The Simplified Investor

On Tuesday, Deutsche Telekom AG unveiled the first smart phone that will use Google’s new Android operating system.  The device is called the G1, sold by Deutsche Telekom’s subsidiary T-Mobile, and it looks a lot like the iPhone and other competing smart phones (well, except for the Google logo on the back).  But its the software, not the hardware, that T-Mobile and Google hope will set this new product apart. It will need to be special to crack the dominance of RIMM’s Blackberry and Apple’s iPhone in the smart phone market.  Those two companies controlled a combined 65% of the market in 2008, ahead of a long list of competitors that also includes PALM, Motorola, LG, and Samsung.

Smart Phone Market Share as of May 2008

But smart phone users are savvy folks, and they’re looking for devices that will make life more efficient, and more enjoyable.  That’s where the cache of Google’s brand name comes in.  But will Android work as promised?  And, importantly, what effect will this new product have on the earnings (and stock prices) of Google, Deutsche Telekom, and the other companies involved in the cell phone industry?

Android is a software suite, including an operating system and key applications, that works on mobile phones.  It’s an open source platform, meaning its code is available to be copied or modified by any developer as a model for future versions of software.  The code is based on the famous Linux operating system, developed in 1991 by Linus Torvalds,  and the product’s origins can be traced to a Silicon Valley startup called Android, Inc. that Google acquired in 2005.

Google claims that Android allows it to improve on its existing mobile apps - for example, a new view in its mapping service that rotates the image based on the direction the phone is pointing, like a compass.  And the company has emphasized the importance of the “Android Marketplace,” where users can download software applications for their Android phones.  In contrast to Apple, many of these programs will be free - and even those that cost money will challenge the iPhone’s dominance.  The music download service, for example, will work through a partnership with Amazon rather than Apple’s iTunes store.

The G1 will sell for $179, $20 less than the 3G iPhone, and data plans will cost between $25 and $35 a month.   It’s likely that most of the target market will be existing smart phone users who convert from RIMM or Apple’s products.  As such it will be an uphill battle for Android to win market share - according to the WSJ, research firm Strategy Analytics estimates that the new platform will earn a 3.8% market share in the fourth quarter of this year, meaning 400,000 units sold.

For a company with massive revenues like Google, this isn’t going to move the needle much in the short term.  Ditto for T-Mobile - the company will need to keep selling basic phone service to close the gap on industry leaders AT&T and Verizon. But intangible benefits are worth some thought, especially if you’re thinking about DT or GOOG stock.

For T-Mobile, the collaboration with Google is at least as cool AT&T’s relationship with Apple - but with the added benefit that T-Mobile and Google are the good cops, making their platform accessible to all in an attempt to revolutionize the mobile software business.  And Google can boast of another ground-breaking technology as it expands its reach even further beyond the core internet search business.  While Google’s revenues will continue to be driven by advertising, this may not be true forever - and value investors might want to place a long bet that Android will help Google morph from the king of search to a diversified tech titan.

Tags: Android, AT&T, Business, Cell Phone, DT, Finance, GOOG, Google, Investing, Mobile Phone, Open Source, Qualcomm, Smart Phone, Stocks, T-Mobile, Telecommunications, Verizon, Wireless

This entry was posted on Wednesday, September 24th, 2008 at 6:16 pm and is filed under Stocks, Telecommunications. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.