T-Mobile wagers deal with Google

The smallest of the leading U.S. cellphone operators, T-Mobile, appears to be the one making the biggest bets.

Perhaps its most daring is its most recent. The Deutsche Telekom AG unit said it will release a phone next year based on Google Inc.’s advanced new software, wagering that it has more to gain than to fear from a partnership with the Web giant.

Most other U.S. carriers such as AT&T Inc. and Verizon Wireless have so far stayed on the sidelines, leery of Google’s push to expand its presence on mobile phones. Those companies fear it could snatch away future revenue from mobile advertising and loosen their ability to control what phone features customers can access. But T-Mobile USA Inc. has aggressively pursued the Google relationship, seeing it as a way to improve the basic operating software on its phones and offer popular Google-branded applications like its Internet search engine and Google Maps.

”Certainly Google is a name consumers trust,” said Cole Brodman, T-Mobile’s chief development officer. ”There are some things they do that are best-in-class.”

It is likely that T-Mobile will be the first U.S. carrier to bring a Google-powered cellphone to market. The two sides have been working together for several months to develop the specifications for a new device, which would be powered by the Google-backed Android open operating platform. The companies have declined to name the manufacturer of the phone, but most people in the industry suspect it is Taiwan’s HTC Corp. The effort puts T-Mobile ahead of Sprint Nextel Corp., the only other U.S. carrier among the 33 partners Google announced last week in its push for open operating platforms for cellphones.

Cellphone carriers are always trying to update their handset lineups with snazzy new devices meant to lure customers away from the competition. But T-Mobile, of Bellevue, Wash., is fundamentally rethinking how it builds phones – with an eye toward making high-end Web and multimedia features available on cheaper phones – and the business models it uses to make money off them.

Beyond the Google project, the carrier has been willing to break with industry orthodoxy. It even has tinkered with the way customers are billed, something long sacred in the wireless industry. This summer, T-Mobile became the first major U.S. carrier to offer phones capable of rolling calls from a cellular network to Wi-Fi networks. Because callers don’t use up ”minutes” while they are on Wi-Fi networks, they can sign up for cheaper monthly plans. An added benefit is that Wi-Fi networks give customers better cellphone coverage indoors, which means people can feel comfortable ditching their home phone. The catch: The Wi-Fi service costs $20 a month.

Standing out from the pack is critical for T-Mobile. The carrier was left behind in the frenzy of mergers that created the two telecom industry behemoths, AT&T and Verizon Communications Inc. Those two companies are now offering customers a bundle of telecom services, including mobile phones, Internet access and TV. T-Mobile’s fortunes, meanwhile, rest purely on wireless. The company is growing quickly and has nearly 28 million customers, but it is still less than half the size of AT&T and Verizon Wireless, and adding new customers is only going to get tougher as the market matures. Some 80 percent of Americans already own a cellphone.

T-Mobile’s initial talks with Google began about two years ago when the Internet company acquired a Silicon Valley start-up called Android Inc. and took on its co-founder, Andy Rubin. Mr. Rubin had a history with T-Mobile, having helped to develop the carrier’s popular Sidekick mobile device through a separate venture.

As the discussions ramp up, the wireless carrier faces some challenges. It must ensure that the openness of the Android platform doesn’t compromise customers’ privacy or make their phones more susceptible to hacking and viruses. Android will make it possible for independent developers to create a range of new applications using information they normally don’t have access to, including a user’s geographic location and communications history. T-Mobile says it will screen third-party applications to protect customers’ security and privacy.

T-Mobile also has to negotiate with Google a fair share of ad revenues from new mobile applications and protect its established relationships. For example, T-Mobile selected start-up Medio Systems to power a service on T-Mobile’s network that lets customers find ringtones and other mobile content and look up local businesses partly because the deal lets T-Mobile keep a large share of the revenue. Mr. Brodman said Medio will continue to have a role at T-Mobile, regardless of any partnership with Google. Medio Chief Executive Brian Lent says he hopes T-Mobile will use its search service as a base and add on the Web-searching functions of Google or another major provider. ”We are giving them the core infrastructure to integrate Web search results with all the other results we already provide,” he said.

The Google initiative is part of a new strategy at T-Mobile to be involved in the creation of phones from the ground up. Usually carriers pick from a slate of prototypes created by handset makers and customize devices to fit their needs. In the case of the iPhone, Apple Inc. designed the phone with minimal input from AT&T. T-Mobile, by contrast, wants to insert itself in the process early, much as Japanese carriers like NTT DoCoMo Inc. ”I’ve always been jealous of how they can come to market with such a tightly integrated product,” Robert Dotson, T-Mobile USA’s chief executive officer, said in an interview several weeks ago.

Late last month, T-Mobile unveiled the ”Shadow,” an HTC device with a slide-out keypad that runs Google rival Microsoft Corp.’s Windows Mobile operating system. T-Mobile was in on the Shadow’s development from scratch. The carrier asked Microsoft to make a series of changes to the Windows platform to make it easier to use for consumers – including playing down lots of business-oriented applications, such as spreadsheets, and making it easier to access email services provided by Microsoft competitors like AOL and Yahoo. The phone was launched on Halloween for $149 with a two-year contract and rebate.

Mr. Dotson says the carrier hopes that by getting involved in phone development at the start it can avoid building smartphones that stuff in lots of features that are too confusing for ordinary consumers.

”At some level, we’re always making significant trade-offs in what the consumer experience would be in the marketplace,” he said. ”For the first time, I don’t believe we’re making those trade-offs.”

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