Will Google Crush The iPhone?
Take one look at the smart-phone market, and it's easy to see a murderer's row. Apple sold one million iPhones in less than three months this summer. Palm is rejuvenating its lineup with the cheap, pretty Centro. Research in Motion's BlackBerry continues to enslave the corporate class. And Microsoft looms large as well, with its software on 140 phone models available from 160 mobile-phone carriers.
But all those devices are, well, just phones. None truly disrupt the wireless industry. That fact has left the field wide open for Google (nasdaq: GOOG - news - people ) to do a little murdering of its own. Industry sources say the online search and advertising specialist could publicly detail its long-rumored mobile-phone project as early as next week--with tech-gadget bloggers gossiping about every aspect of the look and feel of the latest tech toy.
Ultimately, however, the device's design won't matter. Instead, it is the business model powering Google's phone that promises to be something completely new. To Google, it doesn't matter how many software licenses you can grab. It doesn't matter how many pricey handsets you can sell in a quarter. The only thing that matters is eyeballs. More people spending more time with Google's phone will mean more money.
Google's thirst for ad dollars means its phone will be very different from offerings from Apple (nasdaq: AAPL - news - people ) or Microsoft (nasdaq: MSFT - news - people ). While both Apple and Microsoft started with the affluent, Google will be trying to crack the smart-phone market from the bottom up, industry sources say (Google declined to comment for this story).
First, a recap: Google has been building a mobile-phone team ever since the acquisition of mobile-gadget developer Android in 2005. Andy Rubin, Android's founder, is leading the project's engineering team. He co-founded Danger, Inc., the company behind T-Mobile's popular Sidekick line of Internet-friendly smart phones. Rich Miner, in Google's Boston office, is leading the business side of the effort, sources say. Meanwhile, Google co-founder Larry Page is providing high-level support for the project.
The phone promises to fuse open-source software with Google's applications on a high-end handset. Rubin's team is building custom mobile-phone software atop the free Linux operating system that will bind the phone tightly to Google's online applications and advertising services, sources say. Software from another Google acquisition, Skia, will put a slick user interface on the package. Finally, Google will build all that software into a smart phone built by Taiwanese handset specialist HTC, according to a source familiar with the matter.
In some ways, that's not so different from Microsoft's strategy: put its operating system, and applications such as Word and Excel, onto hardware from HTC, and later on, other manufacturers. That, however, is where the similarities end. "Licensing a mobile OS is not the endgame," UBS analyst Benjamin Schachter wrote in a note to investors last week.
It is dissatisfaction with the ability of today's phones to carry targeted advertising--rather than a thirst for software-licensing revenues or desire to build cool gadgets--that is pushing Google to take on the mobile-phone market, industry sources say. "[Google] will likely focus on extending its current ad-based economic model," Schachter writes.
That means Google may find a home for its phone among consumers in developed and emerging economies, rather than the corporate or creative elite. Carriers catering to the developed world hope to make their profits by offering online services and content, such as ringtones. In emerging economies, carriers figure that subscribers bring their eyeballs rather than their wallets. That could make Google attractive in Asia and other fast-growing markets, with China Mobile (nyse: CHL - news - people ) and Orange Telecom--which has a large presence in the developing world--likely to become Google partners.
The payoff could be big: While analysts estimate that mobile-phone software generates $500 million in revenue for Microsoft, New Jersey-based market researcher Kelsey Group figures mobile-search advertising in the United States alone will grow to $1.4 billion in 2012 from $33.2 million this year.
Microsoft has spent its energy helping its partners create applications for its mobile operating system, rather than turning the mobile operating system itself into a vehicle for ads.
"We're going to put the choice in the customer's hands," says Scott Rockfeld, group marketing manager with Microsoft's mobile communications business.
Google, on the other hand, won't be interested in offering a choice between its applications and those offered by the carriers or Microsoft. As a result, Google may have to play rough. UBS's Schachter warns that Google may even have to threaten to spend billions on its own wireless spectrum to get the carriers in line. Google "may be using its potential spectrum acquisition as a hedge against carrier intransigence," Schachter writes.
Then again, unlike Apple or Microsoft, Google only wants one thing: advertising dollars. As a result, they can afford to stomp on a few toes