Analyst Angle: gPhone, hPhone, iPhone.

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Current Analysis’ Avi Greengart, iGR’s Iain Gillot and more.
Should Google have its own phone? Journalists keep calling me and asking me this question. It’s not clear to me whether they think I have a crystal ball or I threw together a business plan to justify a $10 million-plus investment on the back of a cocktail napkin on my last flight home from the Northwest without the benefit of any inside information from Google. (On my last flight home from the East Coast though, I did with the help of my HP12C develop some scenarios to justify their $4.6 billion possible investment in spectrum.) (Kidding.)
Two years ago the question would have been, “Should Google be its own MVNO?” These are really, really big complicated questions.
I’m not answering any of these questions. I’m sure Google has a team of smart people working on answering them. Besides, in asking these questions, folks are bypassing the more fundamental and strategic questions.
Just like Apple, Verizon, Yahoo, Sprint Nextel, AT&T and others, Google wants to own the customer relationship-or “experience,” as my colleague and mentor, Michael Gartenberg, would more eloquently state it. And they want to do so profitably-eventually, in Google’s case. When asked about this initiative or others, Google often replies (in so many words) that they want to do good and provide an amazing customer experience. The right question is something much closer to, “How do we provide a phenomenal customer experience?” Doing this well will translate into owning the customer (experience) and long-term financial rewards.
Companies like Nokia, Apple and Google are thinking about how to own this customer experience. They are creating partnerships where necessary and launching new businesses where it makes sense. Nokia, for example, recently announced Ovi, the company’s new Internet services site. Nokia’s intent is to become a destination site for cellphone owners, although they didn’t explicitly say they wanted to bypass the carriers, simply complement their offerings. Apple launched the iPhone this summer. They own the activation process, the user interface and the online component (e.g., iTunes). Last week, they announced a new ringtone-creation product available as part of iTunes (and, no, it’s not a menu item under AT&T’s MEdia Net data service). They also announced a Wi-Fi version of their iTunes store that bypasses the carrier network all together (well, except T-Mobile’s at Starbucks). (See my colleague Michael Gartenberg’s blog for more on this)
While I won’t answer the question, “Should Google have its own phone?,” I will provide some perspective on why they might. Ninety-nine percent of Google’s $3.9 billion in revenue from the second quarter of this year came from advertising. In the same quarter last year, the number was $2.5 billion. At a high level, the revenue is a function of volume and piece price. Either lever will drive up revenue. Cellphones play a role in both.
To drive up volume, Google needs more people using more applications or services (e.g., search, Gmail) more frequently. They are pursuing this goal through acquisitions (e.g., YouTube), the launch of new applications (e.g., Gmail, maps, news, etc.) and subsidizing broadband access, among other activities.
Subsidizing access is an interesting play. The top reason households don’t have broadband in cities is due to the cost. The top reason households don’t have broadband in rural areas is due to availability. Google was looking to provide access in San Francisco along with EarthLink until the deal was killed last month. They’ve signed a deal with Sprint Nextel to offer their services on the carrier’s forthcoming WiMAX network. They are considering spending more than $4 billion on spectrum early next year. Availability of affordable broadband services, whether to the home or a phone, will drive adoption of services.
Today, owning the wireless network translates into owning the customer-with Apple standing as an exception. The FCC’s rulings on the 700 MHz spectrum may change this, but, for the most part, it’s the case today.
Consumers carry cellphones with them 24×7. Phones with full browser experiences (e.g., iPhone, Nokia N95) offer a compelling experience on a 3G or Wi-Fi network. With an improved experience and the right price, more consumers will access information and services from their cellphone. Why wouldn’t Google want to benefit from this trend?
In many developing countries, the cellphone may be the only way that consumers access the Internet. Getting access to more eyeballs may mean putting the Internet (via a cellphone or a comparable portable device) into people’s hands.
One of many successful services Google has launched is Gmail. Google has been successful in attaching ads to e-mail correspondence, which is one of the most frequently used services on cellphones outside of messaging. When I first began using Gmail, I have to admit that the ad placements, which are linked to the e-mail’s text, spooked me a bit. I had also adopted a cat named Jihad and was completely paranoid about writing his name out in my emails. However, I don’t really notice any more. Moreover, I’ve rationalized that they aren’t “reading” my e-mails-just delivering ads based on keywords.
I spoke to a company called Pudding Media last month. They have a technology that listens in on voice conversations and delivers ads based on keywords. The technology is not that different in principle from that used by Gmail. My initial reaction was “never.” But who knows, for the right price point, I might get used to it. Google already has a voice-based search service so it’s not that far-fetched of an idea.
Ads become more valuable if they are targeted or drive immediate purchase, among other things. Cellphones add the component of location to the equation, thereby increasing their value to many advertisers. Online ads that lead to sales are also valuable. People are less likely to purchase online via a cellphone (though this will change when more people have full browsers), but they can be directed into a local retail shop to make a purchase.
Owning the cellphone would also allow for behavioral tracking in addition to location. Google would be able to see what sites are being surfed, what mobile content is being purchased, what business listings or maps are accessed, etc. All of this information can lead to a more complete picture of the consumer.
Are consumers interested? Maybe. About one-third of 18- to 24-year-old survey respondents said they would be open to advertising messages on their phone if they were given a free phone. (They aren’t even paying for phones today so why not drop ads on top?) About one-quarter of the same age group said free voice minutes would motivate them. This younger age group provides (in my mind) an especially attractive target segment given that they are migrating off of family plans for the first time in their lives and finding they have a $70-$80 per month cellphone habit they might not be able to support. Half of 18- to 24-year-old respondents we surveyed are on their parents’ plan, but less than 15% of 25- to 34-year-old respondents are.
These are a few reasons Google might want its own phone. There are likely many more. The downsides to launching their own phone include distribution, customer service and scale-scale that buys handset selection, interest from developers, interest from retailers, etc. Building one’s own network is also a formidable challenge.
The question of whether or not Google should have its own phone may not be answered for years to come, even if they do launch a phone. There are a lot of reasons companies do things besides near-term financial gains-especially Google. Consumer willingness to put up with advertising is also hard to test. Consumers traditionally are quite negative when asked about ads, but on the other hand, look at the number of hours people spend watching TV each week and surfing the Web. Google like many others wants to own the customer experience. Companies are building towards this objective with many moves over the course of many years, and they are not likely to share their playbook with anyone ahead of time.
Questions or comments about this column? Please e-mail Julie at jask@jupiterresearch.com or RCR Wireless News at rcrwebhelp@crain.com.