What Google Wants With Its Own Phone: Control

Brought to you by Rita Chang

SAN FRANCISCO (AdAge.com) -- With all the attention Google's plan to launch its own phone is receiving, a sensible question remains: Why, when it makes billions off the high-margin business of search and online advertising, would it get its hands dirty launching a mobile handset?

Google's fortunes come from advertising, making money off eyeballs and user experience. As the online world matures and growth from advertising revenue slows, Google is looking to reap ad dollars from mobile. EMarketer has online advertising revenue growing 6% next year, compared to 40% for mobile.

Consider that the search juggernaut last week showed off its vision of mobile search -- from the promises of visual search to using voice commands to find stuff -- it makes sense that Google wants to have a direct hand in accelerating the promise of these applications and control the user's experience with them.

Control its destiny
"Mobile is the next frontier for everyone," said Bill Ho, analyst at Current Analysis. By directly controlling the handset experience and its specs, "they can control their own mobile destiny. At the end of the day, it's adding more subscribers, adding more eyeballs," Mr. Ho said.

Google has already hinted at how it plans to be the go-to service on Android handsets for everything from local search to the ability to retrieve coupons. Already services such as Google maps and Google voice are on every Android device. To activate the inaugural Android handset, the T-Mobile-exclusive G1, for example, users were required to have a Google e-mail account. "It's all about making Google's core services stickier," Mr. Ho said.

Trying to wrest control away from handset makers and carriers that have the most say on the user experience is also fueling Google's motivation to get into the handset business, observers say.

"On the Web, Google has near-total control over its relationship with consumers," said Harry McCracken, a Google-watcher who edits Technologer. "A true Google phone would give Google the opportunity to control the look, feel and functionality in a way it hasn't so far."

Bypass carriers
If Google can successfully bypass wireless carriers and sell its phones directly to consumers, it would be testing the same waters that Apple tread before but without much success. When Apple tried to sell its first-generation iPhone for upward of $400, it didn't move many units. It wasn't until AT&T subsidized the handset that the iPhone became a mass device.

Google has not confirmed its phone's launch, other than by posting a blog entry from Mario Queiroz, Google VP-product management, which said a select number of employees were given a device to test new mobile technologies. Still, reports suggest Google is looking to bypass the carriers and sell the device directly to users online, presumably through outlets such as Amazon.com and its partner Best Buy.

By some accounts, a number of technophiles outside the company have played with the Google device, and reviews have been positive. Although questions swirl about whether the Google phone could give Apple a run for its money, the real issue isn't whether the king of smartphones can be unseated. The test is whether Google, which has been a vocal advocate for an open mobile ecosystem that would loosen the stranglehold dominant U.S. carriers have on the market, can offer a viable alternative to how consumers buy their handsets in the U.S.

It's common for handset makers to circumvent carriers in Europe and Asia, where prepay plans are popular, but in the States, carriers subsidize the handsets, making back the money they shell out for aggressive subsidies on the long-term contract plans that tether subscribers to their services for two years and beyond. As Forrester analyst Charles Golvin sees it, Google would lean on advertising to recoup its handset development and manufacturing costs.

Enough mobile dollars?
"They're not getting the service revenue," Mr. Golvin said. "The only scenario is subsidizing it on ad revenue." One scenario could be installing specific ad-supported apps on the Google phone. Either way, Mr. Golvin sounded a note of skepticism that ad subsidies could realistically offset the phone's costs, considering that, on average, smartphone users pay $70 to $80 per month for voice and data plans. When you add everything up -- even supposing Google's operating costs are lower than the operator -- "it's a pretty strong statement about what advertisers are willing to pay to advertise on those devices," he said.

In the near-term, given Google's cash position, it can afford some losses on the device, but for Mr. Golvin the question is whether mobile-advertising revenue will accelerate fast enough in the long-term to make the investment worthwhile. Mobile ad spending worldwide will grow 74% this year to $913.5 million, according to Gartner, but not really ramp up until 2011, when advertisers bulk up their digital budgets with mobile buys.

For a company like Google that has a sizeable cash trove, this undertaking is a test to see if the mobile ecosystem can be pried open. "This could be an interesting experiment to see if they can sell directly to the public," said mobile analyst Greg Sterling.