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Google's Plans Could Threaten Phone Partners

Google could undermine its long-term strategy of extending its reach into mobile Web services if it chooses to go head-to-head with cell phone manufacturers that are using its Android operating system.

Analysts say Google's ultimate success rests on phones of all sorts using its Web search and services -- the lion's share of its revenue -- a goal that Google (NASDAQ: GOOG) could jeopardize by offering a mobile phone that competes against those of its partners.

Google, which sources say will push out its own phone as early as 2010, may be making a multibillion-dollar mistake and should focus on getting its Android operating system software on as many phones as it can, to draw in consumers for its bread-and-butter Web search and services.

Google is "going to box themselves more and more in a corner by actually making these phones," said Anil Doradla, an analyst with William Blair & Company.

With details scarce for now, analysts struggle to understand Google's move into a highly competitive business in which it has no experience.

Some say the world's No. 1 Internet search engine is trying to temper Apple's (NASDAQ: APPL) dominance in the smart phone market as it tries to publicize Android.

Phones using Google's Android smart phone software -- announced this year -- have lagged Apple's iPhone in sales and reputation, and the search leader's decision to make its own hardware device could solve that problem.

Unlike Apple, whose roots in the hardware design business helped its entry into the cell phone market, Google's has expertise in Web-based software that may not necessarily translate into consumer electronics prowess.

Conversely, smart phone software like Android ensures that the company's advertising-based Web services get prominent placement on the new breed of mobile devices and could give Google better access to valuable data, like a person's location, which can be used to sell targeted ads for a premium price.

Android's rapid rise

Google has had early success convincing phone makers to adopt its Android software. Android is currently available on more than 12 different phones from vendors including Motorola and Samsung, with more devices coming from Sony-Ericsson, LG Electronics and Acer.

That support may fade as Google moves forward with plans to develop its own, Google-branded Android phone to be sold directly to consumers, as a source familiar with the matter told Reuters the company is doing.

"If the most essential element of your phone is coming from a competitor, it's not good. Not in any industry," said Doradla, in reference to phone makers that are currently using Google's Android software.

Signal Hill Group analyst Todd Greenwald said Google, which has a market cap of $189 billion and roughly $22 billion of cash and securities, may figure it is big enough that it can risk upsetting certain partners.

Next page: The hardware challenge