• The device will be made by HTC and is based on the HTC Passion handset
• It will launch on T Mobile USA but will not be linked to a subscription
• The phone uses GSM technology and is likely to be preloaded with key Google applications including Goggles  and Navigation
• The phone will be unlocked and can be used on any (GSM-based) network using a carrier SIM card
• It will support WiFi and 3G network services – and may come preloaded with Flash and a 5Mp camera
• It has a touchscreen interface and soft keyboard only, plus a scroll-ball for navigation

 Google have not confirmed the hardware or software specs for the device but have indicated that Google employees will be ‘dogfooding’ the device (i.e. “eating our own dogfood” = Google speak for testing and using their own technology and applications internally) but Mario Queiroz, a Google Product Manager, provides limited information about the trials:

“We recently came up with the concept of a mobile lab, which is a device that combines innovative hardware from a partner with software that runs on Android to experiment with new mobile features and capabilities, and we shared this device with Google employees across the globe….Unfortunately, because dogfooding is a process exclusively for Google employees, we cannot share specific product details. We hope to share more after our dogfood diet.”

The mystery surrounding the device remains, even as further updates and initial user reviews begin to leak out, yet the most important questions have not been answered:

• Will the device carry Google branding, HTC branding, or both?
• Will it offer unique Google Apps, or specific platform integration capabilities, which are not available on other Android handsets?
• Will the device be sold via the Mobile Network Operator (MNO) sales channels?  (early information suggests the device will be sold SIM-free, which suggests it could retail via Wal-Mart, Best Buy or Amazon)
• Will the device be Google Voice led? (i.e. will voice and text services be almost ‘free’ to drive data services and App penetration?)

Google has been cultivating partnership relationships with most major MNOs and global handset manufacturers for the last two to three years; the relationships were built on the mobile search integration from a handset and (MNO) portal perspective. Handset manufacturer relationships have been extended through the launch of Android which provides an open source O/S platform for next generation devices.   The launch of Android brought Google closer to the manufacturers which are building devices on their O/S, including HTC, Motorola, Sony Ericsson and Samsung – but it splintered the relationship with others, particularly Apple and Nokia.  Google has been operating a “co-opertition” model with both the manufacturers and MNOs for some time: partners embraced Google to exploit the search capability and accepted the risk of giving away valuable mobile advertising revenues, user data and ‘access’ to Google services including Gmail, Maps and Google Voice.   Nokia’s rejection of the Android operating system, because of the vested interest in Symbian, and Apple’s procrastination regarding the acceptance of Google Voice iPhone App are symptomatic of the changing boundaries which mark the co-opertition relationship between Google and partners.

The launch of the Nexus One could mark a watershed for the breakdown of the co-opertition ecosystem. A Google-branded handset, which is heavily integrated with Google Apps and Services, (including Google Voice), will be competitive across the co-opertitive landscape.

Handset Manufacturers

A Google branded handset using the newest version of the Android O/S goes against the ethos of providing an ‘open’ infrastructure which can be leveraged by other manufacturers.  Will Google now favour HTC (who are building the device) over other device partners?  Will HTC feel threatened by Google if they are do not co-brand the device – HTC recently launched their first consumer branding campaign in the US. Most importantly, if Google sell branded devices in-store then they are in direct competition with the partners who support the Android platform and this may lead them to explore other O/S options. 

 Mobile Network Operators

The launch of Android handsets across a range of device manufacturers was a very positive development for the MNOs: 1) greater competition for the iPhone which is not available for all carriers, 2) flexible O/S platform allows better integration with Operator services, 3) carrier-based billing for Android App Store (Operators receive no revenues from iTunes App sales).  However, a Google-branded device which promotes Google Voice threatens this relationship: a) Voice and Text may be given away , damaging Operator revenues and reducing them to ‘utility’ status, b) a SIM-free device will be operator agnostic, which restricts MNOs from securing exclusive deals, c) Google will be unwilling to share mobile advertising revenues on their own device (as Apple do not share App store revenues on the iPhone).

