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Google Beef Up Hardware Business by Acquiring Part of HTC

by Linda Sui | Sep 21, 2017

Unsurprisingly Google announced to purchase part of HTC smartphone operation this evening. Google didn’t acquire HTC whole smartphone business. Instead, it agreed to pay US$1.1 billion to acquire Pixel related engineers and some intellectual property (IP) under non-exclusive agreement. We estimate there would have more than 100 engineers who work for Pixel phones to transfer to Google under the deal.

For HTC, this is a wise move considering its falling track in smartphone market. Our WSS service tracked HTC’s global smartphone market share fell to less than 0.5% during Q2 2017. The company keep losing money on smartphone business for the past 9 quarters in a row. The acquisition will give HTC financial support and flexibility to restructure own smartphone business / seek new buyers. However, Google didn’t act as a white knight to completely take over HTC smartphone business. In contrast, Google only paid for what it truly needs – talented engineers and related patents for Pixel smartphones.

For Google, the move further indicates its commitment of building up own hardware business. Google now looks like to take Apple-like approach, beefing up hardware business and integrating with software offerings.

However, Our Smartphone Model Tracker (SMT) services tracked Pixel phones (Pixel and Pixel XL) is kind of flop in smartphone market, with tiny volumes and market share. Limited distribution channel / partners and higher prices are two main reasons behind the tepid performance. Google is going to unveil new Pixel 2 series on Oct 4, it remains to be seen whether the giant can successfully expand distribution footprint into more top tier carriers in US and more overseas markets.

In addition to Pixel phones, Google is resuming Android One program recently, working with Xiaomi and Motorola. Xiaomi’s A1 will be available in more than 30+ countries. Moto X4 will be available in US bundled with Google’s Project Fi services. It is worth noting that this is the first time that Android One device comes to US market. We believe having Xiaomi and Motorola joining force and enhancing Android one from low cost devices to high end models is a wise move. On one hand, Xiaomi and Motorola’s branding perception is quite solid in emerging markets and US respectively; on the other hand, mid and high end devices will firmly enhance user experiences of Android One devices.

However, we don’t think Google’s Pixel phones and Android One Program will challenge Samsung and Apple’s dominance in premium tier segment in the short term. Samsung and Apple do have own ecosystem and advantages: Apple stand out from walled garden model, while Samsung successfully vertically integrate hardware business and also test water on software / services (Bixby, Samsung Pay etc.). We believe fighting against Android fragmentation is the rationale behind Google’s move into hardware business. Android One and Pixel phones can play the role of demonstrating pure Android OS and latest services/ offerings from Google (AI Google Assistant etc.). All these initiatives do not necessarily sign Google will massively enter smartphone hardware business and compete head to head with Android OEMs. It is still testing water and we don’t think Google can make money from smartphone hardware business before scaling up volumes to minimum 5 million units per quarter.

For Samsung and other Android vendors, however, the tension with Google on AI, services and ecosystem will remain. Android and iOS will continue to dominate smartphone OS market in the following years. The acquisition of HTC (part of smartphone business) will NOT change Android open source nature and change the competitive landscape easily.

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