Is Google Getting into the Cell Phone Business?

Nobody was really surprised when Apple finally trotted out its entry into the cell phone market; even the name – iPhone – had been anticipated. Now many analysts are saying that Google is working on a gPhone to rival Apple. What’s really going on?

Let’s look at what we know about Google. They provide ad-supported services for free. Users interact with these services over the Internet. They are the first – and often the only – company that anyone thinks of when they need to search the Internet. They share with Apple an aura of ubercoolness that comes in part from the same source: their products are high-tech and geeky, yet so simple as to be intuitive.

But it’s at that ubercool aura where Google’s similarities to Apple end. Don’t get me wrong; there are a lot of people who would love to see what Google could do with a cell phone. But let’s get real here. Google is not now and never has been a hardware company. It would have to be crazy to become a hardware manufacturer; think of the amount of research and infrastructure investment that would be involved. Given that the search giant is not likely to have taken leave of its senses, we can assume that it will stick to what it does best: selling ads that people see while they’re busy searching or doing other things.

There’s another reason why Google would be crazy to create and sell its own cell phone. I lied when I said the similarities between Google and Apple end at their geeky coolness. Four of Apple’s eight directors wear other hats – as directors or advisers to Google. In fact, Google CEO Eric Schmidt sits on Apple’s board of directors. Can you say conflict of interest? That’s not something a Google employee at any level would want to face, given the company’s well-worn motto of "Do no evil."

So if Google isn’t going to get into the hardware business, why are so many people speculating about a Google cell phone? There are a lot of ways to get into the cell phone business, as it turns out, and Google may be trying several of these approaches. If the Wall Street Journal can be believed, in fact, these moves tie in perfectly to Google’s main source of income.

According to the respected publication, Google is shopping smart phone prototypes around to a number of wireless operators, including T-Mobile USA and Verizon Wireless. Rather than manufacture the phone itself, Google hopes to convince a variety of manufacturers to make their phones and a number of carriers to sell them. In this sense, Google’s approach is the diametric opposite of Apple’s; only one manufacturer is making the iPhone, and only one wireless carrier – AT&T – is selling the handset.

Whoever ends up manufacturing the cell phone, Google is pretty serious about this project. It has invested hundreds of millions of dollars in it. At least some of that money must be going into luring the right people to the project. Andy Rubin signed on; before drawing his pay packet from Google, Rubin designed T-Mobile’s Sidekick smart phone. One recent article talking about new Sidekicks in the offing described the whole brand as "one of the few smartphone lines outside of those built on Windows Mobile, the Palm OS, or Symbian platforms to gain a loyal following and some market share."

No doubt Google is hoping Rubin will bring some of that magic to the specs for the prototypes. Google would like to see manufacturers include cameras for both photo and video, as well as built-in Wi Fi technology so you can surf the web while you’re sipping that double latte at Starbucks. And just so you don’t feel like your phone could use some coffee too, Google recommends that the phones be designed to work on 3G networks for faster surfing. As a final touch, Google would like to see the phones include global positioning systems (GPS) to show users’ locations.

Anyone who has been in the market for a smart phone knows that these specs aren’t particularly difficult to find on any phone that is currently on the market, with the possible exception of the video camera. So why invest in something like this if Google isn’t going to make it special? The short answer is that, for Google’s purposes, mobile phones are where the money is.

The longer answer was hinted at by Schmidt at the D: All Things Digital conference in May. "What’s interesting about the ads in the mobile phone is that they are twice as profitable or more than the nonmobile phone ads because they’re more personal," he said. Google’s goal has been to get its ads to people at the right place and the right time so that they’ll be receptive; that’s the whole point of search advertising, after all. Ads that are "more personal" can only further this objective.

When asked about the project, a Google spokesperson would only say that "We are partnering with almost all of the carriers and manufacturers to get Google Search and other Google applications onto their devices and networks." Given what cell phones currently offer users, and what applications might be useful on a mobile platform, these applications probably include Gmail, Google Maps, the standard Google search, and others – perhaps Google Notebook so you can clip interesting items while you’re web surfing, Google video search, and Google Calendar.

Whichever applications Google chooses to include in the specs for its handset, you can bet they’ll be shown off to their best advantage. But users will probably have to listen to ads. Indeed, the Wall Street Journal notes that "Google even envisions a phone service one day that is free of monthly subscription charges and supported entirely through ad revenue" and quotes its source simply as "people familiar with the plans."

Google clearly thinks this is a worthwhile market. The numbers aren’t there yet, but they will be. eMarketer said that global spending on mobile phone advertising was only $1.5 billion. This number includes placement of ads in text messages, web pages, video, and all other content. But that figure is projected to grow more than 50 percent a year, to nearly $14 billion by 2011. That’s enough money to make even Google pause – and invest in the future.

But Google faces some serious hurdles along the way. One of these is the wireless operators themselves. Another one, potentially, is the FCC.

If Google is thinking of a wireless handset in the future that costs nothing to the consumer, one must ask how the wireless carriers who offer the handset would benefit from the deal. Obviously there would need to be some kind of revenue sharing arrangement between Google and the carriers. Wireless carriers are not exactly known for being generous or good at sharing.

Indeed, one company may already have rejected Google’s overtures. At the very least, there appears to be some bad blood between Google and Verizon Wireless. The latter’s CEO Lowell McAdam said that Google’s insistence on getting a large share of search-based ad revenue led Verizon Wireless to avoid tightly integrating the search engine into their cell phones. "What this really boils down to is a battle for the mobile ad dollar," McAdam explained. "They want a disproportionate share of the revenue."

Does it make more sense, then, for Google to become its own carrier? When TV broadcasters switch from analog to digital early in 2009, a swatch of spectrum in the 700 MHz band will become available. Google has been very vocal about the rules it would like to see in place when this highly desirable band is auctioned off by the FCC. Google has even reportedly gone so far as to say that it will spend more than $4 billion in the auction if the FCC agreed to open applications, devices, services and networks. According to an article by PC Magazine, "That would basically require licensees to provide wholesale service, access to any desired devices and software applications, and interconnection with third parties."

The FCC only gave Google half of what it wanted, saying yes to open devices and open applications, while not obligating auction winners to let others buy access at wholesale prices in order to offer network services. This would seem to defeat Google’s purpose.

Google is not likely to give up however. It’s been a long slow climb, but mobile devices and mobile phones are getting better at offering the kind of functionality that we expect from our laptops and desktops. It would simply be too useful to too many people to be able to hunt up maps or addresses or other information on the go. How valuable would it be to a restaurant to turn up on a search right when someone is driving around looking for a place to eat? That’s the money that Google hopes to capture; with that kind of untapped gold mine, the search engine giant isn’t going to be discouraged by a few little roadblocks.

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