Analyst Angle: A nexus to vex us

Editor’s Note: This article is an excerpt from RCR Wireless News’ May Special Edition, “Enabling the Mobile Revolution: Mobile Chips, Devices and Accessories.” The 80-page special edition is available here.
The fourth quarter of 2009 was ripe for a Motorola Inc. comeback. The company that had fallen off the Razr-sharp peak of the cellphone industry had seen several quarters of steady decline according to NPD’s Mobile Phone Track. Motorola had already announced its first phone powered by Google Inc.’s Android operating system, which would become T-Mobile USA Inc.’s Cliq; but the gold accents on its Motorola Droid for Verizon Wireless proved symbolic.
The nation’s largest carrier threw its full weight behind its first flagship Android handset, and Motorola saw its fortunes rise to the top the Android heap. According to NPD’s Mobile Phone Track, Android jumped to the No. 3 market-share position among smartphone operating systems in the fourth quarter of 2009, largely on the strength of the Droid. Verizon Wireless’ campaign aimed at Apple Inc.’s iPhone was clearly having an effect.
For Google, which had stood with T-Mobile USA as the carrier launched the first Android device a year earlier, now was a moment to send its partner Motorola a message. But rather than congratulating Motorola, Google launched its own Nexus One to compete head-to-head with the recently launched Droid. Google’s HTC Corp.-built handset boasted a 3.7″ OLED display, a 1 GHz processor, a sleek profile and (exclusively at its launch) the latest Android 2.1 OS.
With its slim profile and minimalist appearance, the Nexus One was hailed as the most direct Android-based challenger to the iPhone to date. Reviews were generally positive, but some observers questioned whether it was much of an advance over the Droid, particularly as it lacked even the Droid’s substandard keyboard, and Google was ill-prepared to address customer service for even the small band of early adopters who purchased the Nexus One.
Strength in numbers
Google’s offering of the Nexus One raised controversy because, at the launch of Android, Google CEO Eric Schmidt downplayed notions of a single “Googlephone.” Schmidt noted that Google wanted a thousand such devices made by many manufacturers (that is to say, a licensing model versus a vertically integrated model like the iPhone or Palm Inc.’s Pre). Yet, while the Nexus One may have violated the spirit of the Android model, it hardly did so in practice. Google did not launch the Nexus One with an exclusive carrier partner the way most high-profile handsets are launched, or even include the Nexus One as part of their portfolios.
Rather, Google used the Nexus One as a lab to test two experiments. The first experiment was to bring this carrier-agnostic cellphone buying to Google’s home turf – the Web.
Currently, e-commerce accounts for just 12% of total handset sales in the U.S. according to NPD’s Mobile Phone Track. The dominant U.S. channel, of course, is the carrier store channel, making the challenge of selling a handset with partial carrier support even harder. Google offered a subsidy for Nexus One users who signed up for a two-year T-Mobile USA subscription, but the company did not create a similar deal for AT&T Mobility, offering only an unsubsidized device for the iPhone carrier at $529.
De-coupling device from carrier
The second experiment was trying to recreate the European cellphone buying experience, in which the cellphone is often selected in advance of the carrier. To do this effectively in the U.S. and take full advantage of major carrier networks, Google would have had to create four versions of the Nexus One. The search giant began by supporting early Android backer T-Mobile USA and latecomer AT&T Mobility, with a notice that a Nexus One for Verizon Wireless was coming soon and a suggestion to check out the Motorola Droid in the interim.
But that did not last long. In a dramatic turnabout from the Nexus One trumping the original Motorola Droid, Verizon Wireless announced the Droid Incredible at the end of April. The HTC device had similar specifications and form factor to that of the Nexus One. In addition, the handset ships with HTC’s slick Sense user interface, a sort of mega-widget overlay that is popular with HTC’s users. Given the similarities in function and form between the Droid Incredible and Nexus One (which Google’s Nexus One site referred to as “cousins”), it was not surprising that Google announced that the Verizon Wireless version of the Nexus One would be cancelled in light of the newer HTC handset.
