The Chromephone and Its Market Structure

NEW YORK ( TheStreet) -- My article from earlier this week caused a bit of controversy.

In short, the article suggested Google ( GOOG) will be launching smartphones based on a future version of Chrome OS in about a year, and a Chrome OS tablet even before then. Well, clearly some people don't think this will happen -- whether within a year, or for that matter two.

In a year or two, we will find out who's right. Perhaps it will take a little longer. In any case, let's play with the thought that I'm right. If I am, what would a Chromephone ecosystem look like? Who would be involved? Winners and losers in the food chain?

The logic goes something like this: Android now has 70% to 75% of the world's unit shipments of smartphones, according to the latest surveys. This is an insanely high market share.

If you're in Google's shoes, would you put all of this 75% market share -- the Android operating system -- in one basket forever? What if something goes wrong with Android? For Google to diversify its tablet and smartphone exposure to its other operating system -- Chrome -- is only prudent risk management. This alone is reason enough to believe I will be right about the upcoming Chromephone and Chromepad, in addition to my previous arguments.

Anyway, the future Chromephone industry structure would look like this:

Let's start with the semiconductors. This involves primarily a CPU/GPU as well as the baseband and related radios. Who would get this business from Google and/or its hardware partners?

Let me contend that the leading contenders for this business, which could amount to hundreds of millions of semiconductors on annualized basis, within only a couple of short years, are these:

Qualcomm ( QCOM), Nvidia ( NVDA), Intel ( INTC), Samsung and Broadcom ( BRCM).

Qualcomm hasn't yet made a CPU for Chrome OS, but it's the leader in basebands. One would not want to bet against Qualcomm being involved in a future Chromephone or Chromepad.

Nvidia has made CPUs for Android, but its integrated baseband -- the Tegra 4i -- hasn't yet shipped. However, it may be ready in time for delivering product by the second quarter of 2014. Still, not as likely as Qualcomm or Intel.

Intel has made most CPUs for Chrome OS to date. It has, however, lagged far behind Qualcomm in the baseband business in the last two or more years, as exemplified by Qualcomm's winning the iPhone business. Chrome OS looks like it could be Intel's path to relevance in the mobile space.

Samsung is gunning hard for new business, and delivered the first quad-core Chrome OS laptop to date last October. One could easily see Samsung being involved in future Chromephone and Chromepad devices.

Broadcom has been behind plan since at least 2007 or 2008, when it talked a big game in the cellular baseband business. It hasn't had a competitive CPU either. Perhaps Chrome OS in phones and tablets will be Broadcom's big break? It's a long shot compared to the four aforementioned, but still it needs to be mentioned.

What about the overall system hardware, the devices?

Chromephones and Chromepads could fall into three hardware buckets:

1. Licensing to the OEMs.

This business is similar to the old-world Windows PC situation, or for that matter Google's current Chrome OS business. It differs from Android in the way that none of these OEMs could modify the software.

A list would look like this: Samsung, LG, HTC, Sony ( SNE), Huawei, Acer, Asus, Lenovo ( LNVGY), Dell ( DELL) and HP ( HPQ)

2. Motorola

Google owns 100% of Motorola, and says it's treating it "just like everyone else." On the other hand, we know that this is essentially impossible, even in theory. If Google treats it "just like everyone else," then why did it buy it in the first place?

Motorola would make Chromephones and Chromepads, just as it makes Android smartphones and tablets today. This should be obvious.

3. Google Itself

Google does engineer its own hardware, typically in conjunction with an ODM in China/Taiwan. This includes its ill-fated Q media player from last June, as well as the outstanding Google Pixel Chromebook, available as WiFi-only or on Verizon's ( VZ) LTE network.

I envision that Google will start creating its own reference hardware for Chromepads and Chromephones -- as well as for Android, augmenting its current and much-beloved Nexus program where it works with partners such as Samsung, Asus and LG.

How Would Chromephones Be Sold?

Google will likely take an all-of-the-above approach to selling the mobile Chrome OS devices. This includes retail such as Wal-Mart ( WMT) and Amazon ( AMZN), as well as Google's own Web site. One can easily envision Google promoting these products more prominently in the Chrome browser, on its main search page.

The Chromephone could also be the vessel for Google to introduce pure VoIP. Rather than buying circuit-switched minutes from the likes of T-Mobile and AT&T ( T), all you would need is a pure data plan for $30 or perhaps even $19, and you would be getting free calling and SMS -- plus a fat monthly data package of 5 gigs or much more.

What Would They Cost?

Google is targeting $199 for unsubsidized phones and $99 for tablets, compared to $199 for the current Chrome OS laptops made by Acer. There would be no contracts, just pay-as-you-go data from whichever operator you prefer. Basically, get a T-Mobile plan from Wal-Mart or Amazon for anywhere between $19 and $30 a month, no long-term contract required.

Food Chain Impact?

On the chip side, Intel looks like the likely winner, with Nvidia as the dark horse. Samsung could capture a big piece of the pie if it bothers to play, which is not a given. Seeing as Chromephones would take share from Android, Apple ( AAPL), Microsoft ( MSFT) and BlackBerry ( BBRY), Qualcomm has the most to lose.

On the system side, it's more likely that the traditional PC players -- Acer, Asus, HP, Lenovo, Dell, perhaps Sony -- would use the Chromephone and Chromepad inflection point to take share from the companies who are strong on the smartphone side -- Samsung and Apple, primarily. This is yet another reason why we should expect aggressive pricing on Chromephones and Chromepads.

In other words, Google would look more like Microsoft in the desktop PC days, totally commoditizing the hardware makers and telcos. However, in this case Google would provide some of the telco services -- telephony and SMS -- for free, just using the telcos for "pure data pipe" purposes.

Look, I know many of you don't believe me. You don't think anything is going to change. You think Android is Google's final and only word in mobile computing. If that's what Google indeed thinks, Google eventually becomes one big short -- 100% dependence on Android forever is too risky, and eventually a better product is more urgently needed. It's just a matter of time.

Microsoft and BlackBerry both waited too long to rejuvenate their mobile operating systems, and look where it got them. Now they are in the 3%-to-6% market share range, with Android dominating the industry at 75% market share, and Apple as the intermediate-range ankle-biter.

Google is riding high on the Android hog now, and it will not abandon Android. What it should do, however, is to add Chrome OS on smartphones and tablets as the insurance policy that the situation warrants -- the sooner the better. It would make for a better product, eliminate fragmentation and increase Google's power over the network operators.

Not a bad outcome for an insurance policy.

At the time of publication the author was long GOOG, APPL, NVDA, BRCM and INTC.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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