OEMs to essentially keep up with Google and update their own Android devices with the latest software versions as well. The Webstore, backed by Google’s promotion on its front page and elsewhere, should help in that regard.
Still, mobile advertising is the business model that most financial analysts are rallying around in the wake of the announcement. Squali sees the Nexus One and Webstore as another way for Google to expand its mobile search and apps footprint, which can then be monetized via ads.
“During the 3Q09 call, Google saw 30 percent quarter-over-quarter rise in mobile searches,” Squali wrote in a Jan. 6 note. “We expect Google to monetize this hyper-growth in search volume via location-based search ads, which are typically more attractive to advertisers, given the ‘in-market’ nature of such consumers.”
Eventually, thanks to the direct-to-consumer model of its Webstore, Google could gain some control over how consumers buy mobile device and services, enabling it to offer VOIP or ad-subsidized mobile devices in the future.