Blin: How will the 'X Phone' affect Google's relationships with Android OEMs?

Julien Blin

With the Google I/O conference right around the corner (May 15-17), there has already been much speculation about what Google is likely to announce at the event.

One of the biggest announcements is likely to be the introduction of the long-awaited Google X Phone, rumored to be manufactured by Motorola Mobility and scheduled to launch in the second half of 2013. Following Google's acquisition of Motorola in May 2012, the Google X Phone would be the first Motorola smartphone built under the search giant's supervision. This flagship device would be a key stepping stone on Google's quest to create a best-of-breed Google-branded mobile devices ecosystem.

All of which raises an important question: Could the Google X Phone affect Google's relationship with leading Android smartphone makers?

HTC, LG Electronics and Sony Mobile Communications could be the most affected by the Google X Phone in the short term.

Sony Mobile and HTC could be the most impacted by the potential success of the Google X Phone in the near term. Both companies need to make a comeback in the highly competitive smartphone market, especially at the high end.

HTC is currently making a big bet on the HTC One, which has received positive reviews. Although the Taiwanese company posted disappointing first-quarter results, it now expects revenue to increase significantly in the second quarter. So if the Google X Phone starts gaining traction in the second half of 2013 and early 2014, and takes share away from HTC, the relationship between Google and HTC could be impacted.

Sony, which is making a big push in the smartphone market with the recent introduction of new Xperia smartphones and plans to get back to profitability in its 2013 fiscal year, could also be one of the biggest losers, as the Google X Phone would likely directly compete with these new Sony devices.

Lastly, LG, which is rumored to be making the Nexus 5, set to be introduced at Google I/O, and recently posted solid year-over-year growth for its handset sales, could also be impacted as the South Korean OEM is still in a transition phase in the smartphone market.

Huawei and ZTE are well positioned to compete on price with the Google X Phone.

Should Google/Motorola decide to competitively price the Google X Phone--say, for a $99 retail price--Huawei and ZTE, like many Chinese OEMs, are better positioned than HTC, Sony, and LG to compete on price due to their low-cost strategy in the smartphone market. Huawei and ZTE are famously known for supporting razor-thin margins, which allows them to price their smartphones very aggressively. Huawei and ZTE also make their own processors, a key competitive advantage because it allows them to lower the BOM cost of their smartphones.

Google and Samsung Electronics still need each other in the near term to continue to be successful in the smartphone market.

In my view, Samsung is unlikely to be impacted in a big way by the Google X Phone, at least not in the near term. Samsung is an established leading smartphone vendor, has a stronger brand in the smartphone market than Google and Motorola, and is focused on improving its services offering on top of Android, which should help improve the stickiness of its smartphone offering over time.

Moreover, even if the Google X Phone starts to gain traction and impacts sales of Samsung smartphones, Samsung is currently too dependent on Android's strong app ecosystem and current momentum to move away from it overnight.

Similarly, Google knows that it needs the continued support of Samsung, which has been a key driver for Android in the past few years. The search giant cannot afford to lose a partner that plans to ship over 400 million smartphones this year, the vast majority of which use Android. That's nearly 50 percent of all smartphones we forecast will ship worldwide this year in Infonetics' fourth-quarter 2012 3G and 4G Mobile Broadband Devices and Subscribers report.

Bottom line

Today OEMs such as Samsung, Huawei and ZTE are better positioned than others to mitigate the impact of the Google X Phone on their smartphone business.

Although Google and Samsung both need each other today, they are also pursuing alternatives to prepare for the future. Over time, depending on how much traction Google branded Motorola smartphones gain, Samsung could decide to progressively move away from Android by either creating a forked version of Android or focusing more on competing mobile operating systems like Tizen or Microsoft's Windows Phone. Currently, Tizen--the open-source operating system backed by Samsung, Intel and others--looks like the most logical alternative for Samsung. However, while not yet ready for prime time, as Tizen's app ecosystem starts to grow, and if Samsung continues to sustain its lead in the smartphone market, this could become a threat for Google.

Ironically though, in the long run, the Google X Phone could potentially benefit and even strengthen Google's relationships with some Android OEMs. If Google ends up improving the future versions of Android (for example, with better software and hardware integration) through its hardware efforts and these developments become available to Android OEMs, it could be a win-win situation for both Google and its partners.

Only time will tell how much impact the Google X Phone will have on Google's relationships with its OEM partners, but today, there is one certainty: Google and its Android partners still need each other to continue to be successful in the smartphone market.

Julien Blin is Directing Analyst for Consumer Electronics and Mobile Broadband at Infonetics Research. A mobile device expert formerly of Samsung, IDC, Ovum and Wedbush Morgan Securities, Julien now authors mobile, broadband and pay TV research and advises Infonetics clients. He can be found on Twitter @jblin.