The Economics of a Free Google Phone

Illustration for article titled The Economics of a Free Google Phone

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.




Lets just make a few rough cut economic calculations.Google had revenues of 5.94 billion last year, mostly from ad revenue I'm assuming. How many people use Google, worldwide? Under any reasonable assumption Google's revenue per person is much much lower than $200.

To even break even on providing one person with a NexusOne for free, Google would need to see marginal revenue increase by $200 from that one person. While that person would be providing that extra revenue for a long time, to a company like Google, cashflows in later time periods are heavily discounted in any capital outlay decision. To rephrase that, the nominal additional revenue received in years 2 & 3 would have to be much higher than just $200. This of course completely ignores the fact that in a few years people will toss out their NexusOne phones for a newer shinier phone. Will Google replace that one for free too, or are they hoping to have folks so sucked into their platform that they'll gladly pay at least cost for a new phone?

Google doesn't even make remotely close to $200 off of every person that uses their searches now. If we say that 250 million people use google (which that number is far too low), then Google is making roughly $23.76 per person in revenue per person using their searches, and hence drawing their ads. I know that Google gets more revenue by drawing certain demographics, but how could Google ensure that people likely to click through to ads end up with a free phone, and do those high revenue people even generate $200 in revenue? That seems like a dubious proposition.

How much marginal profit (not just revenue) does Google receive from one more person using their services, and thus reading their ads through a mobile platform? I seriously doubt its enough to justfiy a free phone.

They may have the money to distribute the phone for free, but just because they have piles of cash, doesn't mean they throw out capital at a loss, that kind of thing upsets the shareholders.