Google phone could ‘cannibalise’ revenues for OS makers

16 Nov 2007

The much-anticipated Google phone operating system – codenamed Android – could result in lower-cost phones. However, it could also mean cannibalising a lucrative revenue stream for operating system suppliers, a leading analyst claims.

The newly forged Open Handset Alliance, codenamed Android, comprises Google along with T-Mobile, HTC, Qualcomm, Motorola and China Mobile to name a few.

The aim of Android is to develop technologies that will lower the cost of developing and distributing mobile devices and services. It will create a ‘mobile software stack’ that will consist of an operating system, middleware, user-friendly interface and applications.

According to analyst firm iSuppli, Google’s goal is to become the main provider of location-based services and mobile advertising on mobile handsets, replicating the success of internet advertising on PCs and location services like Google Earth.

iSuppli forecasts that the advertising portion of worldwide mobile video revenue will rise to US$3.8bn in 2011, up from just US$135m today.

The most significant aspect of Android is the fact that Google intends to offer the software to mobile handset OEMs for free, or close to free. This represents an alternative to Windows Mobile, Symbian and various flavours of Linux.

“The implication of this is that it short circuits an incumbent node in the value chain, potentially decreasing consumer prices for such high-end devices,” said Francis Sideco, senior analyst, wireless communication, for iSuppli.

“However, it also cannibalises a relatively lucrative revenue stream for operating system suppliers,” Sideco added.

But iSuppli warns that Microsoft and other major OEMs like Nokia and Palm may fight bitterly to defend their turf.

It pointed to a similar alliance between AT&T and Go Corp to create an ecosystem for pen-based mobile computing in the early Nineties.

However, the venture faced major competition from Microsoft, which brought out its own pen-based extensions to the Windows operating system. The pre-emptive strike brought an end to the AT&T initiative despite the fact that Microsoft waited until a decade later to bring out a product.

Like AT&T/Go, Google is using a ‘camp strategy’, which calls for the formulation of supply-chain partnerships with multiple companies in order to create required building blocks for its initiative, according to David Carnevale, vice-president, multimedia content and distribution for iSuppli.

Key to success for this strategy will be getting a mobile-handset company to be first to market with a successful product that uses the Google software.

“Google needs to get someone to be the first to make a phone that really creates the category and quickly results in millions of units sold,” Carnevale said. “Previous efforts at establishing standards have largely been failures. Selling a lot of products creates de-facto market standards and that’s why the iPhone has attracted so much attention.”

Like the AT&T/Go effort, Google’s plans face considerable competitive challenges, with the company’s software vying against solutions from high-powered rivals like Apple, Microsoft, Nokia, Palm and Research in Motion.

However, Carnevale said the Google initiative stands a better chance of success than the AT&T/Go effort. This is mainly because Google’s software plays to the company’s strengths in providing internet information to users.

By John Kennedy