A First Step in Google's New Android Strategy?

NEW YORK ( TheStreet) -- He's baaaaack! No, I'm not talking about a zombie in a scary movie or Mitt Romney's future press secretary, Newt Gingrich.

I'm talking about Google ( GOOG) selling unlocked Android phones directly again, bypassing the cellular carriers.

Those of you with decent smartphone memories will recall that Googlejumped into this strategy once before, in January 2010, with the NexusOne.

The alleged reasons why Google quietly backed away from that strategy was some combination of the following two:
  • 1. Google couldn't handle the customer support. Although this isn'tsurprising for those who try to get customer support from any of theother free Google services, one would like to think that Google couldhave walked and chewed gum at the same time, compartmentalizing thisproduct. Or, more likely, it was just a terrible execution debacle onGoogle's side. I mean, simply offering telephone support, if nothingelse, is not rocket science.
  • 2. Google was pressured, or easily bowed to, the carriers such asVerizon Wireless (a joint venture of Verizon Communications (VZ) and Vodafone (VOD)). Again, this seems like a flimsy argument, becauseother devices are also sold outside carrier channels. Apple (AAPL) will sell you an unlocked iPhone, and Nokia (NOK) will do the same. Although these unlocked devices haven't been that popular in the U.S., they can be sold, and U.S. carriers seem to have had nothing to fear here.

Anyway, Google is back for a second bite at the apple here. Startingearlier this week, you can buy the HSPA+ version of the Samsung GalaxyNexus SIM-unlocked and contract-free directly from Google for $399.

Then you can head to your local Walmart and get a T-Mobile SIM card for $30, which gives you 5 gig of HSPA+ data, unlimited overage, unlimited SMS, and 100minutes for circuit-switched calling.

Over two years, you'll spend a fraction of what a device like this would cost you on a major carrier contract.

Just as a reminder, the Samsung Galaxy Nexus is one of the few Android smartphones shipping with Android 4.0 -- and it was the only one until about a month ago.

So why now? Last August, Google announced its intent to acquire Motorola Mobility Holdings ( MMI).

As I wrote last August, this acquisition means Google will attempt to become a more vertical company by incorporating a direct sales model, perhaps all the way tothe point of opening stores similar to the Apple and Microsoft ones.

What we saw from Google this week may be an indication that it mayhave some big plans in this regard after it closes this acquisition, something rumored to happen within the next 30 days.

What is Google's dilemma here? The eternal dilemma of an operatingsystem provider is that it is extremely difficult to try to be "open" and to have one's own hardware. Apple had a big debacle trying to threadthis needle in the early 1990s, and Palm had the same problem in the late 1990s. Theseinitiatives are widely believed to have been monumental disasters.

There is one difference between the Apple/Palm stories from 15-20years ago, and Google's situation today: Apple/Palm started out asintegrated stories and then opened up the OS to other hardware guys. Googletoday would be doing the opposite by going from a pure OS player tomaking its own hardware.

Google has stated emphatically that it can both walk and chew gum atthe same time. It says it will keep a Chinese wall between theAndroid team and the acquired Motorola business.

Everyone in the industry is very skeptical. The largest Android licensee -- Samsung --must consider charting its own course, perhaps by acquiring Research In Motion ( RIMM). Itis making everyone uneasy, except of course Microsoft and Apple, whowould both thrive if Android stumbles. RIM would also benefit as thelast remaining alternative.

Chances are that if the Motorola acquisition closes on time, Googlewill unveil its new strategy at its annual I/O conference in SanFrancisco on June 27-29.

