Why Nexus One Might Become Nexus Done

In a move that surprised no one short of Rip Van Winkle, Google (Nasdaq: GOOG  ) unveiled its highly anticipated Nexus One smartphone yesterday.

Don't read too much into the slight decline in Google's stock yesterday afternoon and this morning. Everyone knew the "gPhone" was coming, so this was just a classic case of buying on the obvious rumor and selling on the news.

Unfortunately, this also doesn't mean that the new wireless device is going to be an iPhone killer, BlackBerry baker, or even a Pre heater. Nexus One may turn a few heads initially, but it's unlikely to revolutionize the market or live up to the early hype.

In a year or two, Nexus One may be Nexus Done -- and I have all of the reasons why.

1. The market is more saturated than you think
Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) are moving millions of handsets every quarter, perpetuating the illusion that this is a buoyant market in its early stages of growth.

Booming market in its infancy? Not quite. This is no baby, baby.

Research In Motion shipped 10.1 million handsets in its latest quarter, but closed the quarter with only 4.4 million net additions to its subscriber base. What's behind the discrepancy? Well, the two key factors behind the 5.7 million gap are the number of BlackBerry buyers who are simply upgrading their devices and those who are canceling altogether.

How many people can afford a smartphone? Subsidized devices may not seem to be a lot more expensive than conventional handsets. AT&T (NYSE: T  ) sold me a refurbished iPhone 3GS for just $50 last week. "Buy one, get one free" deals on BlackBerrys are common through Verizon. The rub -- of course -- comes in the costly data plans that accompany the 3G devices built for ferreting through cyberspace.

Smartphones are largely useless without unlimited data plans, and even with the bare minimum in terms of included minutes, a smartphone on AT&T or Verizon Wireless will set you back at least $70 to $85 a month. How many people can realistically afford that kind of monthly investment?

Now, before you spit out your guess, let's check out the established market. BlackBerry closed its latest quarter with 36 million active accounts, and has shipped far more units. Apple, on the other hand, has sold more than 32 million iPhones during the past two fiscal years.

2. Apple and Research In Motion have cornered the market
Everything seemed to be going right for Palm (Nasdaq: PALM  ) as the release of the Pre drew near. Its stock was roaring back from oblivion. The press was playing up the Pre's bar-raising ability to multitask. Old-school purists were loving Palm's redemptive comeback story.

Well, Palm's devices haven't exactly set the registers on fire, despite the generally favorable media reviews. If Palm couldn't make a dent in this market, why should a newcomer fare any better?

One of the primary challenges in this market is that subsidized phones shackle buyers to two-year contracts. In other words, the buyers of those 32 million iPhones over the past years can't even consider the Nexus One without incurring hefty early termination fees or paying up a full $529 for the unsubsidized model.

Nexus One is down to being marketed to smartphone virgins or those who have owned BlackBerrys or iPhones for more than two years. The former group may not afford it, and the loyalty of the latter is probably stickier than you think.

Put yourself in an iPhone owner's shoes. If that person has owned the device for more than two years, we're talking about someone who may have paid as much as $599 for a 2G device. If they paid that much, why wouldn't they pay a third of that price today for a 3GS smartphone that does so much more?

Sadly, Google is a couple of years too late to penetrate this market.

3. Android is cool but rudderless
This isn't the first smartphone to hit the market on Google's Android platform. HTC put out the G1. Motorola (NYSE: MOT  ) recently launched the much-publicized Droid. HTC is now back with Nexus One, though it's also the first phone being actively marketed through Google.

Each one seems to outdo the previous incarnation, and that makes it even more daunting for someone about to tether themselves to two years with any wireless device. Would you buy a device with a limited shelf life of cool?

The rebuttal here is that upgrades to the Android operating system will help raise the functionality of all devices, but let's walk a mile in Motorola's shoes. It has been flooding the market with "Droid Does" television ads, and along comes Google with its own Nexus One. Motorola sure looks like a chump for championing a platform that is the handiwork of its newest competitor.

What happens if Motorola backs away once it realizes that it's not in on the joke? If anything, Nexus One may give Microsoft (Nasdaq: MSFT  ) -- or even other Linux-based mobile operating systems -- a major boost, as Google goes from friend to frenemy among the handset makers. This could snowball into bigger problems for Nexus One. After all, if Android's penetration is low, developers aren't going to throw their weight behind the platform the way they have with Apple's App Store.

