Google could have the iPhone team dialing 911

In the heart of the holiday phone-buying season, AT&T (T) handed Google (GOOG) a fabulous present and partner Apple (AAPL) a lump of coal. Both were wrapped in one spectacular network failure. On Friday and parts of Saturday, AT&T’s network went down in San Francisco, stranding thousands of the Web’s most vocal and demanding iPhone users.

This came on the heals of another PR disaster when senior AT&T executives told analysts that the phone giant was trying to figure out how to “incentivize” heavy bandwidth users to use less of AT&T’s unlimited data plan in order to improve network quality for all. Or as Fake Steve so aptly put it, AT&T was trying to figure out how to get its customers to buy less of its products.

The timing couldn’t have been better for Google as the blogopshere was flooded with talk — and pictures — of Google’s new phone (which the company discussed in a cagey blog post). Possibly called the Nexus One, Google’s first smartphone is likely to become the top competitor against the iPhone.

The move to limit heavy users’ bandwidth was a tacit admission that AT&T is failing to keep up with demand for iPhone data connections. iPhones account for as much as 50% of all mobile Internet usage despite having a smaller installed base than BlackBerry and less than 30% of the total smartphone market.This is hardly the first big AT&T network failure or the first outcry from aggrieved iPhone users. But now the stakes are much higher for AT&T and Apple.

A Game-Changer

Google’s Android mobile operating system is surging and rapidly becoming the only competitor to the iPhone for the title of most data-friendly smartphone. Verizon’s new Motorola-build, Android-running Droid phone has won rave reviews and is selling extremely well. The Droid has an amazing GPS turn-by-turn navigation application that alone is enough to be a game changer — an application that’s not running on the iPhone, by the way.

The Wall Street Journal reported that Google employees had been given copies of a new Google phone that the search giant had designed from scratch with the help of Taiwanese handset maker HTC. The phone wouldn’t be part of any one carrier’s lineup and will be sold unlocked. What’s more, it would run on GSM networks (the same one AT&T and T-Mobile use). It’s supposedly faster than the iPhone and has a larger touch screen. (Putting Nexus One on GSM networks does beg the question: If the network is horrible for iPhones, why won’t it be awful for Google as well?)

Of course, Apple is probably unleashing its own updated iPhone in the next few months, to keep their pattern of regular iPhone upgrades.

Overpromising and Underdelivering

With the arrival of the Google phone (rumors say it’s going to be on sale in January), Google will be able to outflank Apple with smartphones that are arguably as good as the iPhone but available on every carrier’s network. And like the iPhone, Google plans to control its phone from top-to-bottom — hardware, software and everything else. That’s precisely the type of vertical integration that has been Apple’s signature strategy and a key to making Apple products standouts in ease of use and reliability.

With AT&T reeling from the one-two blows of the Google phone and the recent network failure (which the company refused to comment on publicly, from what I can tell), it finally may be reaping the rewards for overpromising and underdelivering to millions of iPhone users.

And some people I know are taking drastic action. Carnet Williams, CEO of Sprout, an interactive advertising and branding tools company, tweeted “Screw AT&T. Just signed up for a Verizon MIFI. Will move my entire company off AT&T. Nice ROI on not waiving my $140 cancellation fee.” Carnet is one of the biggest iPhone fans I know. When your biggest fans become your worst enemies, something has to give.

While AT&T looks weaker and weaker, the biggest loser may be Apple. With Verizon boasting its own hot-selling smartphone and Google coming up with an iPhone-like offering, Steve Jobs & Co.’s leverage and choices appear to be diminishing by the day.

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