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Technology

Getting Inside Google's gPhone


The search giant's mobile offensive, like the iPhone, may force new cracks in the way the wireless industry operates

Still coming to terms with Apple's iPhone invasion, the cellular industry now finds itself bracing for yet another intrusion by a mighty outsider bent on altering the way wireless does business. This time it's Google.

New signals and speculation about Google's (GOOG) mobile initiatives emerge daily, but with no clear proclamations as yet from the Web search leader. One day there's buzz that Google will follow Apple's (AAPL) lead by introducing its own mobile device, the gPhone. Next comes word the company has developed its own mobile operating system or Web browser. Against this uncertain backdrop, providers of wireless service, handsets, and software have been left to guess anxiously at Google's true intentions, not unlike children gathered about a campfire, scanning for monsters in the shadowy forest.

Google Platform?

So what's really lurking behind those trees? A source familiar with the situation tells BusinessWeek.com that Google may be preparing a new mobile platform, a would-be rival to the Nokia-dominated (NOK) Symbian OS, Microsoft's (MSFT) Windows Mobile, mobile Linux, Palm (PALM), and other operating systems.

The new operating system, which may be named gPhone, was developed in part with know-how Google acquired with a startup named Android in 2005. The platform is designed to enable lower-priced "smartphones" featuring more robust Web browsing and multimedia applications. Most importantly for Google, it will work hand in glove with the company's mobile search engine and other Google applications that are already popular on personal computers. And it would allow Google to bring new applications to the wireless market faster. Google declined to confirm or deny this information.

A number of handset makers have already created prototypes of lower-cost phones based on the Google platform, the source says. These handsets, expected to sell for about $100, are being shopped around to carriers worldwide, including those in the U.S. On top of the lower price tag, Google also hopes to attract customers with the promise of lower monthly cell bills. But in Google style, that means users will have to agree to receive ads on their mobile phones, an approach that's enjoyed some limited success in certain trials by other companies with far less clout than Google. In effect, Google will attempt to introduce not just a new platform, but also a new business model for the wireless-services industry.

Yahoo's Mobile Search Success

This project marks just one of the many ambitious mobile initiatives Google has undertaken. The search giant has indicated it would likely bid in a federal auction to use new swaths of the public airwaves for wireless services. The plan would be to either build its own cellular network or to partner with another company to do so. All the while, Google keeps beefing up its arsenal of mobile applications. On Aug. 30, the U.S. Patent Office published a patent filed by a Google inventor for a mobile payment system designed to allow people to pay for goods and services via text messages. Consider also that Google currently has 67 openings on its Web site for mobile-related positions, mostly in wireless software development, and it becomes clear that something big is afoot.

It's easy to see why Google is turning so much energy toward wireless. The company generated nearly all of last year's $10.6 billion in revenue from online search advertising. But while it dominates that arena with a 62.7% market share, according to research by the consultancy Compete, the company is lagging Microsoft and Yahoo (YHOO) in mobile search and other applications for the cell phone. More than 20 million devices will ship this year with either Mobile Windows or other Microsoft software on them, according to the Yankee Group. But Google—despite deals with handset makers including Motorola (MOT) and LG and carriers such as Sprint Nextel (S)—won't come anywhere near to that sort of distribution, figures John Jackson, an analyst at Yankee.

Yahoo has also enjoyed more success in its wireless endeavors. Thanks to its new mobile search engine, oneSearch, Yahoo has actually stolen some business away from Google. In January, Opera replaced Google with oneSearch as the default search engine on its browser for mobile devices. Though Opera's share of the mobile browser isn't huge, such developments could spell trouble if, as some experts expect, Web searches on mobile devices begin to exceed those on PCs. To protect its core business, then, Google needs to carve its spot in the cell market now.

A Slice of Apple's Approach

This might have been easier to accomplish had Google not forged a somewhat acrimonious relationship with big cellular carriers such as AT&T (T) and Verizon Wireless (VZ). Even before Google revealed its plan to compete directly with them in the wireless auction, the company rankled the cellular establishment with its decision to build a Wi-Fi broadband network in Mountain View, Calif., and join EarthLink (ELNK) in constructing a Wi-Fi network in San Francisco (a plan that's since unraveled).

