Google's Nexus One smartphone: Will mobile ads offset cost?

Unlocked phones haven't done well in the U.S. Just ask Nokia

Google Inc. isn't talking publicly about reported plans to sell a powerful Android-based smartphone called the Nexus One directly to consumers next year, but the idea is already raising eyebrows with analysts.

The chief concern is that selling an unlocked phone directly to consumers, probably online, could be twice as expensive as buying one through a carrier. Today, for example, the Motorola Droid from Verizon Wireless sells for $200 with a two-year contract, meaning it would go for $400 if unlocked, analysts said.

The unlocked approach has largely failed in the U.S., with the world's biggest phone manufacturer, Nokia, doing poorly with the concept. Nokia recently announced that its two direct-sales stores in Chicago and New York will close early next year, a store official said in an interview. Online sales of unlocked devices will continue.

Part of the reason unlocked phones don't do well in the U.S. is that not all of the U.S. carriers will activate every unlocked phone. And doing so is inconvenient, if not frustrating, for users who must remove a SIM card from the back of the unlocked phone and take it to an amenable carrier for activation.

"Selling directly hasn't worked as a business model in the U.S.," Kevin Burden, an analyst at ABI Research, said in an interview.

Conceivably, Google could offer its phone at a price comparable to a subsidized phone from a carrier -- as long as customers agree to receive mobile ads on the devices. Since advertising is central to Google's revenue model, that approach might make some sense, analysts said.

"Google doesn't want to be in the phone business or the mobile carrier business, so this must be about something else, and that's the advertising business, since Google is in the business of selling ads," Burden said.

In one mobile advertising model being tested in Germany, users agree to receive a certain number of ads on their phones to reduce their monthly cellular and texting rates, although reducing the up-front cost of the actual device is relatively novel.

Reinforcing the idea of using mobile advertising with direct sales of unlocked phones, Google bought AdMob in November for $750 million in stock.

Burden and Jack Gold, an analyst at J. Gold Associates, both believe the Nexus One is likely to be an HTC-built device, using Android 2.0 or higher. Gold said it might be the next iteration of an HTC developer's version he received in May at the Google I/O Developer Conference -- along with thousands of others who attended.

Gold said the touchscreen phone he received at the conference and used had six buttons on the front above the scroll ball, not the four navigation buttons shown in pictures of the Nexus One circulating on the Web.

Otherwise, the two phones are similar in appearance, he said. The I/O conference smartphone ran an earlier Android version and was not up to the capabilities of the Apple iPhone, mainly because there were few applications and a limited interface, he said. Google in May was hoping to seed the developer community and elicit new applications, and appears to be doing the same with the Nexus One, Gold said. That name first showed up in a Wall Street Journal report.

Nexus One might have been chosen for as the name since it appears to be running over CDMA and GSM networks as well as Wi-Fi, according to a compliance report filed with the Federal Communicatoins Commission (download PDF).

It isn't clear that the Nexus One phone is the same phone handed to Google employees for use and testing, and Google is offering few details.

In a blog posting on Saturday, Google said it's using Android on a phone built by a partner and giving it to employees to use. The blog calls it "a device that combines innovative hardware from a partner with software that runs on Android to experiment with new mobile features and capabilities, and we shared this device with Google employees across the globe."

Other than that blog, a Google spokeswoman today said the company is offering no other information. Burden said the key attraction to a Nexus One phone could be its powerful processor, which is reported to be a Qualcomm Snapdragon processor with a speed of 1Ghz. That would make it much faster than the next-fastest, which is a 600 Mhz processor running in the Palm Pre, Burden said. "They appear to have built a superphone," he said.

Faster processing would give the Nexus One capability to run complex applications at once, he noted.

Both Burden and Gold said it is highly unlikely that Google will ever manufacture its own devices, which would undercut existing Android device makers that now include Motorola Inc., HTC, LG and Samsung. Palm licensed its OS at one point to IBM and others while also making its own device, but the result was a "total fiasco," Burden noted.

Reuters, quoting an unnamed source, this afternoon reported that in addition to selling an unlocked version of the Nexus One, Google will sell a version through T-Mobile USA at a reduced price. That device could be out as early as next month, Reuters said.

Matt Hamblen covers mobile and wireless, smart phones and other handhelds and wireless networking for Computerworld. Follow Matt on Twitter @matthamblen, send e-mail at mhamblen@computerworld.com or subscribe to Matt's RSS feed .

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