I knew there was something wrong with Google’s plan the second I left its sunny Mountain View, Calif. headquarters to go to the airport.
Google (NSDQ: GOOG) had just released the Nexus One—the first so-called Google Phone that it would sell direct to consumers at Google.com/phone. And, when the cab driver found out that I had one, he matched the day’s excitement by saying he would buy one that night. He even took a picture with his aging BlackBerry Curve to mark the occasion.
However, like most customers, he assumed he could go to the nearest T-Mobile store to pick one up. That’s exactly Google’s challenge. While Google pledges to open up the wireless industry, it may actually end up fighting consumers who are stuck with the way it operates today. Many, especially in the U.S., have become hardwired to buy phones as part of their service plans, and in return, expect to pay less than what the devices cost at retail.
While the physical phone has gotten fairly good reviews, the dizzying amount of headlines since the Jan. 5 launch are more focused on the way Google does business. Consumers want to know who they can call for support. Is it Google, HTC or T-Mobile? (Actually, it’s Google, which promises to get back to you in a 48-hour window if you email them). Further, Google has revealed it will charge a termination fee of its own—so a consumer could conceivably get hit twice if they choose to return the phone, and cancel their contract with T-Mobile. It may cost up to $550!
More information released today doesn’t provide much hope that Google’s new model is working—at least not in the first week. Flurry, a mobile analytics firm, looked at its data to estimate how many Nexus Ones have been sold already. By analyzing the usage of Android applications, Flurry estimates that 20,000 Nexus Ones were sold. That tracks poorly compared to the myTouch3G, which sold up to 60,000, and the Motorola (NYSE: MOT) Droid, which sold 250,000 in the first week.
So, does that mean it’s a lousy phone? Absolutely not. As we’ve written before, the Nexus One is the best phone running the best implementation of Google Android. And although we still believe that after using it for a week, it’s also not anything revolutionary—the phone just works well.
The real story is the way Google wants to change the value chain. For years, U.S. consumers have been taught to buy a phone from the carrier, which provides both a service contract and an equipment subsidy. The phone can be purchased at a store, online, or even through a big retailer, like Best Buy or Amazon.com (NSDQ: AMZN)—but the transaction is very much the same. Consumers also have learned the hard way about early-termination fees—if they leave their contract early, they will have to pay to cancel it. While the mindset is shifting a little bit as smartphones become more popular, heavy subsidies and carrier attachment is still being reinforced, especially with the iPhone, which AT&T (NYSE: T)—and only AT&T—is estimated to sell for $325 below retail value.
At the end of the day, consumers will only change their behavior if they perceive a better value somewhere else, and right now it’s not clear what you get when you buy a phone directly from Google. In fact, it pretty much sounds like business as usual, except that you’ll get charged twice if you leave early.
At the press conference last week, Google made it clear that it believes it cannot innovate quickly enough when the carrier is involved. Mario Queiroz, Google’s VP of product management said: “To help Android adapt to the needs of consumers like you and me, we will be applying engineering resources to select products with our partners— that’s going to continue to be our model. With those partners, we’ve increased the pace and rate of innovation. The volume, variety and quality of Android phones have exceeded our most optimistic expectations. We want to do more.” That’s where the idea for the Nexus One and Google.com/phone came from, Queiroz said. “One of the questions we asked ourselves: What if we worked even more closely with our partners to bring devices to market which will help us showcase the great software technology that we are working on in Google.”
To be sure, Google will be adding more devices from more manufacturers to its online store. In the future, some of them will likely work on multiple carriers, unlike the Nexus One which is limited to T-Mobile. Of course, Google will support its efforts through online ads—a business it obviously knows a lot about. In a WSJ report, Google defended its actions, by saying the Equipment Rental Fee is a way for the company to recoup the subsidy it gives to contract customers. “This is standard practice for third-party resellers of T-Mobile and other operators.”