Vertical Service Integration –A rationale for the Google Phone               

My view is that Google are developing the Google phone in response to the disintegrating relationship with Apple and to ensure that at least one device in the marketplace acts as a showpiece for Google Apps and Services.  The success of the iTunes App Store is based on the limited variation of devices in the market  – all iPhones have the same screen size, access to the same connectivity networks (3G / WiFi) and similar processing power.  All Apps which are developed for the iPhone will work across all devices – period. As handset manufacturers begin to develop variations on the Android platform using proprietary versions of the open-source O/S platform there is a risk that fragmentation occurs – something which restricted the development of data services on traditional feature phones. The Google phone will be optimised for Google Apps (such as Maps, Gmail, Goggles or Wave) – other Android handsets may offer the same services, but enhancements to these applications in the future could then be aimed at the Google Phone, rather than having to dumb-down the requirements to ensure backwards compatibility across all versions of the Android O/S.

UPDATE: confirmation of Android fragmentation across the 3 major O/S releases was provided by Google and Android developers this week.

More importantly, Google would be free to manipulate the device and the service offering for Google Phone users to ensure they are wedded to Google services – rather than to an ‘Android’ handset, for example:

• Contacts integration with Gmail and Voice
• Free turn by turn navigation for Google Maps
• Data backup and disaster recovery using cloud based storage
• Picasa integration for photo sharing, backup and recovery
•  Unique interface design and updates (released first to Google handset users)
• Optimisation for YouTube TV

Google needs to monetise mobile via mobile advertising domination, a la the web, or freemium service offerings based on Google Applications: most of these are free to consumers at present – but not to Enterprise customers….

Expect Google to take the Google Phone to SMEs in direct competition with Apple, Microsoft and Blackberry – integration with Google Mail for business, as well as free Navigation via Google Maps and free data storage and disaster recovery will be the beachhead for this.  Google could leverage these services for a tie-up with an alternative network operator such as Clearwire (Wi-Max) or LTE providers, this would be a perfect fit for Google Voice and offer significant cost saving benefits to smaller business customers.

I believe the Google Phone has more to do with Enterprise Customer revenues, and access to cloud-based Enterprise services, than a play for consumer market share.

The differentiated approach of the games publishers, from “garage-based” flash games creators through to Zynga’s 300+ in-house development team , is the commercial ecosystem which has been created around the most successful games. Social gaming is thriving because micro-payments, access-subscriptions (e.g. payments for time-based access to play games) and virtual-goods economies provide a sustainable business model for games publishers that cannot utilise the retail revenues generated in the traditional console/PC  gaming market.  The new business models enabled by social gaming are proving to be more successful than the traditional retail model and may represent the future commercial model for the games industry . The virtual goods economy alone is expected to generate more than $1bn in revenues in 2009 and will grow by 60% next year – value accretion which will not go un-noticed across the multi-billion dollar console market. 

(UPDATE: Playfish has announced that it has just been acquired by Electronic Arts for US$275m – an incredible return for a two year old gaming company).

The growth of social gaming highlights a parallel shift in the structure of the market from a smaller segment of ‘hardcore’ gaming fans and console-addicts to a much broader global demographic of casual gamers motivated by short term entertainment value rather than immersive gaming experiences.  The focus of social gaming is the shared component of gameplay, and the interactivity between users (any of whom are friends) – the new adage for this industry is:

“You come for the gameplay, you stay for your friends”

The distribution channels for taking games to market has also shifted considerably in the last five years, particularly in the emerging markets – Electronic Arts announced recently that Fifa 2009 would be launched in Asia as an online-only game available to connected PC users.  Piracy concerns and a shift in gaming behaviour towards connected social gaming platforms has destroyed all remnants of retail-based console-game or PC game sales in South Korea, Japan and other parts of Asia.  The shift in approach to retail gaming, and recognition of the ongoing threat from piracy, replicates a shift in other parts of the software industry through cloud-computing – e.g. Google Docs Huddle, or Zoho replacing Microsoft Office and Quicken Finance. 

