Google is paying $1.1 billion for the unit of HTC, a struggling smartphone maker that makes for Google the high-end Pixel smartphone. HTC, once an industry leader, has been struggling in the age of Apple and Samsung.
Alphabet Inc’s (GOOGL.O) Google said it would pay $1.1 billion for the division at Taiwan’s HTC Corp (2498.TW) that develops the U.S. firm’s Pixel smartphones – its second major foray into phone hardware after an earlier costly failure.
The all-cash deal will see Google gain 2,000 HTC employees, roughly equivalent to one fifth of the Taiwanese firm’s total workforce. It will also acquire a non-exclusive license for HTC’s intellectual property and the two firms agreed to look at other areas of collaboration in the future.
This deal has many implications. What is happening is that Google wants to move into a business model where it can effectively control both the hardware and software. Today, that is not possible as Android runs in many phones of different specifications and standards, making it impossible for Google Android to deliver top-grade experiences to its users. Unlike Apple, which controls all elements of its phone business, Google has relied on others for the hardware. The result has been mixed: user experience has been non optimal and Google wants to change that.
Yesterday, within just a few hours, most of Apple’s millions upon millions of users were using the latest mobile operating system, having tapped on the prompt to download iOS 11.
Contrast that experience on Android, where the company’s impressive and innovative updates are greatly hampered as it can take months, sometimes years, for those features to filter to users.
Google knows this disconnect between its software and hardware is a massive problem. And so this curious deal with HTC, which falls short of the rumoured buyout, is about solving that problem. If it can have close control over key premium devices, it can be more ambitious with its software.
In some respects, this $1.1bn deal is like a good friend lending their pal a few quid to tide them over for a while. HTC needs Google’s money to keep going. And Google needs HTC’s expertise and manufacturing capability to remain competitive with its mobile devices.
The Genius of Apple
Apple makes proprietary hardware and using that differentiation creates software and services which are highly exclusive. The ability to control all aspects of its design process makes it easy for it to make the best possible product. That helps it to achieve high margins even when serving a smaller number of people. It is a closed business model. But for Google, you have a company that cannot control its product: Android runs on different hardware which Google does not influence. The key way it can make money is to have as many people as possible, without necessarily delivering the best experience, using Android. While that makes Android look good on the number of users served, it has not worked for the profit margins desired. Google knows that and wants to own the hardware design experience so that it can more effectively control the user experience, mimicking the Apple business model.
Through this deal, Google will get closer to that. It will have an opportunity to control all aspects of Pixel and then give customers a real user experience that can be closer to what iPhone delivers in the market. It needs to do that to have any chance of competing in the smartphone market. This deal is to save Android and secure the future of Google mobile business.
Implications for African Startups
Everything you know about Google is going to change. In the next five years, try to see Google mobile device business from the same lens as you see Apple today. Google, while not going to run a completely closed business model, as Apple does with its hardware and software, will increasingly become a big player on the physical element of the mobile business. People will still buy the cheap Android but Google will set its eyes to recreate the experience of Apple. It wants the margin and it wants to pursue the most profitable customers. That means we could have “two versions” of Android possibly making it harder for some low-end phones we sell in Africa to run some of the latest Android updates. Google may not really care provided Pixel is engineered to compete against iPhone.
Simply, if Google tests a version of Android on Pixel and it looks great, it can launch it to the world. It is now left for the partners to deal with issues that arise. Yet, even if they work harder, it is not likely that those partners can get to the same level of integration Pixel will have with Android. The present model where Google thinks from outside to inside will be changed from thinking from Pixel world to the outside one. It wants to own its ecosystem and take this challenge to Apple by itself.
My suggestion is to see your mobile business with new perspectives on what the relationship with Google Android will become. It is changing and that will affect what happens to its partners in the future. By moving from a horizontally integrated model to a vertical one, Google has a new focus. Do not expect it to do well on both at the same time. It has made its decision with this HTC deal: Google wants to go vertical and offer choices beyond Samsung Android phones to iPhone.