ANALYSIS-Google phone strategy takes off, challenges ahead

Fri Nov 20, 2009 2:14pm EST

* Android OS on 12 phones; 12,000 plus apps available

* Material financial payoff five years away - analyst

* Biggest challenge is compatibility between devices

* Mobile games developer says cutting back on Android apps

* Google executive downplays talk it will make own phone

By Alexei Oreskovic

SAN FRANCISCO, Nov 20 (Reuters) - Google Inc (GOOG.O) has won a seat at the smartphone table.

Two years after the Web search leader announced its plan to barge into the market, a dozen phones are using Google's Android mobile operating software, including Motorola Inc's MOT.N heavily promoted Droid phone.

And software developers have created more than 12,000 games and other applications that run on Android phones, second only to the 100,000 apps on Apple Inc's (AAPL.O) iPhone.

"This is a platform that a lot of people were very sceptical about and it's just exploded," Brigantine Advisors analyst Colin Gillis said about Google's Android.

But Google's success getting handset makers and wireless carriers to adopt its free smartphone software has not yet translated into a material benefit to finances.

Unlike Nokia (NOK1V.HE) or Research in Motion RIM.TO RIMM.O, which make money from hardware sales, Google is looking to prominently place its software and services on a new breed of mobile devices and gain direct access to valuable consumer data that can be used to sell ads for premium prices.

This month, Google announced the $750 million acquisition of AdMob, whose technology and network allow ads to be placed on mobile websites and within iPhone and Android apps.

Google, which recorded about $22 billion in revenue in 2008, doesn't break out its mobile ad sales or disclose how its rates for mobile ads compare to traditional online ads.

"I think we'll start to notice it at the end of 2010, and it will be really material in five years," Gillis said of the impact of the mobile business on Google's overall financial performance.

APP DEVELOPERS KEY

Despite Google's success so far, it still has a long way to go to challenge the iPhone's dominance of the market.

Analysts say the variety of phone makers producing Android phones could result in a less consistent product than competitors like the iPhone and Palm Inc's PALM.O Pre, in which the hardware and software are tightly integrated.

Avian Securities analyst Matthew Thornton said Google's biggest challenge will be to ensure that a surge of Android phones from different vendors doesn't create a potential for incompatible apps, which would turn developers off.

"They want the broadest audience, the most developers they can get on that platform," Thornton said.

French mobile games company Gameloft (GLFT.PA) said on Friday that it and other software developers were cutting back investment in developing games and other apps for Android, mostly due to the weakness of its application store.

"It is not as neatly done as on the iPhone. Google has not been very good to entice customers to actually buy products. On Android, nobody is making significant revenue," said Gameloft finance director Alexandre Rochefort. [nLK608013]

Media reports have suggested that Google is building its own device to sell directly to consumers. This could give it greater control of its smartphone strategy, but could threaten relationships with hardware partners like Motorola.

Google Engineering Vice President Andy Rubin, who oversees Android development and strategy, told Reuters the company has already taken an active role in developing some Android phones such as the HTC (2498.TW) G1 and the Droid.

He described reports of a Google-manufactured phone as rumor and speculation.

"We like working collaboratively with our partners," Rubin said, when asked if it made sense for Google to get into the hardware business. "We don't necessarily want to acquire the expertise to take over ownership of the design of hardware. We're a software company."

NOT UNIFORM

Google hopes it has gained an advantage with its recently released Google Maps Navigation, which provides real-time, turn-by-turn driving directions and weaves in unique features like the company's archive of street photographs.

But the navigation app only works on smartphones with the 2.0 version of Android -- like Droid -- and not on the other phones on the market. This highlights the lack of a uniform Android experience for consumers and developers to rely on.

Google's Rubin said the variety of Android systems is no different than the situation in the PC market, where multiple versions of Microsoft Corp's (MSFT.O) Windows exist.

Google has procedures and incentives in place to ensure that apps are compatible on different Android phones, he said.

And while Android doesn't have nearly as many apps as the iPhone, Rubin said Android will stand out for the functionality of its apps, rather than their sheer quantity.

"Does it have every different type of application to slice and dice and all that squeaky toys and stuff that's out there? I don't care," Rubin said. "I just want the best one in each category."

(Reporting by Alexei Oreskovic; Editing by Tiffany Wu and Richard Chang)

((alexei.oreskovic@thomsonreuters.com; +1 415 677 2511; alexei.oreskovic.reuters.com@reuters.net)) Keywords: GOOGLE/ANDROID Keywords: GOOGLE/ANDROID

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