The shift to connected, dynamic (and ultimately) “social” software solutions – including entertainment products such as gaming – seems part of an ongoing socio-technical evolution which is reticent of 21^st century society.  Yet one facet of this shift in consumptive behaviour does not match the scale of change – the global consumer’s ability to pay for products and services in the new world.

More than 95% of all global transactions are completed with cash. 

Social gaming, virtual world economies, subscription-based MMOGs and even iPhone Apps require the purchasing consumer to have a bank account and / or credit card which enables electronic payments to the merchant or service provider.  Electronic (non-cash) payments continue to grow rapidly in the developed world and surpassed 250bn transactions in 2008, but more than 61% of these transactions are confined to Europe and North America.  The developing world represents more than 2/3 of the world’s population and is cash-centric ; the same is true for many parts of continental and eastern Europe where credit card ownership is very low (<10% on average).

Driving growth of these services requires alternative methods to turn cash into credit for virtual goods and services without requiring a bank account or credit card ownership – two service opportunities stand out:

• Gift Card / Store Card payments for virtual credit
• Mobile payments – linked to prepaid mobile credit / airtime

The success of iTunes Gift Cards represents a powerful business model for turning cash at a retail point-of-sale into virtual credit and digital music, games and videos.  Apple have launched ‘iPhone App’ gift cards for Christmas 2009 which highlights the trend to leverage retail sales to drive purchases of digital goods. iTunes distributes the cards via a wide network of retailers, with cards located near the check-outs, and generated more than $350m in revenues in the US in 2008. This revenue is highly accretive for Apple as the average spend per user for a $10 gift card is $12…and its a “use it or lose it” policy.

The social games and MMOG providers have been adopting this retail approach to drive sales and access new segments of the market; revenues are not cannibalistic as all sales must be turned into credit for the games. Moreover, social gaming communities such as Club Penguin are targeting parents and encouraging children to ask for gift cards to upgrade their characters and virtual rooms within the digital environment. The model is simple, well understood and can be utilised at any POS location, retailers benefit from footfall and consumers can purchase digital services with cash. Cards represent very low risk inventory for the service provider and the retailer as they are not a store-of-value until cash has changed hands and they are activated.  I envisage we will see a much wider range of multi-game and multi-content gift cards in the future, particularly in the emerging markets.

Mobile payments offer the greatest potential to revolutionise the payment industry for virtual goods economies and social gaming because of the scale of the installed customer base (4bn mobile users worldwide) and the array of payment options available to a mobile payment service provider.

Mobile payments for digital content is not new, Premium SMS has been used for a number of years to purchase ringtones, games and information (text) alerts but remains an unreliable and expensive payment method.  More modern services, such   Zoop and Obopay (acquired by Nokia in 2009), use SMS for payment confirmation and PIN entry to confirm external digital payments -   yet many of these services suffer because they are still reliant on access to a bank account or mobile subscription.

I believe a key model which will be adopted for payment for digital goods will be analogous to the MPESA service launched by Vodafone and Citigroup in Kenya. M-PESA allows mobile customers to transfer value via SMS which can be entered and redeemed as cash from local agents. The system replicates electronic banking payments using a simple application on the phone and a methods to redeem the cash – it is even available for international money transfers) which is invaluable to family members working abroad and sending money back home).  Social gaming companies which adopt this payment method will not only be able to tap into the cash economies of these developing markets, they are also utilising a payment mechanism which is inherently social – the mobile platform.

I would expect the next pahse of social gaming will combine mobile payments with mobile gameplay without the need for banks, credit cards or even the mobile operators – this is why Playfish is so important to EA.

The book investigates a number of themes regarding the key debate about the internet:

“What are the consequences of a digital economy where the target price is £0.00?”

