Investors Are Right to Be Skeptical of Google's Phone Launch
With the addition of the Nexus One, Google is now betting across the board in the emerging mobile arena. Along with its own product, Google has partnerships to push its Android mobile operating system with a host of other phone makers and carriers – partners it will now be competing against.
And while some see Google positioning itself for an eventual end run around the iPhone by establishing an open, far-flung mobile platform -- much in the way Microsoft (MSFT) beat Apple for the PC market decades ago -- the approach is riddled with major hurdles. High-end phones tend to be fashion accessories as much as functional devices. That's why Apple is able to deliver blockbuster iPhone sales despite running on AT&T's (T)crumbling network known for dropping calls and Web browsing at a crawl.
Google's scattershot approach will likely only confuse customers. And the goodwill the company has accumulated by creating the best search engine on the Web could be be lost as its brand gets hopelessly diluted when it comes to phones. What is and isn't a Google phone? And after a while, will anyone really care?
Nor is it clear that Google will trump rivals on functionality. Apple's iPhone already has loads more applications developed for it, and Research in Motion's (RIMM) BlackBerry is hard to peel from the hands of its corporate users.
Still a Bit Player Outside of Search
Of course, Google sees itself essentially reinventing the wireless world with its forceful entry. But the once-enticing story of the search giant revolutionizing an industry by introducing the "Google way" has lost massive credibility among investors after the very public bloody noses the company has suffered on many other fronts.
Just two years ago, when Google was first mulling its entry into mobile, CEO Eric Schmidt would talk up the prospects of Google eventually ringing up $100 billion in revenue. The $16 billion in revenue the company clocked in 2007 may have been far shy of the lofty target. But massive growth lay ahead as Google bet heavily on upending TV, newspaper, display and radio advertising, investors were told.
After years of trying, though, Google remains a bit player in most of those markets -- if it hasn't scrapped its efforts entirely as it did with radio ads. And investors understandably want to see more progress than promises of supposedly shaking up yet another industry.
Needed: Concrete Progress
That skepticism is reflected in the company's stock price, which still hovers around the $600 mark it first crossed two years ago. At 23 times forward earnings, Google trades at a discount to other Internet peers like Yahoo (YHOO) and IAC/InterActiveCorp. (IACI).
But investors should continue to wait for Google to make concrete progress in -- not just another splashy entry into -- a market beyond search before getting aboard.