Getting Inside Google's gPhone

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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."

Kharif is a reporter for BusinessWeek.com in Portland, Ore.