Report: Google phone coming soon

A move into the hardware business would be a huge shift for the Internet search giant - and promises to turn the cell phone industry on its head. Fortune's Michal Lev-Ram reports.

By Michal Lev-Ram, Fortune reporter

SAN FRANCISCO (Fortune) -- Google built its empire on the search engine business, and now it appears to be quietly working on the product that Wall Street analysts say will help company shares break the $700 mark - the mobile phone.

Just hours after Lehman Brothers issued a report Tuesday stating that the so-called Gphone "could launch as early as February 2008," Google (Charts, Fortune 500) announced it purchased Jaiku, a Helsinki-based company that develops blogging software for the mobile phone.

Google CEO Eric Schmidt sees the mobile market as the company's biggest opportunity for growth.

"The mobile world has much greater reach than the wired Internet," says Avi Greengart, a principal analyst with research firm Current Analysis. "Google sees this as the future."

Google's bold entry into the cell phone market promises to shake up the $127 billion wireless industry. The company has made no secret that it believes mobile phones should be free to consumers, where revenues are generated through advertising and no single carrier has a lock on users.

In the short run, the Gphone also threatens to dethrone the Apple iPhone as the wireless industry's newest star. Google and Apple (Charts, Fortune 500) have worked closely in the past, but the Gphone could test that cozy relationship and force Apple to make the iPhone a more open device than it is today.

A Google spokesperson would not comment on the company's plans, but there's no question that the Internet giant has ambitious plans for the mobile market.

The company has focused heavily in recent years on developing services like Gmail, video, search and map applications for cell phones. Now Google is signaling plans to bid on an upcoming auction of wireless spectrum.

CEO Eric Schmidt told analysts last year that Google sees the mobile market as its biggest growth opportunity.

"The key for Google is getting better distribution," Greengart says. "They already have several of their applications ported for mobile use, but the problem is that consumers have to go and download them themselves, and in many cases they don't do that."

That's why many are speculating that Google is making its own handheld device for the masses. Lehman analyst Doug Anmuth says the Google phone will be a "low-priced, simple form factor handset with an operating system specifically designed for Internet applications."

Anmuth, in a research report, said that a Gphone prototype has been developed and that Taiwan's HTC Corp. is the phone's likely manufacturer.

Schmidt has not been shy about his vision for the mobile market. He's even gone so far as to suggest that cell phones should be given away for free in exchange for targeting mobile ads to the consumer. While free Gphones may get consumers excited, Google won't make any friends with the major phone carriers like AT&T (Charts, Fortune 500) and Verizon Wireless (Charts, Fortune 500).

That's why Peter Crocker, a mobile analyst with Venture Development Corp thinks Google will likely try to partner with smaller carriers first. "I can see how the cultural difference between Google and some of the large carriers would not mesh very well," he says.

A move into the hardware business could be risky for Google. Hardware manufacturing is fundamentally different from software development, which doesn't have to worry about inventory, factories and suppliers.

For this reason, some industry observers think Google won't get into the phone making business; instead, they predict the company will launch its own Linux-based operating system to provide mapping and search functions on phones. Top of page