Andy Rubin's Essential Phone is a peculiar new product to be launched in 2017. The device looks interesting, including the clever way that accessories magnetically attach, but the last thing we need in 2017 is a smartphone start-up. At the Wired Business Conference last week, Rubin made it clear that he's coming after Apple (NASDAQ:AAPL) and Samsung. "I think when there's this duopoly with these two guys owning 40% of the market, this complacency kind of sets in where people are going, 'What they're building is just good enough, I'll just go to them,'" Rubin said. "And that's the perfect time to start a company with this. Some people are complacent and it needs to be disrupted."
Essential recently closed a $300 million funding round, valuing the start-up at $900 million to $1 billion. It's hard to imagine any other smartphone start-up securing that kind of capital to challenge Apple and Samsung, but Rubin's name, as the father of Android, carries a lot of weight.
But as part of its strategy to compete with the heavyweights, Essential will be launching as an exclusive on the smallest major U.S. carrier, Sprint (NYSE:S). Huh?
Exclusively on the worst network
USA Today first reported the exclusivity, with Essential President Niccolo de Masi telling the publication that Essential wanted to bet "where we think the market is going as opposed to where the market was," describing Sprint as "the network of the future." That's kind of a strange characterization, since Sprint has been plagued by stagnating customer metrics for years and is by far in the worst financial position of all the large domestic carriers, straining its ability to continue investing in its network. OpenSignal continues to rate Sprint as the worst network compared to rivals.
Carrier exclusives are also an antiquated practice that have been (rightfully) fading away for years, and they typically boil down to little more than marketing partnerships. According to de Masi, Essential was looking for a partner that would "make an investment in supporting our brand ambitions."
This won't turn out well
It's worth noting that Rubin has various ties to Sprint. Sprint's majority owner SoftBank had previously considered investing $100 million in Essential, but that deal reportedly fell through because SoftBank has become closer with Apple (Apple contributed $1 billion to SoftBank's Vision Fund, and SoftBank was the first iPhone carrier in Japan). Rubin has also long had a relationship with SoftBank CEO Masayoshi Son, and Rubin serves as an advisor to Vision Fund.
Still, when was the last time that a Sprint exclusive worked out well for either Sprint or the handset manufacturer? Essential has been quick to point out that the Essential Phone will technically support all the networks, so it's really just a matter of distribution and marketing. The time limit for the exclusivity is still unclear, and most of the other carriers are pretty ambivalent about getting Essential Phone on their networks. However, the importance of distribution in the U.S. smartphone market shouldn't be underestimated -- a large number of U.S. consumers still go to their local carrier retail store when it's time to upgrade, as opposed to buying online (Essential Phone can be purchased unlocked online) or visiting a manufacturer's single-brand retail store (most manufacturers other than Apple don't even have their own retail stores).
On paper, Essential Phone looks like a competent contender, but that's unfortunately undermined by a flawed exclusive distribution strategy.