Google’s Nexus One – the point of connection

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6 January 2010 – At the end of 2006, in an interview with Reuters, Google CEO Eric Schmidt strikingly opined that “your mobile phone should be free. It just makes sense.” As mobile phones do more things, and people consequently spend more time using them, Schmidt’s view was that advertising will increasingly be used to subsidise the cost of acquiring a phone – just as advertising subsidises the cost of acquiring a newspaper, for instance.

Three years later, Google has launched its own phone, the Nexus One. Whatever else it might be, free it definitely ain’t. At $530 unsubsidised ($179 with a new mobile service contract), this is an expensive piece of kit to acquire. To persuade large numbers of people to acquire it, Google needs either to offer a quantum leap in features and functionality, or to generate an iPhone-like level of cachet so that the people say: “I want it because I want it.” In the absence of such Nexus-mania, how does the device stack up as a new competitor in the $500 phone segment? It ticks the boxes that such a device needs to tick – big, bright touch screen, 5 megapixel camera, thin, sleek, etc. It also has a few nifty extras, like voice control. But there’s no quantum leap here, nothing obvious about the Nexus One that marks it out as a device that can revolutionise its product category, the way the iPhone did.

So let’s say, at least, that this looks like the best Android phone to hit the market so far. That begs an important question: why would Google produce the market’s best Android phone, at the risk of annoying its licensees who are also producing branded Android phones? More generally, why is Google entering the phone business so directly at all?

Let’s assume that becoming a consumer electronics vendor is not a goal of Google’s corporate strategy. In that case, Google sees phones as a means to an end. That end, we believe, is to build a large user base for Google’s mobile phone service properties; to expose that user base to advertising; and to collect the data its user base generates. In other words, Google wants to be everyone’s starting point when they use the mobile internet. The name “Nexus” is a significant clue here: a nexus is a point at which multiple strands connect.

At root, therefore, what Google needs smartphones to do is steer their users towards Google’s packaged experience of mobile internet services. The Android platform itself is designed to do that, by presenting Google’s package prominently and by prompting users to sign in with their Google ID to get the best user experience. So if all Android phones are already steering users towards the Google experience, why is Google now bringing out its own Android phone? The obvious conclusion is that in Google’s view, the other Android phones are not steering effectively enough. It wants to get its own hands on the wheel. And Android’s main licensees probably need Android enough to swallow whatever annoyance Google’s move into the driving seat might cause them.

If our rationale is correct, then the Nexus One has one big drawback: its price. Google needs to get as many of these devices into users’ hands as possible, as quickly as possible. Failure to do that will not only negate the device’s strategic goal, but it will also damage Google’s brand prestige, since comparisons will inevitably be made with the high volumes of iPhones that Apple has shipped. Maybe it’s not viable for your phone to be free just yet – but it may be in Google’s interests to make this one a lot cheaper.

Author: John Delaney (Research Director – IDC)