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Google finalizes HTC deal, still chasing its elusive hardware dream

Google has finalized its $1.1bn acquisition of HTC’s mobile teams, and though the Taiwanese firm will continue to make its own handsets and its Vive virtual reality gear, the deal is still firmly focused on Google’s counter-intuitive ambition to be a mobile device giant.

Android may be the most successful mobile software platform ever, but Google has not been satisfied with that, or even with the huge amount of mobile searches, adverts and transactions the operating system drives its way. It has struggled with the open source nature of Android, which means device makers can design user experiences which sideline the actual Google services, or blemish the operating system’s reputation with poor performance.

The Open Handset Alliance, which sets rules for those vendors who sign up for it, has only partly addressed Google’s quest to make the Android experience more uniform for users, less fragmented for developers – and to place its services at the heart. And anyway, vendors who do not join can use the open source Android code, which comes with no terms and conditions.

So the other approach is for Google to design its own hardware – first in smartphones, and now in the expanding range of other connected devices which may drive its advertising and services, from home hubs and smart speakers, to virtual reality headsets, even to cars. That can cause conflicts with the partners which are best placed to drive Android usage in any of those product categories, but nevertheless, complete control of the Android user experience is so valuable to Google that it appears willing to take the risk.

So far, its handset efforts have had limited impact on the market in numbers terms, though they have been strong showcases for the best Android can do, with the Nexus range – and the newer, and more commercially aggressive, Pixel – always incorporating the OS’s latest capabilities. In recent times, those have focused heavily on virtual reality and on artificial intelligence, both able to drive a wealth of new applications and user experiences. These are certainly at the core of the HTC deal, and of the push to set Android well ahead of Apple, in handsets and in other devices.

For its $1.1bn, Google gets 2,000 mobile engineers, mainly in Taiwan, which will significantly boost its device design capabilities, and may extend right into the chips. Just as Google has been working on inhouse processors for its webscale platforms, so it can control its own destiny in key areas of performance, so it may do the same in gadgets. Its most recent Pixel smartphone came with a specially designed image processor to differentiate its camera, and Rick Osterloh, head of hardware at the search giant, said there will be more “custom silicon” down the track – a major departure for a company which makes its money and its margins from web services.

Apple, of course, has been developing more and more of the chips its iDevices need inhouse, though Osterloh gave no indication that Google wanted to go that far.

But Osterloh is briefed with gaining the kind of design, production and supply chain expertise, on the devices side, that only a large-scale hardware firm can bring. Google failed to tap into that effectively when it acquired Motorola Mobility (subsequently sold on to Lenovo), but that was before the company had really worked out how to address the dilemma between extending Android to the maximum via partners and keeping iron control of the experience. Motorola was really acquired for its patents, when the Android platform was under litigation siege from Apple and Microsoft. Now, the battle with Apple is all about the user experience that integrated hardware and software can create, hence the hiring of Osterloh in 2016 to head the newly formed hardware division.

“You have to be vertical in some cases to really push the envelope for consumers,” Osterloh said. “Our intention is to invest in this for the long term. You’ll see a steady increase in investment from us.”

HTC said in a statement that it will still launch its next flagship smartphone. Chairperson Cher Wang said: “Today marks the beginning of an exciting new chapter at HTC as we continue to drive innovation in our branded smartphone and VIVE virtual reality businesses.”

We can expect the HTC investment to intensify the efforts behind the Pixel range and other hardware, while Google also gains access to important IPR in areas like VR. Google says it plans to expand R&D and marketing, and to negotiate more deals with operators and retailers. For now, Pixel – which sold 1.5m units last year, according to Counterpoint Research, compared to Samsung’s 300m – sells in just nine countries, including the US, UK, Germany and Singapore. It would seem logical that the new resources of HTC will not only help Google to boost Pixel’s already notable VR capabilities, but will propel it into new geographical markets.

China would be the biggest untapped opportunity but, as Osterloh told Bloomberg, “frankly it’s complicated for the company. “ Google pulled its services out of China in 2010 over a censorship row and while Android is dominant there, it is largely monetized by other companies such as the MNOs, or Baidu and Alibaba, which have their own user interfaces and applications.

It remains to be seen whether the HTC acquisition proves more successful for Google than many of its purchases of hardware companies, such as Motorola and the robot maker Boston Dynamics. Other hardware projects have failed to deliver the looked-for results – the Nest connected thermostat maker has lost its initial prominence; Project Ara, the modular handset concept, has been shelved; the low cost Android reference design fared poorly in emerging markets against local vendors with their own tweaks to the user experience.

HTC has a long history with Google. It made the first ever commercial Android handset, the HTC Dream, in 2008, and the first co-developed Google Nexus product. More recently, it has worked with Google on the Pixel phones, designed and built by HTC under the Google brand.

But this is not just about smartphones or even the Apple race – it is more about Google’s stated ambition to define the whole user experience in the home, office, car and mobile device. It made this aim clear when it appointed Osterloh as SVP of hardware, and he reiterated the vision last fall he wrote about the HTC deal in a company blog post, saying: “Last fall, we introduced our first family of Made by Google products, including Pixel smartphones, Google Home, Google WiFi, Daydream View and Chromecast Ultra, and we’re preparing to unveil our second generation of products on October 4. Creating beautiful products that people rely on every single day is a journey, and we are investing for the long run.”

He went on: “That’s why we’ve signed an agreement with HTC, a leader in consumer electronics, that will fuel even more product innovation in the years ahead. With this agreement, a team of HTC talent will join Google as part of the hardware future.”

Analysts at MoffettNathanson also saw the impact of the current European Commission antitrust probe of Google on the firm’s M&A decisions. They wrote in a client note: “Google may lose share of its key pre-installed apps on OEMs’ devices if the EU comes down on it hard in its current Android probe and blows up Google’s contentious MADA (Mobile Application Distribution Agreements) with OEMs, which set out a list of demands OEMs must meet to gain access to the key Google Play Store.” In that eventuality, Google could compensate for the loss of pre-installed apps by offering its own devices, as well as reducing its reliance on manufacturing partners, which effectively increases its traffic acquisition costs.

“All in, we view this as a low risk and relatively inexpensive way for Alphabet to proactively challenge two major headwinds (i.e. growing traffic acquisition costs and increased regulatory scrutiny around Android) while enabling it to more aggressively move into new growth areas like AI, AR and VR,” the firm continued.

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