Google to stop selling smartphone online

A model demonstrates a Nexus One smartphone, the first mobile phone Google will sell directly to consumers based on its Android platform, after a news conference at Google headquarters in Mountain View, California January 5, 2010.

SAN FRANCISCO (Reuters) - Google Inc is closing its 4-month-old online cell phone store, abandoning an ambitious plan by the Web search leader to redefine wireless retailing.

Google said on Friday it will stop selling its Nexus One smartphone through its online Web store and will instead work with partners to sell the device through retail outlets.

"It's clear that many customers like a hands-on experience before buying a phone," Google Engineering Vice President Andy Rubin wrote on the company's official blog announcing the change on Friday.

Rubin acknowledged that Google's online mobile phone Web store had not lived up to expectations, never growing beyond a "niche channel for early adopters."

The move comes shortly after Sprint Nextel and Verizon both scrapped plans to support the Nexus One phone that Google sold online and represents a significant scaling back of Google's ambitions in the wireless industry, said BGC Financial analyst Colin Gillis.

"They clearly have retreated from the model of revolutionizing the method in which we acquire our smartphones," Gillis said.

Still, analysts noted that Google's challenges with its online phone store come as the search giant is making gains against Apple Inc and Research in Motion in the smartphone market with its Android software.

A dozen handset makers offer devices that feature Google's Android smartphone operating system and more than 65,000 Android-based devices are shipped everyday, according to Google.

A report by NPD Group released earlier this week said that Android became the second most popular smartphone operating system in the United States during the first quarter, behind Research in Motion, and displacing Apple's popular iPhone for the first time. Apple has disputed the study's findings.

"There's clearly an appetite, and there's clearly traction in the Android device area," said RBC Capital Markets analyst Ross Sandler.

For Google, which generated nearly $24 billion in revenue last year, primarily from online advertising, making sure that it has a strong presence in the fast-growing smartphone sector is critical.

"Google's entire philosophy around mobile is they want to make sure that they're the default search engine as users transition from PCs to mobile for Web browsing. That's the overall strategy," said Sandler.

But Google's plans to carve out a larger role for itself in the broader wireless industry were less successful.

Google opened its Web store in January, offering the sleek Nexus One handset as the first of what it promised would be many more devices available for sale.

The Nexus One, which Google designed in close collaboration with HTC, was available for $179 with a two-year contract from Deutsche Telekom's T-Mobile USA, or $529 without a service plan.

In an interview at the time, Google's Rubin said that by selling the phone directly to consumers, Google would be able to cut out extra retailing costs and ultimately deliver phones with lower price tags.

"There's a lot of people in the value chain who don't need to be there," said Rubin. "And then prices can go down, iteration can happen quicker, distribution can be wider."

But BGC's Gillis said Google's plans posed a threat to the established wireless carriers which have traditionally controlled handset sales through their retail stores.

"Part of that equation could have turned the carriers into commodity pipe offerings," said Gillis.

Google said in January that a version of the Nexus One that works on the Verizon Wireless network, a joint venture of Verizon Communications and Vodafone Group Plc, would be available in the United States in the spring; and in March Sprint announced its own plans to support the Nexus One. But in recent weeks, both companies have said they will not offer the Nexus One phone after all.

The fact that Google did not heavily promote the Nexus One, skipping the television advertisements common in the mobile phone industry, may have limited its sales. Analysts estimate that Google sold 150,000 to 200,000 Nexus One phones during the first quarter. By contrast, Apple sold more than one million iPhones in the first three months of its availability in 2007.

Google said on Friday that once the Nexus One smartphone becomes available at retail stores, Google will stop selling handsets via the Web store. Google said it will use the online store as a "window" to showcase Android phone available globally.

"We believe that the changes we're announcing today will help get more phones to more people quicker, which is good for the entire Android ecosystem: users, partners and also Google," Rubin wrote on Friday.

Shares of Google fell 0.66 percent to close at $507.53 on Nasdaq in an overall weaker market.

(Reporting by Alexei Oreskovic; Editing by John Wallace, Gerald E. McCormick and Richard Chang)