Google pays $1.1bn for HTC team to expand its hardware ambitions

Counter-intuitively, Google has been getting more interested in hardware again. The company whose success has rested on pushing search, advertising and content services to every device on the planet is still fascinated by designing its own products. Now it is boosting its efforts by acquiring part of HTC, mainly for its design engineers and its expertise in virtual reality.

Like Amazon, Google has been undeterred by major smartphone setbacks (the disaster of the purchase of Motorola Mobility, now offloaded, bar its valuable patents, to Lenovo). Regardless of conflicts of interest with Android handset partners, and the poor fit of a low margin hardware business within a services and software giant, it has created successive business units around its own gadgets, from handsets to robots.

Its acquisitions of hardware companies have generally had limited success and have been hard to merge into the culture – Boston Dynamics’ lifelike robots have been sold on, 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. Even the Nexus, the brand for a range of devices co-developed with partners, is largely a showcase for new Android features rather than a mass market player; while the Pixel Chromebooks are attractive, but have low market share compared to models from Asus or Toshiba.

Despite all that, Google is paying $1.1bn for the unit of HTC which already works with Google on the Pixel phones, designed and built by HTC under the Google brand. The US firm will gain a team of about 2,000 employees from its Taiwanese partner (which made the very first commercial Android handset in 2010 and has also produced Nexus products for Google); it also secures a non-exclusive licence to HTC’s intellectual property, which includes some innovations in VR.
HTC, of course, gets much-needed cash to invest in its non-handset activities, especially the VIVE VR headset, having been losing the smartphone race badly in recent years.

Google will now have direct control of the Pixel handset line, including the Pixel XL, which is reported to be ready to launch next month in time for the holiday season. The search giant has always tried to assert control over the somewhat anarchic open source Android market, whether by imposing its services on signatories to the Open Handset Alliance, or creating its own reference designs and showcase models.

But this may be about more than having a smartphone play to challenge Apple’s, and more about Google’s stated ambition to define the whole user experience in the home, office, car and mobile device – which includes shaping the market with actual devices of its own.

It made its aim clear when it appointed an SVP of hardware, Rick Osterloh, and he reiterated the vision when 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.