T-Mobile's G1 Could Be a Tough Sell - TheStreet

The G1, the highly touted phone using

Google

(GOOG) - Get Report

software, will hit stores next month, but the device may not be enough to put a dent in

AT&T

(T) - Get Report

and

Verizon's

(VZ) - Get Report

subscriber growth.

The phone, which is being made by HTC exclusively for

Deutsche Telekom's

(DT) - Get Report

T-Mobile USA network, was introduced earlier this week as the first handset device to use Google's Android operating system. The G1 will be available at T-Mobile retail stores beginning Oct. 22 for $179.99 with a two-year voice and data agreement.

T Mobile's G-1: iPhone Killer?

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The T-Mobile G1 offers full touch-screen functionality combined with a QWERTY keyboard, creating yet another rival for

Apple's

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popular iPhone 3G. The new G1 phone will feature built-in support for T-Mobile's EDGE and high-speed 3G networks, as well as Wi-Fi connections. The G1 also comes packaged with features Google users are already well acquainted with, including support for Gmail, YouTube and Google Maps.

Analysts say the new G1 is the latest in a new rush by handset makers to release attractive devices exclusive to different carrier networks, the first since the 2004 launch of

Motorola's

(MOT)

first Razr phone sparked a battle by cell-phone producers to introduce the newest, coolest handsets.

"We're entering a 'hot handset' cycle again, and we haven't been there since the introduction of the original Razr," says Craig Moffett, a research analyst with Sanford Bernstein. "This is already more dramatic than that ever was, in terms of the impact that these new handsets have on brand and carrier choice for consumers."

To Moffett and other analysts, the G1 becomes another straw in the wind after the iPhone and it is unlikely to pull subscribers away from AT&T and Verizon who have already signed a contract. "At least there is now a second choice for a hot handset. That title recently was AT&T's and AT&T's alone," Moffett says.

However, a major concern for investors is whether the T-Mobile G1 will fizzle out quickly like the

Samsung

Instinct, which is only available for

Sprint Nextel's

(S) - Get Report

network.

Launched in June priced at $129.99, the touch-screen Instinct was quickly named the "iPhone Killer" by several pundits who felt the lower price would undercut the iPhone 3G, which is priced at $199 for an 8-gigabyte version but which failed to entice subscribers to sign up for Sprint's service.

"It was good while it lasted," Moffett quipped. "The last time you heard the Samsung Instinct mentioned was before the iPhone 3G was released."

While tech gurus are praising the new G1 phone's design, both it and T-Mobile are already at a distinct disadvantage, much the way Sprint and the Instinct were months ago. The early uptake of the G1 will undoubtedly be limited by T-Mobile's fledgling 3G network coverage, which will be in 27 markets by the end of 2008. Comparatively, AT&T's 3G network currently blankets more than 300 markets.

The uptake difference is readily noticeable in analysts' estimates for device shipments. Mike Abramsky, research analyst with RBC Capital Markets, estimates that the T-Mobile may see 300,000 to 500,000 units shipped in the remaining months of 2008, and another 4 million to 6 million units in 2009. "Comparatively, we expect Apple to sell 6.5 million iPhones and RIM to sell 7.5 million devices

in the last quarter of 2008," he adds.

However, Abramsky does acknowledge that the Android OS has the opportunity to leverage Google's 100-million-plus online base, open-source development platform and advertising-oriented business model. "Significant challenges remain, however, as Android's application deployment, hardware features/pricing and advertising model remain new and immature," he writes in a research note.

Gene Munster, an analyst with Piper Jaffray who is known for his bullish stance on Apple, says that the introduction of a phone with Google's software does not provide a big enough threat to Apple's iPhone yet, although the company could become a greater threat over the next two years.

"We believe that Apple's iPhone platform is one year ahead of Google's Android platform," Munster said in a research note. "To use a baseball analogy, when Apple comes out with a product, they try to hit home runs, but Google's Android strategy is swinging for base hits. While the winning strategy is difficult to determine, we believe Apple and Google are emerging as the early leaders in mobile computing."

Looking strictly at the U.S. carriers, Moffett says that T-Mobile runs the risk of beefing up its operations -- and subsequently its fixed costs -- to support a handset that could rapidly fall out of popularity quickly.

"This handset cycle that we're in could increase market share volatility, which is another way of saying that these handsets could be short-lived fads," says Moffett. "Any business manager that has had the challenge of managing through a fad knows that it's a tough thing to do."

The iPhone, Moffett says, has created all types of problems even for an operator as large and deep pocketed as AT&T. In order to handle the iPhone 3G, AT&T had the unfortunate task of taking on the costs of adding more staff and beefing up customer service operations.

"If I'm T-Mobile and I have to add fixed costs for a phone which may have a few months in the sun before a new phone comes and supplants it, it becomes hard to manage that cost structure," Moffett says.