Sorry, Google’s Nexus Phone Store Isn’t Going To Change The World

Among the noise following Google’s launch of the Nexus One Tuesday was a number of serious articles claiming that the most revolutionary feature of the fabled GPhone wasn’t the phone, but Google’s decision to sell the phone itself with the option of buying the phone outright, vs tied to a telco.

Ars Technica offered one of the better written arguments in this post, saying

The real news at Google’s event this morning—news that could shake up the mobile industry just as thoroughly as the original iPhone announcement—wasn’t a phone at all, but a URL: http://google.com/phone. An online storefront that, if successful, could knock one of the major pillars out the current, much-reviled US carrier model and result in faster, cheaper, more flexible service for mobile users….

By offering a lineup of phones that is essentially carrier-independent (with the radio compatibility caveat), Google has separated the two previously interlocked parts of the phone/plan-buying experience—phone selection and carrier selection—and has done so in a way that threatens one of the most important enablers of carrier lock-in….In short, what Google announced today wasn’t just the Nexus One, but the world’s first carrier-independent smartphone store.

Sounds great doesn’t it, except for two major things: it’s a myopic American view that ignores the experience outside of the United States, and completely ignores simple consumer economics when it comes to price points and desirability of purchase.

Lets start with the basics: I own a 3GS iPhone, which replaced my 3G iPhone after my son broke it. I purchased that 3GS iPhone from an Apple store, unlocked and untied to a telco in September 2009. If I hadn’t purchased that phone from an Apple store, I could have picked up an unlocked iPhone, Android phone, or range of other smart phones from any number of retailers in my local area. If you’re reading me for the first time, I should add that I don’t live in the United States, I live in Australia.

So Ars claiming that Google’s phone store is the “world’s first carrier-independent smartphone store” isn’t just bizarre, it’s 100% factually incorrect.

Australia isn’t alone in offering unlocked phones either, with the unlocked model quite common throughout Asia and parts of Europe, but hey, the world stops at the Mexican and Canadian borders for these guys, doesn’t it.

Even where you can buy unlocked, carrier independent phones, the carrier model still dominates. Even if we concede that Google’s move could drive some change in the United States, it will never be as fundamental as Ars and others argue for one simple reason: the cost of buying a phone outright will always be more than acquiring a phone tied to a carrier on a plan.

What will change in the United States is that tied phones will become cheaper. It still astounds me that Americans have to pay $199 upfront to get an iPhone tied to a 2 year plan that costs them on average $109.99 a month (see chart here.) My last tied phone was my iPhone 3G, with cost me exactly $1 up front tied to an AU$79/mth (roughly US$75/mth) plan. But that was last year; my carrier (Optus, Australia’s second largest carrier) currently offers the 3G for $0 up front on an AU$59 plan. A 16gb 3GS: $0 up front on a AU$79 plan. For something close to an AT&T plan, you can get the 32GB for $0 up front on a AU$119/ mth plan. I should mention that Optus isn’t the cheapest carrier here either, you can shop around and get better deals from the likes of Vodafone or Three Mobile.

iPhone’s aren’t alone though on little to nothing upfront here, Blackberrys for $0 upfront: check, Nokias: too easy, check, Android phones…check again.

What Ars and others seem to miss is that when presented by competition in the form of being able to buy a phone outright, carriers tend to increase the handset subsidy to near or at $0 upfront, because it’s still far more lucrative for them to tie a user to a two year contract then to charge them a couple of hundred dollars for the handset.

AT&T and others in the United States haven’t had any serious challenge to the status quo so far, but once its presented, watch them cut the upfront costs on tied plan phones. Ignoring that $529 for a Nexus vs $199 up front for an iPhone now is really pushing things to begin with (the $199 even tied is still the better sales prospect because it’s a lower figure,) imagine AT&T or a Verizon (who is rumored to be getting the next iPhone) offering it for $1 or $0 upfront tied to a plan iPhone. It doesn’t take a degree in marketing or economics (I only have the former) to know that the difference in opportunity cost between a phone that costs nothing upfront vs a phone for $529 presents, and which one will sell more. Indeed, look no further to places like Australia for the hard evidence: given the widespread opportunity to buy phones untied to a carrier, most Australians sign up for the tied telco deals. And once I’m off my plan for my now dead iPhone 3G (the 3GS has the same SIM card and number as I’m tied to the plan, not the physical new phone), I’ll be lining up to do the same thing again when the next one comes out (well, or maybe an Android, but I won’t be paying a cent upfront for it ? )

Google should be commended for bringing something different to the United States phone market, but people need to stop sucking the kool aid and look beyond the borders of the United States to see what happens when you have unlocked phones, because although Google is doing something somewhat good, it isn’t world changing, or even going to seriously change the market in the United States, except maybe drive upfront prices on tied phone down. The only way Google could do that is to offer the Nexus One for $0 upfront AND untied, and that isn’t happening any time soon.