The Economics of a Free Google PhoneS

We've all been a little breathless over the idea of The Google Phone, and that everything could change (some of us, anyway). But, wait, you say, Google can't just give away a phone like that. Well, they could.

Let's just start with the numbers. Google has a gigantic $22 billion pile of cash. Just sitting there. It had profits of $1.64 billion last quarter, on revenues of $5.94 billion. It has a lot of money.

Now let's look at the Nexus One. There aren't any good cost breakdowns of the closest phone to it, the Droid, but iSuppli's teardown pegged the iPhone 3GS at a build cost of about $180 to build about six month ago, so it's not a bad assumption that today, the Nexus One would run around $200, maybe a little more. Selling the Nexus One direct to consumers at cost—in other words, the exact same amount it costs Google to build them—by definition costs Google nothing. Even if Google were to take a massive $100 hit on every phone to sell them at $200 (or less) and wanted to push 5 million of them, it would cost Google $500 million. That's a pretty tiny of chunk of $22 billion. I mean, Sergey Brin spends millions on companies without Eric Schmidt even noticing. Point being, Google, even in the most drastic scenario, doesn't need a phone company to subsidize the Google Phone.

Now, let's look at how Google makes all that money, considering all the crap they give away for free, like email, finding stuff for you, browsers, turn-by-turn navigation and, lately, operating systems. Advertising. $5.75 billion of its revenues—97 percent—came from advertising. Whenever you go on the internet, essentially, Google makes money. It's why they give away all that stuff, because, they want you online a lot.

So, that doesn't quite explain why Google would want people to have a Nexus one that badly. Until you look at stuff like Morgan Stanley's 424-page tome, 'The Mobile Internet Report,' which says things. Things like mobile internet will be "at least 2x size of Desktop Internet" and that smartphones will beat out notebook and netbook shipments next year. And remember that by purchasing AdMob, Google became the biggest mobile advertiser on the planet (that's with just 24 percent marketshare, meaning they have plenty of room to grow and conquer). It works out even better for Google if you're using an Android phone, because it's completely tethered to Google services, driving you to the internet that much more. (Both on your Android phone and your big computer.) Bottom line: More people using smartphones, especially theirs, going on the internet, makes Google money not just immediately, but long term, since you're not going to go back to a dumbphone.

And that's not even considering some of the more offbeat rumors or speculation, that'll it be subsidized by ads built into the phone, or go full-blown VoIP (Google just bought a VoIP company called Gizmo5) instead of voice plan, on top of using a weird online rebate through Google.

We're just saying, it's totally reasonable Google can sell the Nexus One for cheap, without help from the carriers, and it's not so crazy even, for Google to give it away, just like turn-by-turn navigation. That's what might be worth getting a little breathless about.