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 takea little longer. In any case, let's play with the thought that I'mright. If I am, what would a Chromephone ecosystem look like? Whowould 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 unitshipments of smartphones, according to the latest surveys. This is aninsanely high market share.

If you're in Google's shoes, would you put all of this 75% marketshare -- the Android operating system -- in one basket forever? What ifsomething goes wrong with Android? For Google to diversify its tabletand smartphone exposure to its other operating system -- Chrome -- isonly prudent risk management. This alone is reason enough to believeI will be right about the upcoming Chromephone and Chromepad, inaddition to my previous arguments.

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

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

Let me contend that the leading contenders for this business, whichcould amount to hundreds of millions of semiconductors on annualizedbasis, 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 inbasebands. One would not want to bet against Qualcomm being involvedin a future Chromephone or Chromepad.

Nvidia has made CPUs for Android, but its integrated baseband -- theTegra 4i -- hasn't yet shipped. However, it may be ready in time fordelivering product by the second quarter of 2014. Still, not as likelyas 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 ormore years, as exemplified by Qualcomm's winning the iPhone business.Chrome OS looks like it could be Intel's path to relevance in themobile space.

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

Broadcom has been behind plan since at least 2007 or 2008, when ittalked a big game in the cellular baseband business. It hasn't had acompetitive CPU either. Perhaps Chrome OS in phones and tablets willbe Broadcom's big break? It's a long shot compared to the fouraforementioned, 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 forthat matter Google's current Chrome OS business. It differs fromAndroid 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 likeeveryone else." On the other hand, we know that this is essentiallyimpossible, even in theory. If Google treats it "just like everyoneelse," then why did it buy it in the first place?

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

3. Google Itself

Google does engineer its own hardware, typically in conjunction withan ODM in China/Taiwan. This includes its ill-fated Q media playerfrom 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 hardwarefor Chromepads and Chromephones -- as well as for Android, augmentingits current and much-beloved Nexus program where it works withpartners such as Samsung, Asus and LG.

How Would Chromephones Be Sold?

Google will likely take an all-of-the-above approach to selling themobile 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 Chromebrowser, on its main search page.

The Chromephone could also be the vessel for Google to introduce pureVoIP. 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 orperhaps 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 whicheveroperator you prefer. Basically, get a T-Mobile plan from Wal-Mart orAmazon 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 asthe dark horse. Samsung could capture a big piece of the pie if itbothers to play, which is not a given. Seeing as Chromephones wouldtake share from Android, Apple ( AAPL), Microsoft ( MSFT) and BlackBerry ( BBRY), Qualcomm hasthe 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 theChromephone and Chromepad inflection point to take share from thecompanies who are strong on the smartphone side -- Samsung and Apple,primarily. This is yet another reason why we should expect aggressivepricing on Chromephones and Chromepads.

In other words, Google would look more like Microsoft in the desktopPC 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 datapipe" purposes.

Look, I know many of you don't believe me. You don't think anythingis going to change. You think Android is Google's final and only wordin mobile computing. If that's what Google indeed thinks, Googleeventually becomes one big short -- 100% dependence on Android foreveris 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 theirmobile operating systems, and look where it got them. Now they are inthe 3%-to-6% market share range, with Android dominating the industry at75% market share, and Apple as the intermediate-range ankle-biter.

Google is riding high on the Android hog now, and it will not abandonAndroid. What it should do, however, is to add Chrome OS onsmartphones and tablets as the insurance policy that the situationwarrants -- the sooner the better. It would make for a betterproduct, eliminate fragmentation and increase Google's power over thenetwork 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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