The smartphone wars: What Gass&eacute;e has to say
<p>This is interesting.  Jean-Louis Gass&eacute;e, former head of Be Inc. and now a venture capitalist, has spotted what may be another prong of Google&#8217;s strategy; break the carriers&#8217; term-contract system by driving the price of smartphones so far down that customers don&#8217;t need  or want a carrier subsidy.</p>
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<p>Here&#8217;s what he says:</p>
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The great news is Google wants to disintermediate the carriers. How do they do that? By working with the Android army of manufacturers and targeting the $89 price point. Once there, carrier subsidies are no longer needed, consumers are free to move from one carrier to another as they get a better deal, or as they buy a new gadget without having to beg for an ETF (Early Termination Fee) exemption.
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<p>I&#8217;m not sure why Gass&eacute;e thinks $89 is a magic price point, and this paragraph appears in a post labeled <a href="http://www.mondaynote.com/2010/06/20/science-fiction-nokia-goes-android/">Science Fiction: Nokia goes Android</a>, but no matter.  Qualitatively, Gass&eacute;e is certainly on to something.</p>
<p>There has to be <em>some</em> price point below which subsidies become unnecessary and the term-contract system collapses.   It may not be $89, but it&#8217;s probably bracketed by $50 and $100.  Maybe Google thinks the handset manufacturers really can push handset prices that low if the hardware people don&#8217;t have to pay for smartphone OS development.  It may be right; the underlying question is probably whether smartphones have any components that aren&#8217;t following a Moore&#8217;s Law cost curve.</p>
<p>(Until recently, I would have said &#8220;Aha! The display!&#8221;.  But it turns out the price of LCDs was being held artificially high by collusion among major manufacturers; the ring got busted in early 2009, and lawsuits are continuing.)</p>
<p>Well before we reach the point at which the term-contract system collapses, the declining bill-of-materials cost on a smartphone will put a hard squeeze on the amount carriers can afford to spend on software development &#8211; yet another strike against carrier skins.  This reinforces my conclusion that the time when crippling Android with customizations remains a viable strategy is limited.  It may be over already.</p>
<p>Gass&eacute;e emphasizes an important fact that I first wrote about nearly two years ago, around the time the G-1 first shipped.  The drama with Apple is in many ways a distraction; Google&#8217;s medium-term strategic goal is to break the cell-carrier oligopoly &#8211; smash their profit margins and commoditize their function. Gass&eacute;e doesn&#8217;t note that longer-term than that they&#8217;ll have to take on the fiber/cable oligopoly as well, but he is certainly not stupid enough to have missed this.</p>
<p>Gass&eacute;e has spent a lot of time thinking about which way Nokia&#8217;s going to jump once it becomes apparent that its software strategy is a fragmented mess.  Like Piper Jaffray (and now me) he sees a move to Android as a strong possibility, but he raises another possibility.  What if Stephen Elop, the Microsoft alumnus they&#8217;ve tapped as CEO opts for Windows Phone 7?</p>
<p>I don&#8217;t think it will happen. It would combine all the present business disadvantages of Android with the disadvantages of a closed-source codebase controlled by someone else.  Nokia&#8217;s engineers would scream bloody murder, and Nokia&#8217;s stockholders would probably tar and feather Elop and ride him out of Finland on a rail. </p>
<p>Still, the possibility can&#8217;t be completely ruled out.  Large companies have certainly done more blatantly self-destructive things before.  The smartphone wars have been aspiring to the condition of low comedy ever since Steve Jobs said &#8220;You&#8217;re holding it wrong!&#8221;; a mad fling between Nokia and Microsoft would take them straight to op&eacute;ra bouffe.</p>
