For some time, Google has been rumored to be launching their own mobile device, but now it appears it may happen in the very near future. TechCrunch is reporting that Google employees have been given a device to test over the holidays, that, according to a TechCrunch source, will become the official Google phone.

Trademarked image

It should be noted that while Google has confirmed that there are new handsets being given to Google employees, and their public statement refers to testing new “products”, the product in this case is not necessarily a Google Phone, and could be anything from Android 2.1 itself, to a new browser or a hardware feature that may be rolled out in future carrier handsets running Android.

They did specifically call this little exercise “dogfooding”, so they could simply be making the point that Google’s own employees are now using Android, and if they trust it, so should you. Or it could be all of those things, we don’t know.

With that bit of caution out of the way, TechCrunch and others are sure that Google plans to launch an official Google phone, with some interesting twists on the traditional smartphone business model. I think they might be right, but is there actually a need for an official Google phone? Will it be different enough to matter? It may end up changing things more than we realize.

Raison d’ĂȘtre

It’s no secret that in the U.S., mobile data and voice networks are a bit of a mess. We have multiple competing systems, multiple spectrum allocations, and an environment of middleman network operators essentially deciding which hardware and software products will be developed for sale in the market. The tail is wagging the dog, so to speak.

Most smart phone models sold in the U.S. are made specifically for one carrier’s network, are subsidized to bring down the price, are tied to a long contract as a result of that subsidy, are sold by the carrier itself rather than the hardware manufacturer, and will not usually function on any other network, either because they are locked or because they are technically incompatible with other networks.

To date all of the existing Android handsets have been just another chapter in this dysfunctional mobile network story, but according to a TechCrunch source, who Michael Arrington says is reliable, Google may be planning to sell an Android device not just direct to consumers, but also unlocked for use with a carrier the customer chooses.

Traditionally, unlocked phones have been very expensive, and unsuccessful in the U.S. smartphone market; some consumers are willing to pay $1,500-$2,000 for lengthy service contracts over the life of a device, but are not willing to spend more than $200-$300 on a device itself, even if it is not locked to a specific carrier. Other hardware companies such as Nokia and Sony Ericsson have tried to sell unlocked phones in the U.S. market but have not be very successful. This has led to the cost of expensive devices like the iPhone, which consumers want but won’t typically pay for upfront, being amortized over the course of a long contract by rolling it into the service fees. So a $499 iPhone (which was actually locked even at this price), becomes $199 or even $99 as we saw this past summer.

In this environment of shifting costs around, locked devices, long contacts and carrier control, how can Google compete with the existing players using an unlocked, direct-to-market phone?

Less than free

Users of Firefox may be familiar with how Mozilla Corporation operates a sort of hybrid development environment, with a healthy open source community as well as a stable base of software developers employed by the company, who all work on software that is eventually given away for free.

They can do this because even though the software is completely free in every sense of the word, they take in substantial revenue from Google. The valuable resource that drives it all, is that little search box in the upper right corner of the browser. In Firefox, that search box defaults to Google’s search engine, one of the largest advertising businesses in the world and Google’s main cash cow. You can be sure that if Google is willing to lay down somewhere north of $75 million a year just to be the default search provider in a web browser, they are getting more in return for the investment. You can also be sure that Google is actively exploring ways to extend this model to other areas.

Some have termed this business model ‘less than free’, because the developer or manufacturer of the actual product is being paid to give it away for free, on the assumption that a financier like Google will see a large return simply through use of the product. It is suspected that this is Google’s primary motivation for developing both Android and the forthcoming Chrome OS, and of course the Chrome web browser itself, all of which default to, and integrate tightly with, Google’s search and other web services.

Google wants more people using the web, specifically the mobile web, more often, so that they can monetize things such as mobile search, mobile voice traffic, and of course mobile web display advertising. To that end, Google has recently purchased one of the largest mobile advertising companies, AdMob.

Subsidizing the development of a web browser is one thing, but can they pull the same stunt with a hardware device that may cost hundreds of dollars per unit to manufacture and support? While it may not be possible for Google to completely absorb the cost of an expensive phone handset, they are certainly able to knock the price down to the level people are willing to pay, perhaps even lower than the $99 iPhone. Using the ‘less than free’ model, they can do it without locking the phone to a specific carrier, and without forcing consumers to sign a long contract just to use the product.

The Android equivalent of the iPod Touch, with a bonus

There is a large market for internet connected devices that only work on Wi-Fi rather than 3G networks provided by AT&T or Verizon, for instance Apple’s iPod Touch. This is partly because some users simply don’t want mobile data service. However Apple made the choice to make 2 devices, one with mobile data network support, and one that is much slimmer that only works on Wi-Fi, and users must make a choice upfront if they want mobile data access. If you buy an iPod Touch, you don’t get mobile data without using a device such as the MiFi.

Google Phone users however, may not have to make such a choice, early reports are that the device given to Google employees is actually slimmer than the iPhone, making it a good candidate for the “Android version of the iPod Touch” many have been hoping to see. And the kicker: If a carrier subsidy is not involved and a contract is not required, all Google needs to do to sell millions of these things, is ensure that they function just like an iPod Touch in the absence of a mobile data connection, and sell them on that basis. The 3G hardware will still be present should a user want to connect to a mobile data network at some point, but it would not be required simply to use the device.

This model may actually increase the number of customers for mobile data carriers, since a consumer would already own the device and would not have had to lay down hundreds of dollars to get it, there is no major decision to make. In contrast, once you buy a subsidized device like the iPhone you cannot use it at all without activating it; indeed you cannot even walk out of the store without signing a contract for years of expensive mobile data service.

If carriers go along, and allow Google Phone users to pay for smart phone data connections month to month, this device will be a huge success.

Voice service for free?

Google now owns both Grand Central, which provided call routing, forwarding, screening and voice mail enhancements to an existing phone line, and a company that offers standards based end-to-end VoIP service, Gizmo5. Months before being purchased by Google, Gizmo5 was already providing integration service with Google Voice, which may have been a sign of things to come.

It is really not a question anymore, Google is preparing to offer consumers a potentially free or low cost, complete, vertically integrated VoIP service for mobile devices, with local access numbers in hundreds of markets across the U.S. This would make traditional, expensive mobile voice service completely unnecessary. The carriers may or may not like this, as it would mean the lucrative voice service that makes up 40-50% of the cost of service for a smartphone, would be replaced by something that can run exclusively on the data service.

The canonical Google phone

There are those in the tech community who feel that the Android platform has become fractured, that application development and user experience have suffered because of inconsistencies between the implementations of the platform on multiple handsets from multiple manufacturers.

Many recent Android handsets have significantly altered the user interface with software such as HTC’s Sense UI (which is not actually exclusive to Android, further complicating things). Google still retains some branding control in these cases, it appears that phones which include radically different interfaces cannot use the “With Google” branding. In the past year, there has been a rapid succession of “iPhone killers” based on Android, that don’t quite measure up. The original “Google Phone”, the G1, has been all but forgotten by everyone but those who own one. Since then, companies (primarily HTC) have turned out one Android device after another, seemingly just to see what sticks in the market.

Putting all this to rest would be an official Android model, the leader of the Android pack, the canonical platform to develop applications for: the officially branded Google Phone.