If so, what can we expect for its Motorolasmartphone and tablet strategy? I can think of at least five things:
  1. A focus on what has set Motorola apart in recent months. Thismeans battery life. At 3,300 mAh, the Droid Razr Maxx is the onlyAndroid smartphone in the market today that provides remotelyacceptable battery life with a standard battery. With Apple's iPhone5 rumored to have a battery close to 3,000 mAh, Motorola would be wiseto go even higher than its current 3,300 mAh. Perhaps we will see a5,000 mAh smartphone soon! I think something like 3,300 mAh will be"standard" across all mid/high range Motorola smartphones, perhapswith one or two at 5,000.
  2. A focus on "pure Android." Most people are complaining todayabout the slow updates to Android, and the fact that most people don'tlike the "skins" that essentially all OEMs bake into proprietaryimplementations of Android. For example, HTC has "Sense", Samsung has"TouchWiz" and so forth. These skins are widely hated by the users,and Google (through its Motorola division) coulddifferentiate itself by at least offering "pure Android" on all of itsnew smartphones and tablets. This move alone could chop off the legsof all the other Android OEMs until they decide to copy.
  3. Chrome OS. Why wouldn't "the new Motorola" also make Chromebooks? After all, Motorola already makes keyboards designed for its Android devices. With Chrome OS being ported to run on the same kinds of ARM Holdings (ARMH) chips already driving Android, from companies such as Qualcomm (QCOM), NVIDIA (NVDA) and Texas Instruments (TXN), it would be all that much easier to do.
  4. Actually, Motorola has also signed up to be one of the firstproviders of Intel (INTC)-based Androids, shortly after Lenovo and a fewother smaller players. That being the case, just as it makes sensefor Motorola to offer Chromebooks based on its current Android siliconproviders -- Qualcomm, NVIDIA and Texas Instruments -- it would alsomake sense to offer the whole line of Android and Chromebooks based onIntel. In other words, Google/Motorola should simply offer everyproduct -- smartphone, tablet and laptop -- on all four major siliconproviders here: Intel, Qualcomm, NVIDIA and Texas Instruments.

    How many basic SKUs does that mean? Well, three basic form factors,four silicon providers... that's twelve just for starters. And ofcourse, each basic form factor will be sold in multiple variants, soof course Motorola will offer a lot more than 12 high-end SKUs inthese three basic categories combined.
    What would be the reaction if Google offered "pure Android" versionsof Motorola smartphones and tablets from Intel, Qualcomm, Nvidia andTexas Instruments, as well as Chromebooks based on the same foursilicon providers? Consumers would rejoice! OEMs such as Samsung,LG, Sony, HTC and others? They would feel very threatened, andlegitimately so. Maybe some would jump further into Microsoft's arms. Maybe someone would acquire RIM. Maybe they would just sit tight with apoker face and continue without change in strategy. Who knows. Thestrategic implications of Google going vertical (as a result of theMotorola acquisition) have yet to play out.
  5. That's Google's strategic move on the device side. But if you'reGoogle, why stop there? Why not sell all of these products directly,in addition to the cellular carriers? Google can sell all of thesesmartphones, tablets and Chromebooks contract-free, SIM-unlocked, inaddition to distributing them -- subsidized or unsubsidized --through all cellular carriers and third-party distributors such asAmazon.com (AMZN) and Best Buy (BBY). Perhaps this would persuade U.S. consumersthat it's in their holistic interest to buy unsubsidized in order tobe able to switch carriers and stay flexible.

Traditionally, this SIM-unlocked strategy would have been a hugedisadvantage for Verizon Wireless and Sprint Nextel ( S), given their old EVDO networkslacking SIM cards in most instances. However, as they transition toLTE, they too become SIM shops, and a new Google strategy like this isunlikely to be biased against Verizon and Sprint going forward. Allcarriers would simply become what they were inevitably destined tobecome anyway: "dumb pipes."

Over time, Google could even become its own MVNO (mobile virtualnetwork operator) by simply buying data buckets from AT&T ( T), Verizon,Sprint and T-Mobile and labeling the service itself. Apple surely hasthe same idea in mind. Why? Google and Apple both own theirecosystems in a new way that is the dominant way to connect with theconsumer. The consumer doesn't think of himself as a "Verizon"customer anymore. The consumer is either an Android, iOS, Microsoftor BlackBerry ecosystem consumer. If they're connected to AT&Tinstead of Verizon, so what?

For this reason, this could be the break in the market that wouldcause Google to chart its own course with Android, offering its ownbranded devices and end-to-end services. Apple and Microsoft arelikely to follow, if they don't do it first. Google is best suited tothis approach, because it's got the largest volume of devices,available on every single carrier, unlike Apple so far.

I think the market in general is underestimating the magnitude ofGoogle's options in terms of moving the balls forward for Android,Chrome OS, the Motorola hardware and new service strategies. It kindof feels like a wave cresting now, just in time for the I/O conference.

For these reasons, I believe the announcements we will see are goingto be more significant than most people now anticipate.

At the time of publication, Wahlman was long GOOG, AAPL and QCOM.

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