Google innovates in distribution, not just technology
For tech-savvy people, the new year was ushered in with the Consumer Electronics Show in Las Vegas, where companies from around the world showcased new products and ideas about technology.
Cell phones were a staple of the show, specifically phones featuring Windows Mobile or Google Android operating systems.
The biggest surprise came from Google, with its confirmation that the company will enter the cell phone market with a phone of its own.
The search engine giant debuted its Nexus One phone, but the major announcement was how it will be sold: Google plans to abandon the controversial carrier model used by all major U.S. cellular providers.
But to understand what a new business model means for the industry, it’s important to understand how the current cell phone business model works.
Traditionally, U.S. consumers would buy phones directly from carriers, which pay some or all of the cost of the handsets — sometimes amounting to hundreds of dollars — in exchange for customers signing yearly contracts.
Many consumers tend to pick a phone first and then pick their carrier accordingly (such as with the iPhone and AT&T).
If a person wants to keep using the phone, service must be maintained with that same carrier.
But if customers want to switch phones without incurring costly early termination fees, they are limited to the phones offered in their area by that carrier.
This is bad for consumers but great for carriers, who don’t have to compete solely on network quality, but rather on a combination of network quality and phone selection.
When it comes to competing with phones, carrier incentives are twofold: they want to offer the largest number of attractive, cutting-edge phones in order to attract a user base, and they want to extract a maximum profit from that user base at the lowest possible cost to the carrier.
Because AT&T has captured legions of consumers with the iPhone, the company’s goal is to minimize their infrastructure spending and maximize per-user profits.
This means that AT&T wants to make money off the iPhone and doesn’t want to spend money on upgrading its antiquated network, which is unable to handle the iPhone’s increased data throughput, or rate of message delivery.
AT&T has the ability to nickel-and-dime its iPhone customers to death because packaged with that amazing phone is an astronomical termination fee.
Instead of allowing only specific carriers to sell its phone and locking users in with exclusivity agreements, Google will sell its phones solely through its online store.
Google’s store allows users to pick the phone they want as well as the carrier.
The cost of the handset can be subsidized with a contract from a carrier, but the phone can be carrier independent so that once a person’s contract with one company expires, the consumer is free to switch carriers without having to unlock the phone.
Google could also allow other Android phone makers to sell their hardware through its store, forcing all carriers who support that operating system to compete for customers based on service quality and price.
With its phone and store, Google is telling the industry that it is keen to change the way mobile devices are sold in the U.S., and no other company is in a better position to do so.
Google is the creator of the Android platform, which, because of its open source nature and inherent touch interface, has been adopted by major cell phone makers around the world.
Google wants its operating system to be uninhibited by exclusivity, allowing users the freedom to pick the best carrier that will give them the best cellular experience for the right price, not just the carrier with the best Android phone.