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Why a Google Phone Isn't Great for Shareholders


In the short term, it's all about the margins.

For years, as Google (GOOG) developed its Android mobile operating software, there was speculation that one day the company could sell a Google-branded mobile phone.

No one took it seriously at first, but as Android-powered phones like Motorola's (MOT) Droid hit the market, the speculation started to seem less crazy and maybe even likely. And last weekend, the speculation reached a fevered pitch with a corporate blog post that -- true to Google's oblique PR practices -- didn't mention the word "phone" even once, but mentioned "dogfood" six times.

Here's the part that got the mobile world excited: Google came up with "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."

It was less proclamation than trial balloon, but it generated a storm of discussion. A Google phone -- reportedly named the Nexus One -- would be unsettling for Apple (AAPL), frustrating for Motorola, and intriguing for the growing community of mobile-app developers. But what does it mean for Google investors?

For the next year or so, it won't likely translate to anything good. Much of the news coverage of the Nexus One has focused on strategic concerns, namely the tensions that a Google phone could cause with mobile phone manufacturers.

This argument is valid, but misses the bigger threat. Google's open-source Android is the best thing to come Motorola's way since the once-stylish RAZR phones. Switching to, say, Windows Mobile (MSFT) means swapping Android for a mobile OS with a crumbling market share. Besides, Motorola knows its edge will be in how it uses Android -- its work with Moto Blur is an example of that.

No, the real concern for Google investors was highlighted by some Wall Street analysts. Imran Khan of JP Morgan argued in a note that Google's margins could take a hit if it sells a lot of phones: "While, long term, it could help revenue and profitability, we are concerned that it can impact the margins in the near term," Khan wrote.
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