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The New Economy

Could a new Google phone, the Nexus One, challenge mobile service contracts?

If Google's new phone, the Nexus One, can succeed while being marketed directly to consumers, it could change how mobile phones are sold. But tall challenges remain.

By / December 14, 2009

Google's latest mobile phone product, the Droid, has had strong success. Could Google's new phone, the Nexus One, change the way mobile phones are sold?

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As early as this January, Google could be rolling out the Nexus One, its next move to dethrone the iPhone as mobile technology's "It" phone.

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What makes Google's new phone intriguing – from a business perspective – is the possibility that Google could sell the phone directly to consumers without a contractual relationship to a cellphone service provider. This would have at least two effects. First, it would probably mean the phone would cost a bit more than the subsidized $200 consumers are forking over for the iPhone 3GS or the latest Google phone, the Droid.

Second, it would mean that consumers could use the phone on any service that uses GSM technology — that is, runs with a SIM (subscriber identity module) card. Instead of being locked into AT&T or Verizon service, for example, consumers could take their newly purchased technology where they pleased, taking advantages of typically shorter or nonexistent contracts that companies offer when shoppers bring their own phone to the deal.

The Nexus One could add Google's powerful imprimatur to an already budding movement to free customers from long contracts in exchange for higher upfront prices on mobile hardware.

Allan Keiter, founder of MyRatePlan.com, points out that providers like Virgin Mobile and Boost are offering unlimited and contract-less service plans for around $50.

The tradeoff? Less powerful phones at a higher cost, Mr. Keiter says.

"They don’t offer the latest and greatest. You may be spending a couple hundred for a phone and you won’t be getting a 3G data service," he says.

T-Mobile has also simplified its rates to a half-dozen plans, three with and three without contracts, with the significant difference between the plans being the price of the phone.

Unlocked phones of varying quality are widely available online, Keiter points out. But what Google brings to the table is significant advertising power, brand cachet, and a product potentially enticing enough to hammer open mobile providers' "iron clad" control over what gadgets their customers can wield.

The challenge will be whether Google can reap enough money from mobile advertising to price the phone competitively.

"If they sell it for $500 or $600, they’re going to have a hard time making a huge impact," Keiter says.

In this vein, the Nexus One could be hindered by the success of other Android products.

"How many people can they can convince that (the Nexus One) for $200 is better than the Android phone that is free or next to free from Verizon?" Keiter asks.

Cellular providers like AT&T make their profit off the contracts consumers sign to buy their hot new phone at subsidized prices. If Google sells its phone "unlocked," without allegiance to a particular provider, users would get a new array of choices.

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