5 predictions about Google phones
Skydeck isn’t working with Google. We’ve read the same articles and heard the same rumors that you have. So these are just educated guesses. But everybody else is doing it, so why not us?
The consensus is that Google is about to announce a new Linux-based OS and suite of applications for cell phones, which Google will offer free of charge to manufacturers like HTC and LG. The apps will all be closely tied to Google services like GMail and will be ad-supported. There will be multiple ‘gPhones’ with different form factors. Google will persuade carriers like Sprint and T-Mobile to sell gPhones by offering to share ad revenue and subsidize the cost of the phone to the consumer, in addition to the carrier’s own subsidy. It’s an entirely new model for the wireless industry.
Our predictions:
1. Google will not make phones, but your friends will claim that they do.
On the web, Google gives away software and sells ads. In mobile, Google will give away an OS and software for cell phones and sell ads. People are confused because they’ve seen prototypes. Of course they’ve made prototypes; you can’t design an OS for a phone without building prototypes.
But if a phone has Google’s brand on it, lots of people will say that Google made it. Even people in the industry get confused about this stuff. Danger does not make the Sidekick and does not pay anyone else to make the Sidekick. Danger sells software and services and reference designs for phones. T-Mobile pays Sharp to make the Sidekick.
2. Google will subsidize gPhones, but by no more than $50.
How much cash can Google generate from mobile advertising? On the web, Google reported $2.73 billion in revenue in Q3 for its own properties. The US contributed half of that, say $1.4B. According to Compete.com, Google had 115 to 120 million unique users per month in the US over that period. So average revenue per unique user per month in the US in Q3 was around $4. (We are not ignoring the rest of the world, we don’t have data.)
What about Google’s ad network, AdSense? That brought in another $1.45B, but only $340 million net of Traffic Acquisition Costs – the rev share paid to partner sites. The AdSense revenue may be spread over a larger base of users, but let’s say the total was $4.40 per user per month to Google.
In theory, Google should be able to earn far more from each mobile ad than it can from ads on the desktop: twice as much, according to Eric Schmidt. After all, a phone is a personal device that is always with you and knows your location, and you will be a registered user. True, but a phone is also a small device and you do not spend hours staring at it every day. So while each ad unit may be more valuable, Google cannot deliver as many of them. (Type any popular keyword into Google on the desktop and you will get up to 11 ad units back alongside your search results. On the mobile phone with the biggest display on the market, the iPhone, Google shows just two, and they are at the foot of the results page.)
We’d be very impressed if Google can generate more than $10 per month in ad revenue from gPhone subscribers at scale. US consumers replace their phones every 18 months, so that’s $180 per phone, out of which Google must recover a subsidy, cut a check to the carrier, pay operating costs, and show enough of a margin to support a $700 share price (or $985). Will the carrier share voice and data revenue with Google? In return for a higher share of ad revenue maybe, but that would be a wash. We think the Google subsidy will be $50 at most.
3. Each gPhone will be the most powerful phone in the market at its price point.
$50 is still $50. Assuming a standard carrier subsidy as well, gPhones will cost at least 25% less than comparable smartphones, and hundreds less than the iPhone. To win a large share of the market, Google doesn’t have to pay any more than that even if they think they can afford to.
4. When the Chairman of HTC said that mobile Linux needs a major long-term partner, he was talking about Google.
For a phone manufacturer, the beauty of mobile Linux is not that it’s free – nothing is free – but that nobody else owns it. The challenge is that there is no standard version … because nobody owns it. If you are HTC or LG or Samsung, today you have to license a stack from a direct competitor, roll your own, or be the first and maybe only customer of a startup, and there’s no guarantee that third-party developers will support your flavor no matter which way you go.
Enter Google: big, rich, committed to the market, and not a rival manufacturer. Nokia may see Google as a strategic threat and Motorola has made a massive investment in their own Linux-based platform, but everybody else will be happy to rally behind Google. (Call it the OpenSocial strategy. Yesterday there were a dozen potential widget platforms on the web. Today there are two.)
5. Google is going to buy AdMob.
From what we’ve seen, the part that Google has paid least attention to is how to serve and sell ads on mobile phones. There are no ads in the mobile versions of GMail or Google maps. Last month they announced that they were going to extend AdWords to mobile unchanged and transcode their customers’ landing pages. This is a hack, and when they decide that they have to treat mobile advertising very differently they will buy AdMob.
Will Google bid in next year’s spectrum auction? Andy Seybold’s guesses are better than ours.