Google 'ready to take on Apple iPhone next year'

As shares and earnings soar, the search engine eyes a new market. By Tony Glover
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Google's share price last week broke through the $600 (£300) ceiling and looks set to rise even higher, with a strong set of results expected this week and the company poised to enter lucrative new markets.

Not content with dominating the internet, the search giant is now believed to be planning to take the mobile communications market by storm. Analysts at Lehman Brothers predict that when it unveils its third-quarter results on Thursday, Google's revenues will rise 8.6 per cent quarter-on-quarter to $2.98bn with earnings before interest, tax, depreciation and amortisation (Ebitda) of $1.8bn. For the full year 2007, Lehman predicts a 58 per cent year-on-year increase in turnover to $11.56bn with Ebitda of $7.03bn, representing a year-on-year rise of over 52 per cent. The investment bank has raised its target price for Google shares to $714.

Lehman analyst Douglas Anmuth believes that Google will launch a mobile phone in February next year that will be similar to the recently launched Apple iPhone in that it will have "an oversized screen perhaps around 3in diagonal and with touch display" plus WiFi capability. Google's main differentiator will be on price – its phone is expected to sell at a fraction of the $400 iPhone.

According to Mr Anmuth, the device will be a simple "plain vanilla" smartphone that can be manufactured for $120-$160. But he adds: "We believe a Google phone could be marketed at a price point below $100, and potentially even be free."

The incentive for Google to offer a free phone is the online advertising revenue the company could generate with an internet-enabled mobile device. Lehman Brothers also thinks it probable that Google will follow in Apple's steps by adopting a revenue-sharing model with the carriers, and predicts that Orange will be the most likely mobile operator partner for Google in Europe.

In the US, Lehman sees Sprint and T-Mobile as more suitable partners than AT&T and Verizon. It is thought Google might bid for a slice of the spectrum in the US next year. The Taiwan-based HTC is believed to have already built a prototype mobile phone for Google.

According to Lehman, Google is building a Linux-based mobile operating system which is likely to include Google applications such as a search facility, maps, Gmail, Google Talk and Calendar.

But not all analysts agree that Google is committed to making its own mobile phone handsets. US-based investment bank Piper Jaffray says: "Google is likely developing a mobile operating system, but it is unlikely that it will begin manufacturing phone hardware."

According to Piper Jaffray, Google's mobile phone operating system will compete directly with Microsoft's Windows Mobile system, and could be unveiled before the end of this month.

Google has been making acquisitions that point to a mobile phone strategy. In 2005, it acquired Android, a software development company specialising in mobile operating systems that highlight the location of the user.

But Google still has a challenge ahead in the internet video space, where it is currently facing considerable criticism from the advertising industry concerning some of the content being displayed on the YouTube social networking website. According to Marketing magazine, some of the UK's biggest digital planning and buying specialists have rounded on Google's plans to charge for ads on the site.

Advertisers are reported to be wary of placing their brands against content that may include clips from criminal gangs or other unsavoury sources. A Google spokesman said the company is responding to concerns by allowing users to flag content they feel may be inappropriate.