Hype cuts both ways.

Microsoft is a Motley Fool Inside Value pick, Google is a Rule Breakers recommendation, and Apple is a Stock Advisor pick. Motley Fool Options recommends a diagonal call strategy on Microsoft. Try any of our Foolish newsletters free for 30 days.

Longtime Fool contributor Rick Munarriz is starting to see more Apple products creep into his home lately, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2010, at 1:59 PM, TMFBent wrote:

    THANKs, Rick. I think you were too polite, though. This thing is lame, obsolete, with no price advantage and has lousier hardware and software than many existing phones -- droid runners included. I am in the market for an unlocked smartphone. I actually value them for their non data-dependent services, like carrying my to-do list, calendar, and other stuff in the phone, fully synced with outlook. But this isn't possible with google's phone, not without some as-of-yet nonexistant software, or without signing up for a data plan and running everything through the unecessary snooping of Gmail.

    If Microsoft came out with a product this lousy, and called a special news conference to hype it, we'd all be rolling on the floor pointing fingers. But since it's Google, somehow the pressmen fawn anyway.

    Apple must be laughing its tushy off as Google proves yet again that it doesn't have what it takes to innovate anything other than an ad biz.

    Sj

  • Report this Comment On January 06, 2010, at 2:11 PM, Fool wrote:

    Bad design, no iTumes, poor app selection... competion to the iPhone.... Please :)

  • Report this Comment On January 06, 2010, at 2:20 PM, Checkka wrote:

    TMFBent: Lousier hardware? Examples please.

    While the Nexus One is certainly not an 'iPhone killer'. Its definetly a competitor to what is currently available, the Droid, iPhone and the Palm Pre.

    So in all fairness, I think this phone might be a Droid killer. Motorola is probably the biggest loser in all this.

  • Report this Comment On January 06, 2010, at 2:28 PM, onepremise wrote:

    Checkka, I'm with you on that. I don't know what these guys are smoking. The specs on the nexus are awesome and android itself is definitely more appealing than Palm's Linux platform or Windows Mobile:

    http://www.google.com/phone/static/en_US-nexusone_tech_specs...

    Let's look at some statistics here:

    http://androidcommunity.com/more-prospective-buyers-for-andr...

  • Report this Comment On January 06, 2010, at 2:33 PM, Fool wrote:

    Rick,

    Get a job that doesn't have you reporting on tech. You're so far off base on this one it's a joke.

  • Report this Comment On January 06, 2010, at 2:35 PM, onepremise wrote:

    Checkka, I'm with you on that. I don't know what these shills are smoking. The specs on the Nexus are quite impressive:

    http://www.google.com/phone/static/en_US-nexusone_tech_specs...

    Definitely better hardware than the iPhone and existing Droid phones. Actually, the phone has a processor twice the speed of the Motorola Droid.

    As for market usage, how about we stop spurting off and look at the actual numbers:

    http://androidcommunity.com/more-prospective-buyers-for-andr...

  • Report this Comment On January 06, 2010, at 2:39 PM, onepremise wrote:

    BTW, the Nexus has a processor twice the speed of the Motorola Droid.

  • Report this Comment On January 06, 2010, at 5:07 PM, WoodyDog1400 wrote:

    Google is a search engine to 90% of ppl and nothing more....

    They are playing in the wrong industry now, and will become the next YAHOO!

  • Report this Comment On January 06, 2010, at 5:29 PM, misfitred wrote:

    I believe your 'RUDDERLESS' comment is spot on. What is the difference between a Google phone and a Motorola android phone? That is the question the masses will ask. If one Android phone performs poorly, it will be hard to distingiush between software and hardware. And the number of options of Android phones also clouds the market.

    Apple on the other hand, is just Apple. There are not 5 or 10 different models. The whole device is Apple. So it is easier to associate with the brand. It is clearer to understand, making it much easier to accept.

    And though I believe the Google phone is good, it is being launched with nothing the iPhone doesn't have. Not many people would pony up $479 to get it untethered to a service (yet though I am sure some will). Apple is seen as the innovator in the smartphone segment. And even though you maybe locked into them for two years, you can trust that software upgrades will be there and be good.

