Could 2010 be the year Android unlocks your phone contract?

R. Scott Raynovich is the editor and publisher of the RaynoReport.com, a research and analysis firm. In this post, he shares key conclusions from his 35-page report, “The Android Ecosystem.”

Steve Jobs, the iPad, and iPhone OS 4.0 are dominating the airwaves. But it’s time to take a look at the next hype machine: Google’s Android, a mobile operating system seen as wireless carriers’ best bulwark against an Apple-dominated world. But should they embrace Android so readily?

Expect more buzz about Android in a few months. With Android apps proliferating by the tens of thousands and nearly 50 major Android-based phone projects in the works, the latter half of 2010 is going to be huge for Android.

What’s interesting in this rapid, perhaps even hasty, adoption is that Android is so radical. Like Apple, it has an application platform that is proliferating. Unlike Apple, the OS is open source and designed to work with unlocked phones — phones that can run on any carrier’s network. After spending three months collaborating on a research report with a top mobile analyst on this topic, I can tell you this: Google Android is going to cause a lot of disruption in the mobile phone market. Perhaps more than its wireless partners anticipated.

First, its unique performance and the rising mass of applications available will catapult it quickly to the No. 2 spot in mobile operating systems, behind Apple, says Randy Giusto, the independent analyst who authored the report, “The Android Ecosystem.” (Disclosure: This report is being marketed by my media company.) Android is currently in fourth place, but recently unseated Palm.

Second, it will introduce the concept of unlocked phones and an open operating system to the U.S. market. Unlocked, unsubsidized phones are common in other countries, especially in Europe, but so far they have not made waves in the U.S., where carriers have historically offered phones to consumers at lowered prices in exchange for long-term contracts.

Android has already caused a lot of pain for Symbian, a one-time leader in mobile operating systems that has slipped behind RIM and Apple in the U.S. market. Symbian was forced to move to an open-source model in 2008 under pressure from Android’s advance. Microsoft has struggled against both Apple and Android, and its Windows Mobile operating system, soon to be relaunched as Windows Phone, has been losing market share for years.

People say Android is taking a lot of time to develop. But its rise is actually shockingly fast. Google acquired Android Inc., a startup developing a mobile OS based on the Linux kernel, in 2005. The company filed several patent applications in 2007. In October 2008, phone manufacturer HTC released the first Android-based smartphone. And this year, Google introduced the Nexus One, its first company-branded Google phone. Is that so slow? In under five years, Google is on the verge of becoming the second-most important mobile-app platform after the iPhone.

Apps are just a means to an end for Google, though. As Android’s market share grows, Google gains more leverage to impose its vision of unlocked phones on U.S. carriers. Why are unlocked phones so important? Freedom — the same kind of freedom Google enjoys on the Web and that it sees as so important to its success there. Open and free systems can bloom suddenly as application developers and manufacturers flock there, driving down costs.

The question is, will the U.S. carriers welcome Android’s unlocked phones with open arms? The industry’s desire is clearly to keep customers under contract, shelling out big bucks for mobile plans. So far, Google’s Nexus One is being jointly marketed by Google and T-Mobile in the United States and hasn’t been a big seller. An unlocked Nexus One can run on AT&T’s 3G network, but consumers must pay top price for that phone. At launch time, the unlocked phones retailed for $530, whereas they were available at a subsidized cost as low as $180 with a T-Mobile contract.

There are other issues with Android: So far, 3G-based Android phones have caused a variety of complaints relating to 3G connectivity and customer service. And the mobile operating system, because it can be adapted to so many different manufacturing platforms, risks a high degree of fragmentation, a common problem in the mobile industry.

Indeed, the reception of the Nexus One has been mixed. Nexus One sales have been a disappointment, with only 20,000 sold in the first week of availability compared to 250,000 units for the Verizon-sold, Motorola-built Droid, and 1.6 million for Apple’s iPhone 3GS, according to a January 2010 report by Flurry Analytics.

Still, some financial analysts expect 2010 Nexus One sales to come in between 1 million and 2 million units. HTC planned to produce 700,000 units in the first quarter and 1.2 million units in the first half of 2010, in anticipation of market demand. And nearly 50 Android devices are in the pipeline, from huge manufacturers including Acer, Dell, HTC, Motorola, Nokia, Samsung, Sony Ericsson, and many others.

Then there are the applications. As we’ve seen with the iPhone, the magic of a widely distributed application platform can work wonders. Developers go where the customers are, but they also seek out platforms that let them exercise their creativity and create distinctive products. There were nearly 30,000 Android applications in the market worldwide as of February 2010, According to AndroLib.com. Google officially announced it hit that number in March 2010. The total number has risen substantially since the Motorola Droid and Nexus One debuts.

Flurry Analytics shows that new Android application development is accelerating.

In the end, I believe Android has hit a temporary lull before the explosion. Consumer demand is likely to sway the carriers to more widely adopt Android phones with a wider menu of pricing and network options, locked or unlocked, subsidized or non-subsidized. Once wireless carriers get past their shock, they’ll embrace the Android vision.

The story may change this summer, when HTC markets an Android-based phone, the EVO 4G, for Sprint’s fourth-generation, high-speed wireless network. The device was recently demonstrated at the CTIA show in Las Vegas, and I thought some of the applications, such as streaming HD video and augmented-reality browser, were pretty spectacular. It was Blade Runner stuff. Unfortunately, we still don’t know the pricing and data plans, evidence that service providers are still afraid.

In the end, just as in the case of iPhone, carriers will have to cede to consumer excitement. The arrival of Android is going to put pressure on existing U.S. carrier business models to open up, and this will in turn generate more tension with Apple. But it’s going to be great for the mobile industry, as consumers get exposed to an entirely new market with unfathomable potential for applications.