The Nexus One Failure?

by Dave Michels
Is the Nexus One a Failure? Certainly a number of news outlets think so. Easy conclusion, didn’t sell much and two major carriers are rejecting it. But wait there is more…

Today’s news was triggered by Sprint’s decision to pass on the Nexus One. Verizon also recently declared it would not offer the Nexus One. That means the Nexus One only works on Tmobile and AT&T; (unsubsidized) in the US. I was going to write more on this, but Kevin at GigaOm beat me to it with “No Google Nexus One for Sprint. So What?. Kevin points out that the Nexus One was never intended to be a big seller, and the reasons Sprint/Verizon are not selling the Nexus is because they have better phones with exclusives. Ironically? these phones are Android Smart Phones made by HTC. Neither HTC or Google can be very upset about this.

Kevin also points out that Google’s poor sales volume of 135k units in the first 74 days may sound low, but it was done “without any of the mainstream media marketing often employed by carriers, and without long-term contracts.” Conversely, The San Francisco Chronicle along with many other sites are quick to call the Nexus a failure: “It’s no secret that TV commercials sell a lot of cellphones. This is why you see commercials for cellphones — often terrible commercials and phones — during nearly every commercial break on U.S. television. Yet Google refused to advertise the Nexus One on TV, trying to do its advertising online alone.”

I think the Nexus One has been a reasonable success – it bolstered HTC as a partner, it pushed Android into the mainstream, and it was the first phone with Android 2.1 including several new features such as turn by turn navigation. HTC is now offering the high-end Android device on every US carrier. I still expect Motorola to come out swinging soon, but so far HTC has been the most aggressive with Android. Apple filed a patent suit against HTC, but hasn’t taken steps to block imports (which would not be hard to do), likely a result of a bi
G brother.

But the bigger issue that people are not talking about is what Google really wanted to test or even break – the notion that hardware and carriers are one coupled decision. There is no doubt that Google wants to break this, and every consumer of mobile services should agree. The current model is flawed.

It is bad enough that we have four incompatible carriers with exclusive hardware contracts. This means you can’t take your phone to another carrier. But the bigger problem is the notion of the subsidy. Most people think subsidies are a good thing because the alternative is a higher priced phone. But do subsidies lower or increase our cell bills? The problem is the subsidy is a shell game to the carrier’s advantage. It is perfectly reasonable to “give” away free phones for a one or two year contract. But after the contract, shouldn’t the rate drop? If the contract is cancelled early, shouldn’t the penalty have something to do with how much of the subsidy was repaid? Why is the price ($199) and the term (2 years) pretty much the same among smart phones even though the price of the phones must vary?

The current model is like getting a free car if you promised to refill it at a specific gas company for two years. And since we don’t know who has a subsidized car, we will triple gas prices for everyone. This may be reasonable for the owner of the new car, but there are plenty of Fender Bent Four Bangers out there. What about after the two years? The gas price still stays high. Seems like a bad deal, but that’s our mobile world.

The cost of the phone and the cost of the service should be separate issues.

But the carriers don’t want to break the model. Google experimented (and it will take a Google, MS, or Apple to do this) and separated the phone purchase from the carrier purchase, but it didn’t work. It won’t work until the carriers offer a lower price without a subsidy. Since subsidized phones cost $200 (2 year contract) and unsubsidized open phones cost $600 – one could conclude the subsidy is about $400. Over two years, that is about $17/mo. If the choice was $77/mo and a two year contract and a $200 phone OR a $60/mo rate and no contract and a phone for $600 – I think the second one would win more often. If you keep the phone for three years, the lower monthly rate is a bargain. That’s too simple though, carriers will discount for a contract. Plus the time value of money benefit, so the actual upfront cost would likely be much lower. It will also create an incentive to keep phones longer (think green). Today the incentive is to upgrade regularly.

Once one carrier does this, the others will have to follow. It will happen. It doesn’t appear it will happen with Apple – rumors are spreading Apple just got exclusive rights on the iPad 3G – hopefully the iPhone exclusive will still end soon. It won’t happen with Microsoft – they don’t have the pull in mobile. Possibly RIM, but unlikely. It is a tough model to change. The Nexus One had consider media fanfare and impressive specs and didn’t do it.

Probably the next window with be a new Android 3.0 phone. If that’s the strategy, I am sure Google learned a few things with the Nexus One.


Disclosure: None. I don’t have a Nexus One.

UPDATE May 14 2010: Google decides to send the Nexus One to Retailers:

Today, Andy Rubin has announced that this will soon change. While he stresses that the Nexus One was an innovative pioneer handset that has spurred the advancement of mobile technology, he also admits that Google’s new distribution model wasn’t so successful, so Google will be shifting the focus away from themselves as the sole channel for device sales (a move echoed by their rumored team-up with Verizon on an Android tablet).