Will A Google Phone Change The Game?

OCTOBER 8, 2007 BUSINESSWEEK

Will A Google Phone Change The Game?
Mobile biggies are quaking at the idea of competition from a free, ad-based service

Imagine your cellphone as a mini marketing machine. As you head into your car after dinner, a text alert pops onto the screen of your handset announcing the 9 p.m. lineup at a nearby cineplex. You choose the Jodi Foster flick The Brave One and a promo video for the next Warner Bros. (TWX ) release, a George Clooney movie, starts running. Afterward, more text appears, prompting you to launch the phone's Web browser so that you can click through to buy the movie's ringtones and wallpaper.

That kind of 24/7 advertising engagement--on a phone, no less--may sound like a nightmare. But what if you could determine the kinds of products you get pitched? Or, when your flight gets canceled in a faraway airport, text messages pop up for the best hotel deals in town? No random insurance ads or airline deals for trips to places you never visit. Best of all: Watch or read the custom ads, and your phone minutes are free.

For big cell carriers, that's the real nightmare. And it may be coming in the form of a Google phone. Wireless industry consultants and marketing executives with knowledge of Google's plans say it has been showing prototypes of a new phone to handset manufacturers and network operators for a couple of months. Its plans have been kept top secret, but Google is expected to tap a company on the Pacific Rim that specializes in mobile design and manufacturing to build a handset to its specs. Google could then apply its expertise in operating software and user applications, says Paul Catalano, a partner at consultancy RelevantC Business Group (RCBG). Google officials won't talk about phones, and industry sources don't expect one before the second half of 2008.

Still, Google has made it clear it has an interest in wireless. It is experimenting with wireless broadband networks in a couple of U.S. cities. In August, CEO Eric Schmidt announced his intention to participate in a federal auction early next year of the sort of radio spectrum that would help pull off a phone service.

So far only a few outfits in Europe and the U.S. have dabbled with ways to serve up ad-based service. Most, like Virgin Mobile USA, have limited control over ad delivery because their service runs over a network leased from one of the big players. Moreover, there are good reasons that advertising accounts for less than 1% of phone company revenues: Consumers remain skittish about ads on their phone. Networks and handsets are only now getting sophisticated enough to deliver colorful, location-specific ads. And Verizon (VZ ), AT&T (T ), and T-Mobile have no interest in giving up their fat service fees.

That equation goes out the window, though, once you combine Google's financial heft with its ultra-sophisticated ability to target ads to specific customers. "The day is coming when wireless users will experience nirvana scenarios--mobile ads tied to your individual behavior, what you are doing, and where you are," says Linda Barrabee, wireless analyst at researcher Yankee Group.



BILLIONS OF EYES
Google and advertisers drool over the growth potential in wireless. The more than 2 1/2 billion phones in use worldwide exceed the number of PCs and TVs combined. On Sept. 17, Google announced a Web program aimed at advertisers who have created sites for display on cell phones and other handheld devices. Like its online ad network, Google's AdSense for Mobile delivers ads relevant to the advertiser's mobile audience. "The sheer volume of users across the globe makes mobile the next channel for information," says Dilip Venkatachari, director of product management for Google's mobile team.

Why stop there? The core of Google's online ad strategy has always been to help advertisers target their ads so they fit like spandex tights with user interests. Employing technologies that figure out where callers are and where they're headed boosts advertising prices by 50%, according to studies by RCBG.

A number of existing strategies by smaller companies offer a glimpse into how Google might play its wireless hand, once all the cards have been dealt. Blyk, a wireless startup that made its debut in Britain on Sept. 24, offers free mobile phone calls and text messages for people aged 16 to 24 who agree to let companies such as L'Oréal, McDonald's (MCD ), and Coca-Cola (KO ) send text ads to their handsets. Blyk leases space on European carrier Orange's network in Britain, but it operates its own billing and marketing system. That lets it retain full control of valuable customer information and avoid sharing ad revenues with the carrier. Users fill out detailed information about their lifestyles, areas of interest, and brand preferences. Those who agree to receive tailored ads get 43 minutes per month of free mobile voice service and 217 free text messages.

In the U.S., a service from Virgin Mobile called Sugar Mama offers subscribers a chance to earn free minutes if they agree to view tailored ads. As of August, more than 425,000 people had signed up. They can choose to have text ads in the form of quizzes and games sent to a phone a couple of times a week; play the games and you earn minutes.

The big-time carriers already have banner ads from companies such as Avis or the Discovery Channel on the pages of their mobile Web portals. But don't expect the phone giants to change their business model if they don't have to. A Verizon spokesman says the incremental dollar value of advertising pales next to the cost of losing customers who don't like ads. Says AT&T Mobility's Mark Collins, vice-president for consumer data: "We don't believe in a world where you have to give everything away for free."

That's precisely what Google represents. Even without a network, Venkatachari says Google plans to connect mobile advertisers with users based on information from its search engine, maps, and other software, just as it has done on the desktop. Via Google search, for example, an advertiser learns a user is at the corner bakery in downtown Chicago. And it learns the person has a taste for sweets. Wireless carriers have customer information as well, but "they are not a data warehouse, the way Google is," explains Richard Siber, principal of SiberConsulting.

If Google decides to spend the $4.6 billion that may be needed to win the spectrum auction, analysts speculate that it has several options: continue its broadband expansion, or perhaps buy a wireless carrier, such as beleaguered Sprint Nextel (S ). Then it could launch the first ad- supported, and free, nationwide phone service. "Google is the first gambler sitting down with as big a bankroll as the carriers have," says John du Pre Gauntt, a wireless industry analyst for researcher eMarketer. "By playing in wireless, they have caused people to look at the industry in a different way."