Now, as it charts more of an independent course, Google may even use the gPhone as Apple has the iPhone, stoking discontent with the current state of mobile Web access. Today's cellular providers, to prevent their customers from wandering the Internet freely on phones as they do on computers, herd users to their own branded mobile portals and a limited selection of approved partner sites—a model reminiscent of the "walled garden" that AOL thrived on a decade ago until customers rebelled. Thanks to such obstacles, while 15% of U.S. wireless users have browsed Web pages on their mobile phones, only 3% have used a mobile search engine, according to JupiterResearch.

Though its brand doesn't generate the same passions among consumers as Apple's, Google may hope its new platform will present an irresistible attraction to handset makers and carriers seeking the next "it" phone, replicating at least some of success the iPhone has managed since its U.S. launch through AT&T.

Google's new, ad-supported business model may ultimately appeal to the carriers as they struggle to boost revenues in markets where the price competition is fierce and first-time users are becoming scarce. "The addition of new business models simply creates more opportunities for all companies in the industry to sell more products," says John Starkweather, general manager of mobile communications at Microsoft.

Boost to Wireless Broadband?

While analysts have long frowned on the idea of mobile ads, Virgin Mobile recently reported that 330,000 of its 4.8 million subscribers have agreed to view ads in exchange for free calling minutes (BusinessWeek.com, 07/09/07). When a small carrier named Revel recently gave 5,000 subscribers a one-time $10 discount for agreeing to receive ads on their phones for a 12-week trial, "the satisfaction levels were off the charts," says Jon Jackson, CEO of Mobile Posse, the ad technology provider in the trial. In fact, Mobile Posse's research shows that marketing on mobile phones can generate up to $40 in ad revenue per month—which isn't very far from the $50-plus that carriers generate from monthly service plans. Mobile Posse says it's now conducting trials with two other larger carriers, offering free text-messaging and mobile data access to users who'll accept ads.

Meanwhile, if Google succeeds in bringing a lower-priced yet more robust phone to the market, the gPhone could have some broader impact than the iPhone, which still costs $400 after a recent price cut. "Today, the overall mobile experience, candidly, is not great," says Shawn Freeman, chief technology officer at Handango, a provider of mobile content and applications. With better Web-surfing and search capabilities, such a handset could fill a void in developing markets where many people can't afford computers. Elsewhere, by increasing interest in mobile Web access, Google also might speed consumer adoption of wireless broadband. "If they produce something that's a good experience, the whole market will rise," says Barry West, chief technology officer at Sprint. "Google is a big name on the Internet. This reaffirms that the Internet is going mobile."

But the main goal for Google is to provide mobile phone users with devices that smoothly integrate all Google applications so that, at a push of a button, they can launch a search or use the mobile payment service. Today, carriers like AT&T and Verizon Wireless only provide access to a smattering of Google applications, such as Google Maps and YouTube video, and not on all phones.

Wireless Players Gearing Up

Yet by launching its own operating system, Google faces a disadvantage in terms of the limited number of applications that will be available for that platform. It will take time to build the sort of ecosystem that surrounds Symbian and Windows Mobile, where there are thousands of third-party applications to choose from and more being written by software developers every day. "If you have a smaller platform, it's harder to get people to develop for it," says Julie Ask, an analyst at JupiterResearch.

It is possible to build a mobile platform from scratch without having a ubiquitous operating system like Windows as your foundation. Symbian says it now commands a 72% share of the smartphone market. But it has taken 10 years and more than $750 million in investment to get there. "It's fairly easy for someone to trivialize creating a feature-rich operating system, but there's a lot of man-years involved," says Jerry Panagrossi, vice-president of U.S. operations at Symbian.

Despite such hurdles, there's no doubt that major wireless players are factoring in the potential game-changing tactics of Google and Apple as they compete with their traditional rivals. On Aug. 29, Nokia unveiled a new suite of mobile Internet services called Ovi. And at a recent investment conference, a Microsoft executive hinted that his company may be working on a phone version of its Zune music player. "Competition breeds innovation," says Rich Nespola, founder of consultancy TMNG (TMNG). "If Google is planning on entering this business, everyone gets prepared."

It's important to remember Google's end goal, though: changing the wireless business. "They want the carriers to open up," says Handango's Freeman. "This is another way to drive the market in the direction they want to go."


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