I will not provide an in-depth review of the book here (after all, for Chris Anderson the sale of his book is not ‘free’ and he will wish that remains so), but I would like to comment on some of the implications for (social) media and our perception of content and services in the future.

Chris Anderson frames his debate using the Monty Python YouTube example: millions of pirated Monthy Python clips were available on YouTube and so the surviving members decided to launch a YouTube channel with high-quality clips from their archive, they also released this statement:

“We’re letting you see absolutely everything for free. So there! But we want something in return. None of your driveling, mindless comments. Instead, we want you to click on the links, buy our movies & TV shows and soften our pain and disgust at being ripped off all these years.”

Sales of Monty Python DVDs increased by 23,000% and reached the number 2 position on Amazon’s DVD charts.  Monty Python had released a significant quantity of material online for free to drive sales of physical media with much higher value…and it was incredibly successful.

This model is not uncommon:  Radiohead released their album “In Rainbows” as an honesty-box download for all fans that registered on their website – you could download it for free or pay the price you choose. They subsequenltly released the CD album and DVD box set (including a couple of additional tracks) via normal retail channels and paid-for digital channels (e.g. iTunes).  The statistics associated with this release are intriguing:

• 62% of people did not pay for the album
• the average price paid by fans was £2.90, but this was inflated by a hardcore of fans paying £3.90 to £5.80
• the CD release went straight to number 1 in the charts and sold 1.75m albums, 100k dvd box-sets and 30,000 iTunes downloads in the 1st week
• The tracks were played 17m times on LastFM
• The album was downloaded 2.3m times from BitTorrent (240,000 times on the day of the release)
• Radiohead made more money from InRainbows than their previous album

We can draw a number of conclusions from this, but we must also put into context the examples of Monty Python and Radiohead and their standing in the TV and Music industries:

• Consumers are willing to pay for media on the internet, but they are in the minority. Including torrent downloads of InRainbows indicates that at least 60% did not pay for it (and this is probably low)
• A dedicated fan base will provide money (income) to artists regardless of price – the difference between the casual and committed consumer
• The experience of downloading music on BitTorrent remains easier and more compelling than registering for a marketing-based website
• Physical Album/DVD sales can be supported by free distribution if the fan base is large enough and the content is compelling

The scale of the fan base is important in these two cases: Monty Python and Radiohead were global brands which used their ‘celebrity’ to drive massive publicity for these campaigns. Both groups have a very loyal and dedicated fan base.  Can the same be true for a young breaking artist releasing their first album?  The negative growth of music sales in the last year would suggest this is not the case…

The report by Matthew Robson for Morgan Stanley on the media consumption habits of teenagers in the UK demonstrates that the internet has fundamentally changed the way media is consumed by younger people:

• LastFM replaces Radio
• Music is free and comes from BitTorrent – it is listened to on mobile phones and iPods
• Games platforms including the Wii, Playstation and Xbox are used for communication (VoIP and IM) as much as gaming
• Teenagers don’t read newspapers – except for the Metro, because it is free…

We could argue that teenagers do not pay for content and will not pay for it online – but this also asks the question of whether they can pay for it?  Content-payments on the internet are based around bank accounts and credit cards – which are not available to most teenagers.  Try and use iTunes without either and you will quickly understand the problem.  Mobile phones offer a potential payment solution for teenagers (they can be topped up using cash) but mobile payments are not a widespread mechanism for buying digital content online.

I believe that part of the issue with ‘free’ on the internet is linked to ‘payment’ on the internet as well as the provision of consumer services which are both valued and valuable – Malcom Gladwell touches on this in his response to Chris Anderson’s book.  BitTorrent is free, but is also provides the largest database of digital content on the internet – without restrictions on media consumption by country, or specific hardware product (e.g. DRM).

I will explore some of the alternative models to ‘free’ on the internet in a susequent post, but i wanted to leave you with this: 

Its Chris Anderson’s new book, for FREE…

…but only available to customers in the US?!  It appears that some  media habits are still hard to change.