Just because the model was innovative doesn't mean it was a good idea. With a few months hindsight, did Google have a smart strategy? What does the Nexus One tell us about channels for new markets?
One explanation for Google's move is that it wanted to enter the $100 billion market for smartphones as a new source of growth. Certainly the revenue numbers may have looked enticing, but the industry is highly competitive and profit margins are thin (except for Apple's). Moreover, Google relies on handset makers like Motorola to license Android. The strategy would seem to undermine Android's long-term prospects with these manufacturers.
A final explanation is somewhat devious, but perhaps the most sensible: Google never intended to be a major player in handsets, or to create a viable direct channel. It used the Nexus One as a ploy to force operators to embrace Android and Google Search on other handsets so that they could compete with the device. Now that phones such as the Droid showcase Google's mobile capabilities as effectively as the N1, the company can gradually back away from the direct business model. If this was the strategy, it was a brilliant success. Oftentimes a new market pioneer won't have the visibility to pursue this route effectively, and it may lack Google's resilience had carriers and other handset makers come to view the company as a major threat. But Google is Google. It had the credibility, customer reach, and deep pockets to make this strategy work.
The moral of the story is that companies should choose direct channels for new markets only if they are pursuing a focused niche of customers (usually, this is a good idea). Companies will run big risks if they rely on third-party channels for part of their business while competing with those same channels in other endeavors. A direct approach might be effective for initially launching an offering for mass markets, but after the initial wave of customer enthusiasm fades channel conflict can be as real in new markets as in any industry. Google seems to have walked this tightrope with great skill.
This post was written by Steve Wunker. Click for more of New Markets Advisors' thinking on business models.