Contestable Markets - Google launches the Nexus One

Google has launched the Nexus One a “super phone” designed to challenge the established dominance of smartphones such as the iPhone, Blackberry and Palm Pre. For £330 buyers anxious to own a Nexus One without locking themselves into a lengthy contract with one of the major mobile phone operators can have a phone delivered that can run on any network.

Lock-ins are a common feature of mobile phone contracts. With the Nexus One, consumers in the USA can buy the new phpne for $179 but only if they commit to a two-year service contract with T-Mobile USA. Vodafone will be the first carrier to subsidise Google’s new phone but it will not have exclusivity.

The marketing of Google’s new phone - which runs on their Android operating system - has centred on it’s noise-cancellation technology, voice enabling on all text boxes, a 3.7in touch-screen and a 5-megapixel camera with flash. Google says the phone’s battery gives it up to 7 hours talk time, 250 hours standby and 5 hours of browsing use. But the iPhone (for the moment) has many more downloadable applications - only 20,000 apps are compatible with Google’s mobile-operating software Android.

Why is Google becoming a manufacturer and retailer of mobile phones? The reality is that Google’s revenues are driven by internet advertising and it must act to protect and grow these revenues as more people become able to surf the web from mobile devices and crucially use these devices on a regular basis during the day to access social media platforms such as Facebook and Twitter.

The Nexus One is being manufactured by Taiwanese electronics manufacturer HTC.

This is a good market to look at when considering the concept of a contestable market. The market for high-specification mobile phone devices is becoming increasingly congested. Consumer demand is affected by many factors including the price set for the phone and the cost of a contract. But network performance, functionality, speed and reliability of access, product design and the length of battery life are all important non-price factors influencing consumer preferences. Price is significant and smart-phone manufacturers are fully aware of the need to attract heat-seekers or ‘early adopters’ – consumers who are willing to pay a premium price for being among the first to be seen using a new piece of kit.

For a contestable market to exist there must be low barriers to entry and exit so that new suppliers can come into a market to provide fresh competition

Despite the obvious barriers to entry for new participants, the smart-phone market is increasingly contestable even though it is dominated by a handful of major players. The increasing use of open-source software has helped to make the battle for market dominance a more intense affair. Google’s entry into the market is a classic example of this.

Background reading:

Apple moves into advertising as Google goes for phones

Google’s rival to Apple iPhone hits the market

Google steps into online retailing with launch of Nexus One, new ‘superphone’