Will Google's Project Fi Hurt Apple's iPhone?

The Nexus 6, Project Fi's only compatible phone. Source: Google

Google is a wireless carrier.

Project Fi, the search giant's new wireless service, offers U.S. subscribers an alternative to the traditional carriers. Project Fi has a number of exclusive perks, including a more straightforward billing policy and a cloud-based telephone number. But Project Fi also has its limitations, including, most notably, its dependence on Google's own phone, the Nexus 6.

Currently, the Nexus 6 is the only smartphone that works with Project Fi. Owners of Apple's iPhone, and other Android handsets, cannot use it. As an exclusive perk, Project Fi could entice some smartphone buyers to choose a Nexus 6 over other phones, including Apple's iPhone.

Google has no desire to takeover the wireless industryBut most probably won't. The Nexus 6, although fairly positively reviewed, is certainly not for everyone. With its 6-inch display, it truly pushes the boundaries between smartphone and tablet. It's quite a bit bigger than both Apple's competing iPhone 6 Plus and Samsung's Galaxy Note 4, and most will likely find it unwieldy. The popularity of phablets is certainly increasing,but they remain in the overwhelming minority(they represented 21% of U.S. smartphone sales in the first quarter, according to recent data from Kantar Worldpanel).

If Google opened its service up to more Android phones, or at least a phone more likely to see mainstream adoption (like Samsung's Galaxy S6), then it could have an effect. Project Fi isn't for everyone -- there's no family plans, for example, or unlimited data -- but a select group of smartphone buyers may find its base rate data billing and combined network service extremely attractive.

Yet I doubt Google will do this. Google's management has been fairly upfront in terms of its plans. In March, Google's Sundar Pichai said the company has no plans to become a wireless provider "at scale." A few million subscribers may be possible, but tens of millions is unlikely. Sticking to a niche phone like the Nexus 6 would fit with Google's relatively modest ambitions.

Shaking up the wireless industryBut Project Fi may still pose somewhat of a risk. Rather than takeover the domestic wireless industry, Google is hoping to reshape it. The shape that it takes could be more beneficial to Android handsets than Apple's iPhone.

Project Fi seems aimed at reducing the price of wireless service, particularly data service. In contrast to traditional carriers, which often encourage consumers to buy more data than they need (and thus inflate the cost of their wireless service), Project Fi sells data in a straightforward pay-as-you-go manner. Every gigabyte of data costs a flat $10 per month, no matter how much a subscriber uses.

Wireless data in the U.S. is among the most expensive in the world, and Apple's iPhone is particularly popular (it's U.S. market share is around 40%, compared to around 80% internationally). These two facts may not be wholly unrelated. U.S. carriers, in contrast to many of their international rivals, have often used the prospect of subsidized phones (either directly on two-year contrasts, or indirectly through phone financing programs) to entice subscribers to sign up for expensive wireless plans. Smartphone makers (including Apple) sell unlocked handsets, but few buy them, instead taking advantage of the subsidies offered by carriers.

In markets like China, companies such as Xiaomi have found tremendous success selling cheap smartphones directly to consumers. Google has tried that in the past with the Nexus 4 and Neuxs 5, but it made little difference.

It will be interesting to see how Google evolves Project Fi over time, and if Google is successful at shifting the dynamics of the U.S. wireless industry. It's unlikely to have much of an affect on Apple's U.S. iPhone business at all in the near-term, but it's definitely worth watching.

The article Will Google's Project Fi Hurt Apple's iPhone? originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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