Can Google's foray into mobile phones succeed?

USA: The promise: ubiquitous, mobile Internet access for millions of users worldwide. The stakes: a market of 324 million units and advertising revenue of $3.8 billion by 2011.

The risk: embarking on an ambitious effort to establish a consortium to promote a new platform for mobile computing/communications, an endeavor that others have tried before—and have achieved only high-profile failure.

The news: Google Inc.’s bold initiative to reshape the mobile-phone market by establishing a consortium of companies intended to promote a new platform for mobile-handset software that will bring Internet access to smart phone platforms.

For users, Google’s move could mean that Internet access will no longer be limited to the confines of the PC. For Google’s rivals, the establishment of the consortium means the arrival of a powerful new competitor—one that could cannibalize their sales. For Google, this initiative could allow it to achieve its goal of dominating the potentially lucrative market for mobile advertising and Location-Based Services (LBS).

Opening up handsets

Google announced the formation of the Open Handset Alliance, a multinational coalition of top technology and mobile communications firms. The Open Handset Alliance will focus on developing the Android software stack, a set of programs consisting of an operating system, middleware, a user-friendly interface and applications.

Platforms based on Android are intended to deliver a superior user experience and improved Internet access compared to existing smartphones. Perhaps, the most significant aspect of Android is the fact that Google intends to offer the software to mobile-handset OEMs for free, or very close to free. This represents an alternative to existing software solutions like Windows Mobile, Symbian and various flavors of Linux, which incur considerable expenses for mobile-handset OEMs.

"The implication of this is that it short circuits an incumbent node in the value chain, potentially decreasing consumer prices for such high-end devices. However, it also cannibalizes a relatively lucrative revenue stream for operating system suppliers,” said Francis Sideco, senior analyst, wireless communication, for iSuppli.

The smartphone market

Google’s announcement comes at a time when interest in such products has been stimulated by the arrival of Apple Inc.’s iPhone, which offers high-quality Internet access. Global shipments of smartphones are expected to rise to 324 million units by 2011, up from 124.3 million in 2007, according to iSuppli.

iSuppli defines smartphones as mobile handsets with open operating systems that allow functional expansion through sophisticated add-on applications. Thus, Google is addressing a market with high growth potential.

Google’s goal

Google’s goal with the establishment of the Open Handset Alliance is to become the main provider of LBS and mobile advertisements on wireless handsets, replicating its success in PC-based ads and location-oriented services like Google Earth.

The stakes in this market are potentially huge, since iSuppli forecasts the advertising portion of worldwide mobile video revenue will rise to $3.8 billion in 2011, up from just $135 million in 2007. Google’s interest in this area is so great that it may consider an acquisition of a provider of map navigation software.

Prospects for success

To determine the chances for success of the Google venture, one can examine previous, similar initiatives.

The closest parallel to the Google venture can be found in the venture launched by Go Corp./AT&T Microelectronics to promote support for pen-based mobile computing. Similar to what Google is doing now, Go and AT&T in the early 1990s attempted to create an industry ecosystem for a new type of product that combined wireless communications and computing. Like Google, it was to usher in a new category of mobile devices, in that case, the Personal Communicator.

Go created an operating system and other software for pen-based computing and the company and AT&T attempted to work with other market participants to cultivate an ecosystem for pen-based hardware and software.

However, the AT&T/Go venture faced major competition from Microsoft Corp., which announced its own pen-based extensions to the Windows operating system, although it did not bring them to market until a decade later. This pre-emptive strike helped bring an end to the AT&T/Go initiative.

Like AT&T/Go, Google is using a “camp strategy,” which calls for the formulation of supply- chain partnerships with multiple companies in order to create required building blocks for its initiative, according to David Carnevale, vice president, multimedia content and distribution for iSuppli. Key to success for this strategy will be getting a mobile-handset company to be first to market with a successful product that uses the Google software.

“Google needs to get someone to be the first to make a phone that really creates the category and quickly results in millions of units sold,” Carnevale said.

“Previous efforts at establishing standards have largely been failures. Selling a lot of products creates de-facto market standards and that’s why the iPhone has attracted so much attention.”

Like the AT&T/Go effort, Google’s plans face considerable competitive challenges, with the company’s software vying against solutions from high-powered rivals like Apple, Microsoft, Nokia, Palm and Research in Motion.

However, Carnevale said the Google initiative stands a better chance of success than the AT&T/Go effort. This is mainly because Google’s software plays to the company’s strengths in providing Internet information to users.