December 15, 2009, 2:27 PM — Speculation, rumor and guesswork is rampant about Google's Nexus One phone. But I think the speculators are missing the most obvious and likely aspect of Google's plan: It's probably an advertising-subsidized phone.
Why? Because Google sells advertising. That's what the company does.
According to the Wikipedia, "99% of Google's revenue is derived from its advertising programs."
[ See also: Google's Nexus One: The story so far ]
So here's a question to ask about the Google Phone: Is Google entering into a radically different business than it has ever tackled, or is Google still in the same business?
I think the answer is the latter.
Cell phones are often sold with a subsidy, which is provided by the carrier as an incentive to sign a 2-year service contract. This model benefits carriers, who usually get to control everything: handset pricing, wireless data and phone-call pricing, downloadable content and more. Do carriers discount phones by, say $200, then add $400 to the life of your 2-year contract, actually making a huge profit off the handset while tricking you into believing you got a deal? There's no way to tell. But you can bet the subsidized-handset model is very profitable for carriers.
Google smells money, and hates the idea of somebody else running off with it. So what if Google's Nexus One phone is designed to get in on the subsidized phone racket? Instead of, or in addition to, being subsidized by the carrier in exchange for a wireless contract, Google may subsidize handsets in exchange for advertising.
In addition to whatever advertising Google would allow in various apps, which are all accessible from the Android interface, the company could sell space on the home screen. It could also sell contextual advertising, based on your location, your interests (as revealed in your Gmail and Web browsing history) or your shopping preferences. With this model, Google could easily recoup, say, a $200 subsidy with advertising sales over a year or two.
It could then partner with carriers to offer the phone for free — half the price paid by the carrier, and half by Google.
Free is a very popular price. This would benefit the Android ecosystem by radically ramping up Android market share, which would provide an incentive for developers to write apps for it, which would incentivize handset makers to create phones.
What this means, by the way, is that the Nexus One wouldn't compete with the iPhone at all — or any other high-end handset. An advertising supported Android phone would be a high-end phone for a low-end crowd — a discount smart phone.
The phone wouldn't appeal to the fancy phone snobs, because the advertising would be locked down, and forced upon the user.
So my radical proposal is that Google isn't doing anything radical. They're doing what they always do: Selling advertising and growing market share by giving away free what others are selling.