Publish date:

Google Phone Unlikely to Be Game-Changer

As do-no-wrong Google prepares to release a smart phone, there appear to be more obstacles than opportunities.

BOSTON (

TheStreet

) -- As

Google

(GOOG) - Get Report

announced more than a week ago that it was developing a smart phone to compete with offerings from

Apple

(AAPL) - Get Report

,

Palm

(PALM)

,

Research in Motion

(RIMM)

and

Motorola

(MOT)

, some of which run Google's own Android operating system, annoying phrases like "game-changer" were bandied about.

TheStreet Recommends

Along with news about the hardware from Google, called the

Nexus One

, came rampant speculation about funky new models for how the phones will interact with service providers. Some theorized that the phone could use VoIP technology (voice over Internet protocol) to bypass the need for cell-phone service. Others said they could maybe be unlocked from the get-go, allowing users to pick whichever network they choose.

Despite the thrill and speculation in the tech community, Google's stock price has failed to get a lift. Investors are waiting for the details.

The hype is understandable, though. Google has a phenomenal track record of launching wildly successful products that quickly gain cult followings. But this is a much different project in which Google's success is irrelevant.

Google's past hits, such as Gmail, Chrome and, of course, its search algorithm, are software applications with no physical components. Introducing a new phone is a completely different undertaking. Despite teaming with

HTC

, a cell-phone industry veteran, the design of the new phone is Google's to screw up. There are many examples of why software companies should stay out of the hardware business.

Microsoft

(MSFT) - Get Report

and its ill fated Zune spring to mind.

Even companies that are adept at designing and manufacturing devices have released technically sound, yet mostly ignored, models. Google faces a brutally competitive market, not the best environment for a foray into hardware. Palm, for instance, whiffed big time with its largely ignored Pre and Pixi, which were snapped up only by a few tech fans, leading the stock to miss earnings estimates last week.

Other manufacturers have proven that the cost to make a high-tech phone is too high without a subsidy from a wireless company. Phones like the Apple iPhone and the Motorola Droid are pricey at $200 to $300 with a two-year service contract. Without the contract, they jump to about $600. Assuming that the Google Nexus One will have similarly high-tech components, selling the phone without a provider subsidy would prove difficult.

Some have suggested that Google, the king of digital ad placement, could subsidize the cost of the phone by selling advertising space in the phone's operating system, which would solve the cost problem and offer super-advanced functionality to advertisers. Users would have to decide whether the prospect of an ad-filled phone is worth the freedom of forgoing a long-term cell-phone contract.

The phone market has seen a glut of new phones released this year, yet none have dethroned the iPhone as king of the smart phone. While Google's Android operating system is a fan favorite, there's nothing to suggest that a Google device running Android will be anything better than the Motorola Droid or any other competitor. As more smart phones are sold every day, the market for potential customers shrinks as the standard two-year contract locks up newcomers.

The Nexus One very well may be an innovative and slick phone, but in this fragmented market, don't expect a phenomenon that leads to a sea change in the industry. It's still the iPhone and then everything else.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.