Google’s announcement that it would acquire the bulk of HTC’s smartphone research and design division came as a surprise, but it wasn’t entirely unexpected.
HTC has been struggling massively in the smartphone space and reports of HTC selling off various divisions had been flowing in for a while. Since the last few years, Google has been increasingly interested in developing its own hardware, and if the 2016’s Pixel is any indication, it’s already quite good at it.
We spoke to various analysts to understand the motivation behind the deal and what the future holds for both Google and HTC.
The underlying message from all the analysts we spoke to suggests that Google is very keen on entering the premium smartphone space. Tarun Pathak of Counterpoint Research points out that Apple and Samsung command over 90 percent of the high-end smartphone market, a market that Google wishes to enter.
Tarun Pathak of Counterpoint Research points out that Apple and Samsung command over 90 percent of the high-end smartphone market, a market that Google wishes to enter.
Sanchit Vir Gogia of Greyhound Research is certain that with this acquisition, Google is directly targeting Apple. He adds that the move is a wake-up call to Apple, more so because the iPhone maker has “taken a backseat” in areas like home and Wi-Fi. He adds that Apple’s AI is also not best in class and that Apple’s investments in that field are comparatively limited.
IDC’s Navkendar Singh tells us that the deal is a clear message to everyone that Google is a “serious hardware player”. HTC has the design and manufacturing chops and Google controls the software.
Apple is seen to be so far ahead in the smartphone game not just for its design chops, but because of the absolute control it holds over the hardware and software ecosystem it offers. Google’s Android, on the other hand, is better known for its severely fragmented ecosystem.
This deal now means that at least in the premium space, Google can now compete directly with Apple. Pathak explains that technology like AR (augmented reality) and AI (artificial intelligence) can only work well with tight hardware and software integration. Because of this, he believes, Google needs a hardware partner. “Right now, hardware-software integration is critical,” says Pathak. Singh adds that “full ownership of the value chain is critical to Google”.
When asked about what the acquisition means for Google’s device strategy in the coming years, Singh tells us that he believes that Google is looking at three tiers of the Android experience. Android Go for budget devices (below $200), Android One for mid-range devices and Pixel for the premium segment.
The analysts also point out that this latest deal should be worrying the likes of Samsung and LG. Both manufacturers make premium handsets and Google’s move to push into the premium segment is just as likely, if not more likely, to eat into their market share as it is to eat into Apple’s.
The analysts told us that HTC and Google have always been close. The HTC Dream, for example, was the very first, commercially available Android device, “the relationship isn’t new”, says Gogia. HTC also partnered with Google for the first Nexus device, the Nexus One, and the first Pixel as well. Pathak describes the relationship as an “emotional connect”. HTC is also expected to be working on the upcoming Pixel 2 smartphone.
Singh points to HTC’s dwindling market cap, falling sales and general desperation as another indicator as to why HTC gave up such a large chunk of its workforce. Going by a New York Times report, HTC’s 4,000 strong design team will now be cut down by half.
In the end, the acquisition doesn’t mean that HTC is dead, say the analysts. HTC intends to continue building smartphones, but it is unlikely that the company will get back into the premium segment any time soon. The money that Google is offering, $1.1 billion, might just be what struggling HTC needs to recover, the analysts suggest. Gogia says, “HTC will continue in a different segment.”
Motorola vs HTC
In August 2011, Google paid $12.5 billion for Motorola Mobility. Without even accounting for inflation, that deal is more than ten times the amount that Google paid for HTC.
Gogia and Singh both point out that the Google-Motorola acquisition was a patent licensing deal. “It was a shot in the arm to get IP quickly”, says Gogia. Singh suggests that the Motorola deal did not involve hardware and software integration at the level that’s expected today. He adds that Google did not think of itself as a hardware company at the time.
Overall, the analysts think that the deal is interesting and gives Google a good base to build its hardware. Apple had better watch out.