Perhaps Verizon Wireless, despite its move toward encouraging handset development outside of its core portfolio, balked at Google selling such a device. Or perhaps HTC, deciding between offering a niche handset like the Nexus One outside of the Verizon Wireless portfolio and a heavily promoted one inside that portfolio, made an easy choice. In any case, the goal of one Android device for all major U.S. carriers was gone and Google looked more out of touch with the carriers than ever.
As for the last major U.S. carrier, there may still be a Sprint Nextel Corp. Nexus One; however, it will struggle to compete with the powerhouse of the HTC Evo 4G, the Android superphone that was announced at CTIA along with another impressive Android device, the Samsung Galaxy S. The Evo 4G trumps Google’s handset in many respects, since it offers WiMAX network speeds in areas where there is coverage, a larger screen, a higher resolution camera that captures HD video, mobile hotspot capability for up to eight devices (besting the limit of five on Sprint Nextel’s dedicated Overdrive mobile hotspot device), a front-facing camera and HDMI output support.
If HTC can deliver acceptable battery life with the Evo 4G, it will be difficult for the Nexus One to compete, even at a lower price, which it certainly will not have unless it is subsidized. If there has been any winner in the showdown among the Nexus One, Droid Incredible and Evo 4G, it has been HTC, which manufactured all three devices.
What now for Google’s handset plans?
Google may rebound soon with a Nexus Two, or a perhaps it will wait until Verizon Wireless is far enough along in its LTE rollout to simplify creating a device that could more easily traverse the networks of the two largest U.S. carriers. The Nexus One faced a daunting competitive challenge: whereas most handsets must compete for attention primarily within the relatively loyal customer base of a carrier, Google’s handset had to face challengers from all the carriers, challengers that were bred to pull attention and customers away from the other three.
In contrast, the Droid had a run of about six months as Verizon’s unchallenged flagship smartphone. Exclusive online distribution made it difficult for most customers to see why the Nexus One was better, and competing against the aggregate portfolio of the carriers ensured that it wasn’t better for long.
The aspect of the Nexus One’s story most likely to perplex industry watchers is why Google even wants to compete with its surging hardware partners and marginalize carriers. The company could do greater good for the Android ecosystem in a technology evangelizing role, by creating a marketing microsite on its supercharged Internet traffic electromagnet.
This initiative would be aimed at consumers and devoted to the benefits of Android. In contrast, Android.com is a site aimed more at developers and the media, and there is no site at either http://android.google.com/ or http://google.com/android. Google hasn’t even bothered to redirect those pages. And if it wants to evangelize the online channel for cellphones, or become a retailer itself, why not sell all domestic Android handsets at its site, as Amazon does, or act as an affiliate?
In adopting any licensed operating system, manufacturers assume risks of the backers. The open source nature of Android is d
esigned to mitigate dependence on any si
ngle party, but it also opens the door for Google to compete as a handset brand (while also offering its name as an ingredient brand via the “with Google” suffix). But while Google could do so, it doesn’t mean it should. Indeed, Google’s experiment may have also contributed to losing a major advocate and customer. Not long after the launch of the Droid Incredible, Hewlett-Packard Co. – one of the first major notebook manufacturers to launch an Android-based netbook – picked up struggling Palm for $1.2 billion in a move to “double down” on Palm’s webOS, even as that operating system had struggled competitively against Android.
In explaining the acquisition, HP cited the ability to own the end-to-end experience. Android may be a cheap, modern, and relatively flexible solution for companies that are climbing the hill (like HTC) or climbing back up the hill (like Motorola); but for all the openness in the Open Handset Alliance, Google’s brand, bankrolling, and business decisions weigh heavily on the perception of the operating system. In launching a handset that competes with its partners for little benefit, Google must recognize that its actions have consequences. A nexus brings with it a series of connections.
Ross Rubin (@rossrubin on Twitter) is executive director of industry analysis at The NPD Group (@npdtech on Twitter). He blogs at The NPD Group Blog as well as his own blog, Out of the Box.