Why did Google launch Nexus One?

nexus

On 5th January, 2010, Google formally announced its entry into the competitive mobile handset space. The phone is a HTC-manufactured Nexus-One which Google calls as “Super phone”. Nexus One runs on Android 2.1 and boosts a 1 GHz Qualcomm Snapdragon processor. The key differentiator is its 3.7 inches AMOLED touch screen apart from a 5 MP camera and 512 MB RAM. Google plans to sell phones through the online Google store.

Mobile handsets is a highly competitive industry and requires special skills of supply chain management and distribution. Google is not known for hardware selling or distribution and its competence lies in software. Google does not even sell a computer despite being so strong in the fixed internet then why does it need to sell a mobile phone?

Google is a proponent of open environment as it believes that its revenues can be maximized only in a scenario where no other entity is dominant. The mobile space is very different from the computer world. Unlike the computer and internet space, in mobile industry, the carriers control much of value chain and especially the access to the web. Google’s decision to launch Android a couple of years back was an attempt to control the mobile operating system which is key to web access. Other attempts to open up the mobile ecosystem include Google’s participation in 700 MHz spectrum auction in the US. Google did not win the auction but it was a victory in disguise as it convinced FCC to adopt open-access rules that require the network operator to allow any device or application to connect to it

Search and advertising are the two key assets of Google. Google has managed to monetize the fixed internet using the combination of the two. Mobile phones are likely to emerge as key access devices for internet in the future and hence it is important for Google to invest in the mobile internet to keep the growth engine running. Google aims to replicate its web dominance in the mobile internet world as well. To this end, Google has been concentrating on various entities of the value chain – it launched Android mobile operating system, launched application store, launched Google Voice, bought Admob (the largest mobile advertising company) and now entry into the mobile handset business. It is clear that Google wants to make web the center of the mobile phone where its mobile search is used to enter the web, applications are downloaded from its store and then they are monetized from the advertising revenues from Admob. It wants to suck the value out of hardware vendors and carriers just the way Microsoft and Intel did to the computer world. Google envisages an open mobile industry where the value lies in the software and services and it wants to play a key role there. Nexus One would help it expand its search and applications footprint which can then be monetized via advertisements. Google has supervised the hardware design of the phone to ensure that the web assets of Google are perfectly integrated with the phone. Google is not interested in the hardware margins but its real aim is to increase the adoption of search and applications.

The figure alongside depicts how Google intends to make money by monetizing search and applications. The business model is simple – point the user to the required web page or application and then serve advertisement in the page/application to generate advertisement revenues. This is the successful Google model on fixed internet that Google now wants to replicate in the mobile space. Bulk of Google’s revenues are from advertisements, majority of which is search based.

Google positioned Android as an open platform providing it free to the vendors was Google’s strategy of controlling the device to deliver a seamless, integrated experience of its services (navigation, application store, etc.) to the consumers. In the process, it intends to learn about the consumer behavior and preferences to have targeted advertising. The biggest advantage for Google is high adoption of its web based PC services and the demand for similar services on mobile internet. People who use a particular service from a particular company would like to use the same service from the same company on other access media. Google recognized this and decided to control the mobile ecosystem through Android. However, since Android is an open source, there is a possibility of high fragmentation of Android leading to its development in a way that may not be entirely beneficial to Google. To overcome this drawback, Google thought that it is best to launch its own handset and control the experience on Android. Through Nexus One, Google is attempting to showcase the true capabilities of Android platform.

Google’s long term goal seems to be completely commoditize the hardware and web access. If it is able to generate sufficient advertising revenues, it would attempt to offer ad-subsidized phones directly to the consumers from its online store. This explains why it has decided to sell Nexus One from online Google store. Moreover, Google wants to dismantle the control of carriers in handset distribution and hence it has decided to sell the phone exclusively from the online channel. However, the biggest challenge for Google to sell a phone from its online channel would be the ability of phone to work on all the networks (carriers in the US may not allow Google phone to work on their networks). Carriers would fight to keep the distribution of handsets within their control. By moving towards open distribution, Google is trying to ensure that the mobile phones are sold the way personal computers are sold. I think, one of the main reasons for Google to launch Nexus One was the Online store and its attempt to end carrier’s control over distribution. Any other objective  could have easily been met by promoting Android through its partners like Motorola, Samsung and HTC.  Google’s offer to sell non-Google phones (based on Android) to be sold through the online store indicates that it is not entirely interested in the hardware margins and in the process it has ensured a wider participation and may not be required to launch follow-up models soon which is a norm in the handset industry.

Google’s intention to disrupt the mobile value chain should make its partner handset vendors and carriers worry. The key question in front of partners is whether to partner or to compete. In my opinion, the partners need to take a long term view and think about the areas of conflict five years from now.

Impact of Google’s decision on other handset vendors

Many vendors including Motorola, Sony Ericsson and HTC are betting big on Android platform and have announced product road-maps for Android based phones. With the announcement of Nexus One, there would be a lot of apprehensions amongst the handset vendors. Will the latest version of Android be available to the partner vendors or will they get an old version? Should the vendors plan to launch their own services, then they would need to compete with Google services (application store, navigation, etc.) and this is likely to impact Samsung the most which is taking baby steps in the services direction. Google wanted to comfort its partners and hence had invited the CEOs of HTC and Motorola at the time of launch of Nexus One though both the CEOs looked a little uncomfortable on the dais. Google plans to sell Android devices of other vendors in an effort to mitigate the apprehensions of its other handset vendors who use Android.

Impact of Nexus One and Android on Carriers

Using the Online channel and Application store, Google is trying to disintermediate the carriers and make them nothing more than dumb pipes. That’s what happened in the landline world of the Internet. It is a significant risk for carriers as no exclusivity and no use of carrier channel is a game changer at least in the western markets.

Google has been attempting to embed Google Voice application in its Android platform apart from seamless integration of its other services like navigation and application store. This is likely to be in direct conflict with the carrier’s voice and data services. Smaller carriers have no choice but to partner with Google but the larger operators like Vodafone should be careful in its partnerships with Google and should carefully analyze the impact of alliance on their own services. Vodafone has already placed big bets by buying out Wayfinder and launching Vodafone 360.

Summary

Google seems to be making intelligent moves to get a foothold in the mobile industry with an aim to disrupt the current value chain. It would be need to do a fine balancing act between its goals and the goals of its partners. Google would need to convince its licensees that it is not in competition with them. I do not doubt Google’s ability to deliver on software and hardware (or HTC’s ability) but it seems to be making more enemies then friends by pursuing its current strategy. If successful, Google can change the way phones are sold and the way the value is created in this industry.

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