    Apple also has locked down many things involving third party app developments. And although this has caused some grief in the developer community, all apps work on the iPhone. There have already been reports have apps having conflicts with the Android operating systems. This boils down to the point, the iPhone just works, while some Android phones are having issues. And even if the Motorola Droid has an issue, it hurts the image of the Google Nexus.

  • Report this Comment On January 06, 2010, at 5:55 PM, prginww wrote:

    It is a miserable business. Do you sign a contract for a certain fuel brand wwhen you buy a car? The FTC is obviously in the pocket of the wireless providers.

    The real cost of the phones may be $200 if I compare how much computer I get for $300 or $400. or much GPS device I get for $100. In Germany the data plans cost half of what they cost in the US and that includes all the taxes other than in the US. You can also buy daily data use which would save me a lot of money.

    I would gladly buy the Google phone at my estimated price if they had data plans like in Europe. In the meantime I wait for my contract to expire and then never buy a contract again. Never that is in case the contracts are overly expensive.

    Google, think out of the box!

  • Report this Comment On January 06, 2010, at 6:21 PM, cdanj wrote:

    When is Apple going to get out of bed with AT&T? I would get an iPhone in an instant if it were not for the carrier. Where I live, the AT&T map truly is void and Verizon is the most reliable carrier. I wish smartphone developers would open market their devices...then you would also see carrier charges get realistic as well.

    Just my 2 cents...

  • Report this Comment On January 06, 2010, at 7:05 PM, TMFBent wrote:

    Lousier hardware? Yeah, the two multitouch droid phones (one on AT&T, the other on verizon) that my nephew and my brother in law had at Christmas offer more than this lousy new handset, including 3G on their networks, something you won't get with this thing if you roll AT&T.

    Google's done nothing here except open a phone store and sell a product inferior to current droids as way below iphone capabilities -- for a price that doesn't beat any of them either. But that's enough to get the pressmen wagging.

    Sj

  • Report this Comment On January 06, 2010, at 7:54 PM, bc0203 wrote:

    I think you guys don't get Google's strategy here. The Android platform (particularly in it's 2.1 incarnation) is just another product that fulfils Google's mission statement of "making information useful everywhere" In this case, Android is a real-time, location based delivery system for products and services from Google and it's partners. Oh, and it happens to be a phone, too.

    The Nexus, with its high-speed processor and huge OLED display certianly puts a fresh, sexy face on that delivery model, and will surely draw more into the fold. The fact that it's being offered on T-mobile is a nice hat trick, because it allows Google to say "thank you" to them for their prior support with the G1, and it gives Google a limited roll-out (which includes a large number of former G1 users - who are used to being early adopters) for the new technology.

    Since most Android phones sold in the last 6-12 months will run version 2.1 of the OS (including the Droid), I doubt too many who have these phones will feel buned once their phones are upgraded. Indeed, within the next 6-12 months, when buyers will be able to choose between a wide variety of Android 2.1 capable phones, and at that point the Nexus will just be one more high-end smartphone worth considering, with it's own pluses and minuses

    As a Motorola Droid user myself, I'm not overly concerned. I bought my unit because it has a built in keyboard (something the Nexus does not have) and with the knowledge it would run Android 2.1. I already have all the apps I need from the 20,000+ available on the Android app store, and with Pandora, Slacker Radio and Rhapsody, I have no need for iTunes. When my contract renews in two years, they'll proabably have a slicker phone then, so bide my time. :-)

  • Report this Comment On January 06, 2010, at 8:28 PM, Checkka wrote:

    TMFBent: Here are the technical specifications of the Nexus One. http://www.google.com/phone/static/en_US-nexusone_tech_specs.... Clearly it supports 3G.

    And just like Verizon's Droid, the multitouch capability on the Nexus One is disabled in the US.

    Source: http://www.engadget.com/2009/12/18/googles-nexus-one-lacks-m...

    I've come to the conclusion that TMFBent is simply 'trolling'. And regardless of the reason his comments here should be ignored.

