Later this year, Google will launch its very first smartphone. It could be the most revolutionary handset to hit the market since Apple (NASDAQ:AAPL) sold the original iPhone back in 2007.
In the past, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) search giant has worked with its various hardware partners to deliver Google-branded Nexus phones, but it has never made a smartphone from start to finish. That will change later this year when its Project Ara smartphone goes on sale. Initially, it will be aimed at developers, but Google plans to sell it to consumers in 2017.
Project Ara's success isn't guaranteed. Indeed, given its unorthodox nature, it could prove to be a dramatic failure. But if it succeeds, it could shake the very foundations of the handset market, and undermine the business models of both Apple and Samsung (NASDAQOTH: SSNLF).
A different vision, but at least it's not vaporware
Project Ara was originally announced back in 2013, and then demonstrated publicly in 2014. It was supposed to begin shipping in the second half of last year, but in August, Google announced that it had been delayed. At the time, I warned that Project Ara seemed to be running the risk of becoming vaporware -- a promising device that, for whatever reason, fell short of internal expectations and never made it to the public.
Fortunately, that's not the case. To be clear, the Project Ara phone shipping later this year is a less ambitious device than the one Google described previously. Originally, Project Ara would've been perhaps the last phone you'd ever need to buy -- with a fully modular design, consumers would buy a phone frame from Google, then outfit it with a variety of modules. These modules would encompass key components, including the processor, memory, cellular radio, and display.
Now, those key components are integrated into Project Ara's frame, along with a set of speakers. It's still a modular device, but the modules are limited to ancillary functions. The most useful may be the camera -- those willing and able to purchase the proper camera module could equip their Project Ara phone with a truly professional-grade camera. Other modules could add projectors, fitness sensors, game controllers, secondary displays, or larger batteries. Almost anything is possible. Each Project Ara phone can take up to six modules, allowing for a great degree of customization and added functionality.
Redefining consumer expectations
Google's Android operating system has managed to capture about 80% of the world's smartphone users largely because of its customization options. Handset manufacturers are free to use the Android operating system on almost any smartphone, which has led to a flurry of different models. There's an Android phone sold at virtually every price point, in every size, on every carrier, in every country.
Project Ara will bring customization to an entirely new level. There's still a lot reasons to doubt Project Ara's chances: Beyond Google's relative inexperience when it comes to selling handsets at scale, it's not clear that consumers will want to deal with the hassle of swapping modules. Introducing a wide variety of different hardware configurations could lead to bugs, or other unforeseen circumstances that make the user experience less than ideal. Many of the more attractive Project Ara modules could be expensive, and consumers may not be able to take advantage of generous financing plans currently offered by carriers to purchase them.
But if Project Ara does succeed, it could change how consumers view the smartphone market. If must-have, revolutionary modules emerge, integrated phones that cannot work with Project Ara's modules could be at an immense disadvantage.
Samsung and Apple remain the world's largest smartphone sellers, and therefore remain the most susceptible to competition. Apple derived nearly two-thirds of its revenue from the iPhone last quarter, and likely a larger percentage of its profit. Samsung is a more diversified business, but its mobile devices still brought in more than half its sales last quarter.
Both companies have faced competition from a wide variety of sources in recent years, but they've never faced a competitor like Project Ara before. Investors in the space should watch Google's progress closely.