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.