by Brad Moon | March 11, 2014 10:48 am
When Google’s (GOOG) Motorola Mobility division announced Project Ara — a platform for creating modular smartphone hardware — there was considerable interest in the concept, followed by the suspicion that this might be more theater than reality. After all, while a modular smartphone that users could upgrade by the component instead of having to buy a whole device every year or two sounds great (if you’re a consumer), it could wreak havoc on smartphone profits. And while Google might be happy to see Apple (AAPL) and Samsung (SSNLF) take a hit, its own handset division would suffer just as badly.
But when GOOG unloaded Motorola Mobility on Lenovo (LNVGY), suddenly it had nothing to lose by disrupting the existing smartphone sales model. The recent announcements by Google that it’s taking over Project Ara from Motorola and holding not one, but three Project Ara developer conferences in 2014 (the first in April) sends a clear signal — Google is actually serious about this.
And this ambitious initiative could shake up the handset space in a very real way.
We’ve written before about the jostling going on between GOOG and Samsung. Google owns Android and gives the mobile OS away for free to smartphone manufacturers. This strategy ensures its own services (like Google Maps, Search and Google Now) are front and center on these smartphones, driving Google’s mobile ad and search revenue.
Samsung was great for Google several years ago when popular smartphones including its Galaxy S III helped push Android into a commanding lead over competing platforms like iOS, Microsoft’s (MSFT) Windows Phone and BlackBerry (BBRY) — devices where Google services don’t get the same priority placement. However, Samsung became too big. Over 63% of mobile devices running Android globally are made by Samsung. That’s a problem for GOOG, because Samsung likes to overlay its own user interface on top of Android, it offers its own app store for some devices and it’s experimenting with replacing Android altogether by moving the new Gear 2 and Gear 2 Neo smartwatches to its in-house Tizen operating system.
It’s bad enough that Samsung has the ability to mess with the placement of Google services on its Android smartphones, but what if SSNLF decided to ditch Android altogether, or pull an Amazon (AMZN) and develop its own version based on the open-source base code? If those Galaxy smartphone owners stick with Samsung instead of moving to an alternate Android device, then a huge chunk of Google’s Android user base could essentially be lost.
This would be bad news for a company dependent on ad revenue that’s increasingly generated by mobile devices.
GOOG has few weapons to defend against that scenario, but Project Ara may just be the most effective.
Under the current smartphone business model, manufacturers like Samsung and Apple release new models every year. They rely on some users — the ones who must have the latest and greatest — to buy that new model every year. Many more are on contract with wireless carriers and upgrade to a new device every two years. Whether the consumer pays for the new hardware upfront, amortizes it over one to two years or has it subsidized as part of a contract, that new smartphone is still expensive: $650 or more shelled out every one to two years.
Project Ara provides a hardware framework for designing a modular smartphone. A Google-branded “endoskeleton” is the base and everything else is added as components that plug in to this base.
Of course, it runs Android.
Instead of having to replace their smartphone every year or two, consumers would have the ability to upgrade it component by component. If you wanted to take advantage of the latest new CPU, you could swap it out. If a new higher-resolution camera became available, that wouldn’t have to mean buying a whole new smartphone.
Under the Project Ara model, consumers would have far more choice in personalizing their smartphones to meet their individual needs too, going way beyond the customized case options Motorola is currently offering. For example, someone wanting a high-powered device with a relatively low price could balance the latest CPU’s cost by choosing a cheaper camera module, opting to skip the fingerprint scanner and installing minimal storage to keep the initial price tag down — after all, they could always add the components later. A road warrior could opt for a smaller display module and dual batteries.
The Project Ara concept takes advantage of smaller-scale manufacturing made possible through technology like 3-D printing, while also offering the big industry players the ability to plug in. Google sees modules being sold through Google Play, just like apps.
And just like the app market, once third-party developers sign on, the potential opens up for components with unique capabilities that are unlikely to show up on mass-market smartphones.
Staying on the app market analogy, those smaller developers are great — but the big players have to participate too if Project Ara is to be a success. Just as an app store that lacks a Facebook (FB) or Twitter (TWTR) app is in trouble, if GOOG fails to convince the likes of Qualcomm (QCOM) to make components, that modular smartphone is going to be a tough sell.
If the manufacturers that make some of the most important “guts” don’t play along, this ambitious initiative will be a nonstarter. You need QCOM to sell Snapdragon chips in a compatible component form factor, Sharp needs to make displays, and so on. No one will buy a modular smartphone using an unknown CPU.
Could third parties step in for the core components? Sure … but they’d be expensive. There’s a significant barrier to entry for chip fabrication, for example — and these imaginary third-party players will want to make a profit too. And they’d have a hard time guaranteeing supply.
Regardless of who comes to play, if GOOG can see Project Ara to fruition, it could disrupt the entire smartphone market, neutralize the Samsung threat and ensure that Android — pure Android with all Google’s services, not a forked version or one watered down by manufacturer user interfaces — remains the world’s dominant mobile operating system.
If all this still sounds like science fiction or fantasy (despite the Project Ara developer conferences taking place this year), think again. ExtremeTech points out that Google has a working Project Ara prototype … and it aims to begin selling the endoskelton (frame) as soon as 2015 for $50. Clearly, GOOG is serious about smartphone disruption.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/03/project-ara-goog/
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