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 Google jumped into this strategy once before, in January 2010, with the Nexus One.

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't surprising for those who try to get customer support from any of the other free Google services, one would like to think that Google could have walked and chewed gum at the same time, compartmentalizing this product. Or, more likely, it was just a terrible execution debacle on Google's side. I mean, simply offering telephone support, if nothing else, is not rocket science.
  • 2. Google was pressured, or easily bowed to, the carriers such as Verizon Wireless (a joint venture of Verizon Communications (VZ) and Vodafone (VOD)). Again, this seems like a flimsy argument, because other 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. Starting earlier this week, you can buy the HSPA+ version of the Samsung Galaxy Nexus 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 100 minutes 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 to the point of opening stores similar to the Apple and Microsoft ones.

What we saw from Google this week may be an indication that it may have 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 operating system 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 thread this needle in the early 1990s, and Palm had the same problem in the late 1990s. These initiatives are widely believed to have been monumental disasters.

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

Google has stated emphatically that it can both walk and chew gum at the same time. It says it will keep a Chinese wall between the Android 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). It is making everyone uneasy, except of course Microsoft and Apple, who would both thrive if Android stumbles. RIM would also benefit as the last remaining alternative.

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

If so, what can we expect for its Motorola smartphone and tablet strategy? I can think of at least five things:
  1. A focus on what has set Motorola apart in recent months. This means battery life. At 3,300 mAh, the Droid Razr Maxx is the only Android smartphone in the market today that provides remotely acceptable battery life with a standard battery. With Apple's iPhone 5 rumored to have a battery close to 3,000 mAh, Motorola would be wise to go even higher than its current 3,300 mAh. Perhaps we will see a 5,000 mAh smartphone soon! I think something like 3,300 mAh will be "standard" across all mid/high range Motorola smartphones, perhaps with one or two at 5,000.
  2. A focus on "pure Android." Most people are complaining today about the slow updates to Android, and the fact that most people don't like the "skins" that essentially all OEMs bake into proprietary implementations 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) could differentiate itself by at least offering "pure Android" on all of its new smartphones and tablets. This move alone could chop off the legs of 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 first providers of Intel (INTC)-based Androids, shortly after Lenovo and a few other smaller players. That being the case, just as it makes sense for Motorola to offer Chromebooks based on its current Android silicon providers -- Qualcomm, NVIDIA and Texas Instruments -- it would also make sense to offer the whole line of Android and Chromebooks based on Intel. In other words, Google/Motorola should simply offer every product -- smartphone, tablet and laptop -- on all four major silicon providers 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 of course, each basic form factor will be sold in multiple variants, so of course Motorola will offer a lot more than 12 high-end SKUs in these three basic categories combined.
    What would be the reaction if Google offered "pure Android" versions of Motorola smartphones and tablets from Intel, Qualcomm, Nvidia and Texas Instruments, as well as Chromebooks based on the same four silicon providers? Consumers would rejoice! OEMs such as Samsung, LG, Sony, HTC and others? They would feel very threatened, and legitimately so. Maybe some would jump further into Microsoft's arms. Maybe someone would acquire RIM. Maybe they would just sit tight with a poker face and continue without change in strategy. Who knows. The strategic implications of Google going vertical (as a result of the Motorola acquisition) have yet to play out.
  5. That's Google's strategic move on the device side. But if you're Google, why stop there? Why not sell all of these products directly, in addition to the cellular carriers? Google can sell all of these smartphones, tablets and Chromebooks contract-free, SIM-unlocked, in addition to distributing them -- subsidized or unsubsidized -- through all cellular carriers and third-party distributors such as Amazon.com (AMZN) and Best Buy (BBY). Perhaps this would persuade U.S. consumers that it's in their holistic interest to buy unsubsidized in order to be able to switch carriers and stay flexible.

Traditionally, this SIM-unlocked strategy would have been a huge disadvantage for Verizon Wireless and Sprint Nextel ( S), given their old EVDO networks lacking SIM cards in most instances. However, as they transition to LTE, they too become SIM shops, and a new Google strategy like this is unlikely to be biased against Verizon and Sprint going forward. All carriers would simply become what they were inevitably destined to become anyway: "dumb pipes."

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

For this reason, this could be the break in the market that would cause Google to chart its own course with Android, offering its own branded devices and end-to-end services. Apple and Microsoft are likely to follow, if they don't do it first. Google is best suited to this 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 of Google's options in terms of moving the balls forward for Android, Chrome OS, the Motorola hardware and new service strategies. It kind of 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 going to be more significant than most people now anticipate.

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

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