Is Google Plotting a Super-Phone?

We're used to Google (GOOG) doing something unexpected, or diving into a business no one could have foreseen. But the latest rumors are so completely counterintuitive that we have a really hard time believing them: Google is building its own smartphone. Not an operating system or software platform to hand out to handset manufacturers. Its own phone.

This comes from TechCrunch reporter Michael Arrington, and it has industry watchers shaking their heads in disbelief. Here's Arrington's story: For months, Google's engineers have been working on a smartphone that will be sold, both directly and through retailers, under the Google brand. Unlike other Android phones, which are built and designed by business partners that don't have to take every suggestion Google makes, the phone will be entirely designed by Google itself, which would give Google absolute control over the phone, a la Apple (AAPL) and the iPhone. Possible manufacturers include HTC, Samsung, and LC, with LC emerging as the likeliest partner. The launch date will be sometime in early 2010.

Almost immediately after Arrington filed his story, Googlewatchers arrived at exactly the same conclusion: This is a terrible idea. Where to start? Let's try Silicon Alley Insider's Dan Frommer. Google's main objective, Frommer points out, is to sell ads on mobile Internet devices. That's where it's always made money, and that's what it's best at. Selling the actual phones is a sucker's game; it comes with a lot of logistical headaches, and the profit margin is far too low. For one thing, it's very probable that Google doesn't have a phone carrier lined up to provide the reception. Carriers also subsidize the phone manufacturing itself, enabling companies to sell a $600 product for $200 in order to cash in on service contracts in the long term. Would you buy a Google phone for $600? Didn't think so.

In addition, Frommer notes, this would amount to a serious bait-and-switch for companies that have already committed to building Android smartphones. Once companies like Verizon (VZ) realize that they've been hustled by Google, they're going to drop using Android as soon as they can, in addition to never trusting Google again. And, as PC World writer David Coursey points out, the consequences of such a betrayal would extend well beyond the smartphones.

"What would this mean for Chrome OS?" he writes. "Suppose you are a netbook maker, would you want Google selling hardware against your own? Better to partner with a company you understand—Microsoft—than one with seemingly no limit on its ambition. A Google-branded phone could render Chrome OS DOA."

All these headaches, just to get into a business with low profit-margins and a lot of preexisting competitors? Don't make sense. We can think of only one plausible explanation: Google is more than a little frustrated with how unimaginative all the current Android designs are, and it's building a prototype to show manufacturers how it could be done, and possibly to ultimately license the design to someone like Motorola. Otherwise, it's a sucker's bet.