Rumors of a Gphone refuse to die

Is Google really thinking about making a substantial change to its business model by releasing the fabled Gphone?

TechCrunch sparked the latest round of Gphone rumors Wednesday, reporting that its sources indicate Google is working on releasing a Google-branded Android phone sometime in early 2010 that will be sold directly to consumers at retail, presumably bypassing wireless carriers. Such a phone is supposedly being built by a manufacturing partner with the intent that Google's brand will dominate the phone; TechCrunch compares the strategy to what Microsoft did with Toshiba and the Zune music player.

Well before Google unveiled its Android mobile operating system project two years ago, and almost ever since, persistent rumors have circulated that Google's mobile phone ambitions go beyond software development. Just as consistently, Google executives have downplayed such rumors with statements that the company is most interested in seeding Android far and wide across multiple carriers and hardware manufacturers, rather than following Apple's strategy of designing and building the entire product itself.

Just a few weeks ago, Google's Andy Rubin, vice president of engineering for Android and the head of the project, told CNET that Google had no interest in "competing with its customers" by releasing a Google-developed phone, echoing comments he made earlier in the year that "I'd much rather be the guy that does a platform that's capable of running on multiple companies' phones than just focusing on a single product."

Now, there was some wiggle room in Rubin's statements. Most smartphone hardware brands--even Apple--don't actually build their own phones, they contract with companies in China or Taiwan that assemble the parts. Therefore, Google's statement that "we're not making hardware" doesn't preclude the company from designing hardware.

On Wednesday, Google refused to comment on what it termed "market rumor or speculation." But why would Google build its own phone? What would it have to gain to offset what it could potentially lose?

Google just signed a multiyear collaboration deal with Verizon Wireless, pledging to help develop a family of Android-based products running on Verizon's network. Any attempt on Google's part to bypass Verizon and sell its own branded handset would likely raise a few eyebrows in New Jersey, no matter how close of friends Google CEO Eric Schmidt and Verizon Wireless CEO Lowell McAdam have supposedly become.

So maybe Google wants to completely bypass carrier networks and release the ultimate IP phone, with Google Voice and the technologies it just acquired from Gizmo5. Such a phone would be free of the two-year contracts imposed by the wireless industry, but would it really be compelling without some kind of wide-area networking technology?

In the same conversation in which he denied Google was working on its own hardware, Rubin implied that Google doesn't think there's much of a future for WiMax, which Intel and others have long billed as a way around the wireless carriers. The company sat out a recent funding round for WiMax start-up Clearwire after investing around $500 million in the company in 2008, and Rubin said it was planning future Android development around the LTE standard, which is the path that AT&T, T-Mobile, and Verizon plan to take to 4G networks. LTE carriers will likely insist on the now-familiar two-year contract to offset the costs of building out that network, unless federal regulators tell them they can't.

But assuming Google really is planning on releasing a completely Google-branded phone at retail, such a plan could derail the momentum enjoyed by Google and its Android partners this year.

The Microsoft/Zune strategy alluded to by TechCrunch was a disaster for Microsoft's PlaysForSure hardware partners, who had been working with the company on MP3 players that hooked into Microsoft's media software. It effectively cut them out of that market, and almost certainly created distrust and outright resentment that could come back to hurt Microsoft one day.

Any Google-branded phone would immediately compete with phones that Google partners like Verizon and Motorola are placing huge bets around, namely the Droid. What incentive would those companies have to work with Google in the future should it throw a huge wrench into their product development strategy?

And even putting all that aside, smartphones in the U.S. are only attractive to consumers because no one actually pays what a smartphone is worth. Heavy carrier subsidies knock the price of the average smartphone from around $500 or $600 to around $200, because time and time again most people have shown that even if they will save money in the long run by avoiding a two-year contract, they get sticker shock at the sight of a $599 phone. Just ask Apple: the iPhone would not be the iPhone if it was still selling for $599.

If Google were to release its own phone at retail, would it have to subsidize it itself to get the price down to about $200? Would the federal government look favorably on such a plan, knowing that virtually no other company could afford to sell such a smartphone at a loss?

TechCrunch later reported that Google could be working on a "data-only" device that would ostensibly use AT&T's network for data services, with calls being placed using VoIP technology. That's a bit puzzling as well, since that would allow Google to annoy new best friend Verizon and AT&T to annoy longtime steady Apple, so at this point, it's hard to know exactly what's going on here.

Few businesspeople directly answer questions about major strategy shifts they might be planning, for the obvious reason that surprise is a competitive advantage. But it's hard to imagine why Google would risk stunting Android momentum just as the software is rounding into the best chance for hardware manufacturers and wireless carriers to compete with Apple and AT&T.

That is, unless somebody at Google has decided that they are the ones with the best chance of competing with Apple.