Verizon Wireless and Google may be nearing an agreement that would place the Internet search engine in a prominent spot on the cellular operator's phones, but speculation that Verizon is set to introduce a new breed of phones developed by Google is overblown, say people familiar with the matter.

The companies have been speaking off and on over the past year about a deal to feature a Google (GOOG) search box on Verizon's (VZ) mobile Web service. But the talks have heated up recently and could produce an announcement over the next few weeks, these sources say. However, major sticking points remain over financial terms and the specific branding and placement of the Google search engine.

Ad revenue issue

An agreement would mark a major step for Google, which has struggled to extend its dominance on the Web to cell phones, but fall well short of the company's broader ambition to become as major a broker of ads on mobile devices as it is on computers. For Verizon Wireless, the talks indicate the growing importance of packing phones with cool brands and tools (BusinessWeek.com, 10/29/07)—even if it means giving up a greater slice of sales and a sliver of control over what services and software people can use on mobile phones, needs made all the more urgent with the success of Apple's iPhone.

For now, Verizon and Google are not holding serious discussions about anything other than a search engine partnership, sources say. On Oct. 31, The Wall Street Journal reported that Google and Verizon Wireless were in advanced talks about a deal for Verizon to sell handsets powered by "gPhone," a new mobile operating system (BusinessWeek.com, 9/6/07) that Google is developing. But for now, it seems the nation's second-biggest wireless operator won't be heading down that path any time soon. "They are not intending to do anything with the gPhone," says one source familiar with the discussions. A successful search deal, however, could lead to other talks. Both companies declined comment.

Money is perhaps the largest hurdle to overcome for a search partnership. In its Internet search deals, Google typically keeps the lion's share of the advertising revenue generated when customers click on the ads that appear alongside search results. But in the wireless world, Google does not have as much leverage. "I don't think Verizon feels they need to give anything up," says Brian Donovan, senior analyst with mobile research firm M: Metrics.

Complementary service

Several years ago, Verizon put the kibosh on a proposed deal to distribute Apple's (AAPL) planned iPhone, balking at what it considered unacceptably rich financial terms and other demands. Verizon Wireless CEO Lowell McAdam said Apple's proposed revenue split was not "commensurate with the investment that we have in the network." The same obstacles could arise again now with Google.

At present, Verizon Wireless offers two mobile search engines provided by other companies with no specific branding. InfoSpace (INSP) powers the search engine featured on the top-level screen of Verizon's Mobile Web service. Medio Systems allows consumers to search for content such as music, videos, and games featured on Verizon's proprietary Get It Now service. Verizon Wireless does not disclose the terms of those deals, but online advertising experts say the mobile carrier gets the majority of any ad revenue generated from search queries with those two engines. Typically, those are performance-based deals in which an advertiser pays a fee when a consumer clicks on an advertisement.

A deal with Google could help complement Verizon's existing search deals, providing a service that would allow customers to search the land-based Internet from a cell phone. "We'll follow Verizon's lead with how they want us to partner with a major Internet brand," says Brian Lent, CEO of Medio Systems.

"Top billing"

But in partnering with Google, Verizon also runs a risk of undercutting its revenue from some home-grown applications that help consumers find information. For example, Verizon currently offers a service called VZ Navigator for $9.99 per month that provides consumers with driving directions, maps, and local search capabilities on phones equipped with GPS satellite receivers. "That's part of the tension with operators," says one source who works closely with the cellular carriers.

Branding and placement on Verizon's phones are also potential points of dispute. In the past, Verizon has preferred to strike so-called white-label deals in which the brands of partners are hidden from the consumer's view. But recently the company has shown more willingness to feature the brands of its technology and content partners.

Verizon Wireless might also see value in featuring Google's name since the brand has developed such a great reputation when it comes to Internet search. But it's not clear how much prominence Verizon will allow. Right now, the wireless operator does not feature other brands on the first screen of its mobile Web service, though it does showcase ESPN, CNN, and Reuters on subsequent pages as users click through menus. Google would likely want to be featured right off when consumers boot up the mobile Web. "Google wants top billing," says one source.