The Blog of Burgher Jon



This is Part Two of a three part post (Part 1: The Apple and the Android). Google is doing something really exciting in the world of phones.  Something that may very well change the way you buy phones and service contracts in the next three to five years.  The way Google is approaching the phone market is fascinating not only from a technology perspective, but from a business perspective as well. For this reason, I’m going to spend a few days looking at the play and its intended outcomes.

The timing of this post is intentionally pretty good.  Google has allowed their initial testers to review the phone starting today.  One of my favorite bloggers, Fred Wilson, was among the testers.  He posts his review over at A VC.  He talks about it as another smart phone.  For now, it’s just that.  According to Fred, it may be one of the best, but it is still just another internet enabled, email checking, application running phone.  The irony is that the real impact of the Google Phone (Nexus One), won’t be on the cell phone manufacturers.

I mentioned in yesterday’s post that the people who are most scared (or at least should be most scared) of Android, Google’s Operating System, are actually smart phone manufacturers such as Apple and RIM.  In the same way, the companies most threatened by the Nexus One are actually the Wireless Cariers not the phone manufacteurs.  This is because Google is going to offer the phone as an “open” phone.

Currently, the wireless providers (Verizon, AT&T, T-Mobile, etc…) hold all the strings.  They make the deals with the phone manufacturers.  Then they sell the phones in their stores coupled with a 2 year service plan.  They give the manufactures an initial payment and then rake in the cash every month for the next two years.  It’s estimated that AT&T (in addition to the price of the phone) pays Apple $18 per month per iPhone user that stays on their network.  How can AT&T afford that?  Simple, because they are charging you the customer even more then $18 over what it costs them to actually provide service to your phone.

Based on the latest Google Analytics, I don’t have any readers in Europe.  That means that the concept of an “open” phone will be new to just about everybody.  Few people stateside have heard of the concept and even fewer have done much thinking into what it might mean to the wireless industry.  An open phone is one that is not linked to any specific network and therefore can be transferred to any network easily.  If you’re not sure, your phone is not an open phone.

With Google putting their name and reputation behind an “open” phone in the United States, carriers will be pressured to allow “open” phones on their network.  I doubt that all of them will, initially, but at least AT&T and T-Mobile will.  This (and any other high-profile “open” phones) will put pressure on Verizon and Sprint to update their networks to support “open” phones.  If this happens (probably not for several years) power will be shifted away from the carrier.  The $18 that AT&T pays Apple?  I’ll buy my own phone and then ask them to take that off my bill.

The significance of Google in this game is this.  They developed their own phone and likely had offers from Verizon, T-Mobile, and Sprint similar to AT&T’s $18.  They said, “no thanks we want to make it open so that we can make more money on phones (and applications for phones) in the future.”  It’s a bold move that likely will be mimicked by other device manufacturers.  Someone had to fire first in a battle that may eventually (probably 8 to 10 years) change completely how you buy mobile phones and service.

We’ve covered how Google will change the phone that you use, the operating system you use and how you buy your phone and service.  Tomorrow, what is Google Voice and how does it fit?

This is Part One of a three part post.  Google is doing something really exciting in the world of phones.  Something that may very well change the way you buy phones and service contracts in the next three to five years.  The way Google is approaching the phone market is fascinating –  not only from a technology perspective, but from a business perspective as well. For this reason, I’m going to spend a few days looking at the play and its intended outcomes.

I got the Motorola Droid, Verizon’s most powerful Android powered phone, a couple months ago on the day it came out.  I’ve reserved making too much of a judgment until now.  The primary reason for waiting is because I tend (as technologists do) to fall in love with a new toy and look past its faults.  I’m not proud of it, but I actually recommended the, now unanimously scorned, Blackberry Storm to a family member.  So, after waiting a reasonable amount of time, I’m here to tell you the Droid (and Android as an OS) are the real deal.

For those of you a little less tech savy, let me explain.  While it’s not discussed often, your phone has an operating system built into it.  Your phone runs this operating system just as your computer is running Windows (or Mac OS).  The difference between computers and phones is that the operating systems are often developed by and used exclusively by the manufacturer.  For example, only Blackberries run the RIM operating system, only iPhones run Apple’s OS and only Palm Pilots run the Palm OS.  The two largest counter examples are Windows Mobile and now Android (which is an operating system published by Google).  Since I’m quite sure that Bill Gates is not a regular reader of my blog, I’m going to dismiss Windows Mobile for now*.

The implications to RIM (makers of the Blackberry) and Apple of a popular, device-independent operating system are ominous to say the least.  For proof, one need not look further then the fight for dominance in personal computing.  Apple had (hands down) a better product then Microsoft.  This gave Apple a competitive advantage and allowed them to charge a significant markup on their hardware.  On the other hand, the fact that multiple hardware manufacturers were producing Microsoft compatible systems opened up a price war.  As a result, PCs were considerably less expensive even with the same margin on the operating system itself.

Every corporation, academic institution, and even group of friends had to standardize on either Apple or Microsoft.  This standardization would ensure that they could easily transfer files, hire a single set of technical support professionals, and create a knowledge base around the operation of the computer.  Since PCs were cheaper (and gaining on Apple in usability), Microsoft’s market share grew.  Once Microsoft became the dominant operating system for PCs, Apple had no choice but to become a niche player.

I believe we may see the same thing happen in the mobile phone market.  Dell, HTC, Motorola, and LG are all making (or expected to make) competing Android phones.  The fact that these companies will all be competing with the same operating system means that they will have to compete on price, hardware features, or marketing.  No matter what they choose, their competition-tested products are sure to diminish Apple’s market share.  If this dynamic doesn’t change, I predict Apple (and RIM) will be occupying a niche market in smart phones within 5 years.

* What makes PCs dominant is their hold over the things we do in the office –  spreadsheets, presentations, word processing.  Windows Mobile attempts to transfer that power to the phone.  While it does that better than any of its competition, that’s not why people buy phones (at least not yet).

Note: Image from Got No Milk (there looks to be a tasty applesauce recipe there).