The Customer Is Always Right? B2C and Google the Phone-Maker

The continuing coverage of Nexus One support and whether Google (News - Alert) was prepared, leads one to a larger discussion on the DNA of a company. Specifically, whether Google has what it takes to be a hardware vendor, with all that it entails regarding customer handholding, returns, and the retail channel.

 

Some companies excel at the complete user experience (device, store, support), and in the smartphone space, Apple is probably the best example of this. Sort of like Craftsman for hardware. A company can’t just ‘dabble’ in hardware and call it a day. They’ve got to establish a complete device ecosystem, and though Google now offers direct support, that is only part of the equation.

 

Microsoft (News - Alert) is another example. They produce the Xbox, and are rumored to be on the verge of introducing a next-generation Sidekick-type device, Pink. No need to mention Surface and Courier, two science projects. Gartenberg, in a recent column, made the case that Microsoft should take a long hard look at their hardware business with a view to strategy and profitability, and decide whether they really want to be a player in this space. Or, should they just stick to their demonstrated strengths in software. Hardware requires specialized support, as well as a retail channel and an understanding of hardware margins.

 

The many-faceted Google, however, is an interesting case. Unknown to many, they do market hardware – the Google Search Appliance – and by all accounts do a good job of it. In fact, we purchased one of the earlier models at my previous employer, and were quite pleased with installation and performance. But the GSA (News - Alert) is strictly B2B. Does Google want to be a B2C hardware company? Will they hang their shingle across from the Apple Store on Santa Cruz Avenue in Los Gatos? On a side note, I know some folks at Cisco (News - Alert). About two years ago, there was a bunch of talk about Cisco retail stores, selling Linksys routers and whatnot. The whatnot is what confused me. VoIP for my home office? Telepresence for the TV room? I think not. I’m also skeptical on Microsoft’s concept store, though I wish them well.

 

Does Google also want to tackle the B2C margin issue? Well-run software companies traditionally have gross margins in the 75 percent range and above. It is very different in the consumer hardware space. Depending upon the market, premium vs commoditized, margins may range from 20 percent to 60 percent (or more if lucky... ask any LCD TV vendor outside of Vizio or Westinghouse). For example, Apple, even with cutting-edge hardware such as the iPad, expects margins approaching 60 percent on the 3G models.

 

According to iSuppli’s teardown estimates, they’ll get this due to internal sourcing of key components such as the processor. Can Google, with a Nexus One installed base of 100K, demand the same from its partner HTC (News - Alert)? Will they build the necessary volume over time, and even so, is there an incentive to purchase via Google as opposed to the operator? Net-net, does Google have the DNA to build the support ecosystem to take its place as a top-tier B2C hardware retailer?