Google recently entered the cell phone arena by introducing a platform that will serve as an operating system for mobile phones. This system, named Android, will allow independent software developers to write applications for cell phones similar to the way software companies write programs for personal computer operating systems such as Windows or Linux. Aside from this development being an incredible boon to the consumer in that it will unleash additional capabilities, we feel that this model will reduce carrier margins and threaten Apple's nascent opportunity with the iPhone.

The cell phone business model is currently based on proprietary standards that are closed and limit innovation and consumer choice. The infrastructure/chip companies such as Qualcomm and Texas Instruments develop systems to transmit wireless voice and data and then sell chips to the handset makers. These handset makers, such as Motorola and Samsung, then design and manufacture phones which take advantage of the features embedded within the chips on which the phones are based. However, the carriers (with AT&T and Verizon dominating the US market) subsidize the handset cost and restrict the features available to the end-users. The carriers want all services to run through their networks. For example, such items as ring tones remain stubbornly expensive since the carriers require individuals to download those tones through their services.

Apple began to circumvent this process through its iPhone which was launched earlier last year. AT&T exclusively provides cellular services to the iPhone; however, services such as Apple’s music service, iTunes, are delivered directly to the consumer without AT&T’s interference.

Apple envisions a similar role for the iPhone as the Mac personal computer. Apple designs intuitive software and aesthetically pleasing hardware. The software is typically bundled into the hardware and Apple sells the hardware at a premium price. Apple’s environment is proprietary and closed; Apple writes the software itself and designs the hardware and does not license either to the broader technology community.

More than twenty years ago, Apple competed for the desktop market against Microsoft and the numerous PC manufacturers. Initially, the Macintosh held its own after establishing a stronghold in the educational market since its computers were easier to use. However, Microsoft PCs equaled Macs on the software side and PC makers such as Dell and Hewlett Packard were able to sell far more powerful PCs for an equivalent price point. Apple never licensed its software to various manufacturers or software developers and its market share was driven into the single digits.

It appears that history is repeating itself and that Google is outflanking Apple similar to how Microsoft dominated Apple earlier. Google’s Android will be open to the larger manufacturing and software communities. Software developers will be able to develop third party applications which will extend the functionality of phones beyond where slow-footed carriers would if left to their own devices. Google is also licensing Android to the phone hardware makers so that they can develop innovative phones that take full advantage of the technology built into sophisticated digital chips.