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Google in Phone Search?

On a day when the long-awaited iPhone was finally announced -- only not that iPhone, the one expected from Apple Inc. (Nasdaq: AAPL) -- another big tech brand is reportedly in talks to produce its own branded mobile handset.

Citing "a source close to the talks," U.K. broadsheet the Observer reported over the weekend that Google (Nasdaq: GOOG) is discussing a mobile phone deal with European carrier Orange SA (London/Paris: OGE). The paper claims that executives from Orange flew to Google's Mountain View headquarters for "preliminary discussions" about a joint handset venture.

Taiwanese handset manufacturer High Tech Computer Corp. (HTC) (Taiwan: 2498) is seen as the logical original-equipment manufacturer for any future Google phone.

Google has not commented, but Orange (NYSE: FTE), the owner of Orange, was quick to deny the rumor. FT CEO Didier Lombard told French newspaper Les Echos that his company had not held talks with Google, while a spokesperson called the Observer article "utter speculation."

The Googlephone speculation emerged the day before Cisco Systems Inc. (Nasdaq: CSCO) division Linksys released a line of cordless VOIP phones under the model name "iPhone" -- thus preempting the release of iPhones from Apple, which has long been presumed to be developing its own mobile phone.

Branded phones are often seen as a way to offer consumers richer and more targeted experiences than conventional carrier-distributed models while tapping into the huge and still-growing market for mobile phones. World handset shipments are expected to hit one billion this year, according to IDC , as developing-world consumers acquire mobile phones and customers in "saturated" markets in the West and in East Asia buy replacement phones with added features.

A Google phone would make sense, according to Avi Greengart, principal analyst for mobile devices at Current Analysis , as the search giant tries to push its capabilities -- and its ad sales -- into new realms.

"Even leaving aside the potential mobile advertising market, there is a natural progression from tethered (PC-based) Web services to mobile (phone-based)," Greengart explains. "Yahoo already has a suite of mobile applications, and Google has been doing a lot of one-offs for specific handset models."

For example, Google agreed to provide clips from YouTube, acquired by Google in October for $1.65 billion, to Verizon Wireless subscribers last month. In another Internet-app-to-mobile deal, Cingular said today it would provide subscribers who pay $3 a month access to MySpace content on their mobiles. (See The Gorilla That Ate the Carriers.)

Such one-off deals do not satisfy Google's desire for ubiquity, however.

"It is hard to gain traction in such a fragmented wireless market," points out Greengart. "The ubiquity and homogeneity of the Windows/Internet browser platform is a key reason for Google's success."

Whether it chooses to plunge into the risky, low-margin business of selling mobile phones or not, Google is clearly plotting ways to grab a large chunk of mobile ad dollars. The market for mobile advertising is expected to hit $1.26 billion in 2009, up from just $45 million in 2005, according to Ovum Ltd.

Google spokespersons declined to comment on the Googlephone rumors.

— Richard Martin, Senior Editor, Unstrung

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