  • Report this Comment On January 06, 2010, at 9:38 PM, Fool wrote:

    One thing that does not seem to have been mentioned. If you look at the specs of the Nexus One, it supports UMTS Band 1/4/8, GSM/EDGE and WiFi....no mention of CDMA. So on the surface it looks like this device was meant to take on the iPhone and/or support T-Mobile's network (both of which have GSM based networks including EDGE and WCDMA). Verizon has a CDMA network which is supported by both the Droid Eris (by HTC) and the Droid (by Motorola), both of which are Verizon's answer to the iphone. So, unless Nexus One plans to offer a CDMA version as well, I don't see it competing with either Droid version. However, I also don't see it beating the iphone either. I've heard the Nexus One is really fast, but not sure there are any real features to draw away iphone users. I don't know of an unhappy iphone user (except the one's limited by AT&T bandwidth which is not the phone's problem) So I would agree with the article, in that the Nexus One will be limited to smartphone virgins.

  • Report this Comment On January 06, 2010, at 10:53 PM, gdf55 wrote:

    Got the Droid and love it. Love the slide-out keyboard, love the look, love the Google maps navigation app, love the fact that it's on Verizon's network which, despite the 3G coverage map ad battle, has yet to fail me anywhere in the Midwest. Love the fact that *I* can write apps for it that work and that can be downloaded and installed directly without having to go through an app store. Did Motorola do everything right with the Droid? No, but they didn't do anything egregiously wrong either, and that's a pleasant change.

    All that is preamble to disagreeing in principle with Rick's article. I think Google will do OK here and I really doubt that Google has high expectations for the Nexus in terms of total sales.

    I do agree with the comments that the Droid and other Android phones may ultimately be a stake in the heart of RIM. I want to go further, though, to say that what Android is doing is demonstrating to the world that you don't *have* to drink Apple's koolaid (contents: forced choice of second-rate carrier, App gestapos, iTunes lockin, premium price, and 1 chance in 3 that your phone locks up and can only be fixed by replacing, in warranty or out).

  • Report this Comment On January 07, 2010, at 6:35 AM, gilsh wrote:

    the main problem of this article is that it is considering the current market (u.s, europe) as the "world". guys, a co,mpletely new middle class is forming in south-east asia.

    These are google's target.

  • Report this Comment On January 07, 2010, at 6:48 AM, Flishiz wrote:

    If this was Google's motive all along, they shouldn't have let any of the previous Android-carrying phones happen. I'm not convinced that Google will be able to take on Apple, especially in infrastructure. In fact I'm partially reminded of Microsoft releasing the Xbox 360 a year before the competition, and even though it was a terribly buggy machine that was knowingly shipped faulty, it still managed to outperform Sony, who years before produced the greatest selling console of all time.

    The correlation here is the developer market. People were itching to create applications for the iPhone before it was even in their hands, so when Apple made the development kit available, the floodgates opened a torrent of applications. Conversely, Google will need to make that same kind of independent developer pitch sound as sweet as it is for Apple. A good app and the right luck is a gold mine. iPhone app developers don't forget iShoot, and neither should we.

  • Report this Comment On January 07, 2010, at 11:05 AM, efp76 wrote:

    My vote was that it would do okay, mostly because I agree with your statement that the smartphone market is already saturated.

    The first thing that popped into my head when I saw the news about Nexus One was "Ooh, it's kind of like the Zune vs. the iPod" You can argue specs all you want, but IMHO, they're pretty much the same darn thing - the only real difference is the brand name! Success or failure will depend largely on the strength of the brand and its market appeal. Which is why I still stay Nexus One will just do okay. Because again I agree with you - RIM and Apple loyalists are tough nuts to crack.

    When Verizon gets its dands on a Nexus One, we'll get a chance to see how well (or poorly) the sales will go. That won't be for a few months, right? That's what the news said. Even then, the Nexus still won't be the first phone with 3G/GSM/UMTS/HSPDA/CDMA yada yada yada technology. I've had a BB Tour for a couple months now and it's got those onboard already.

    Welcome to the party, Google.

  • Report this Comment On January 07, 2010, at 3:04 PM, JakilaTheHun wrote:

    Great article. Raises a lot of good points that I had not considered before. Particularly interesting is how Nexus One might alienate other companies making Android based phones.

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