Google is learning and it is a very fast learner. Many years ago, when Google unveiled Android, it pursued a path it has pursued for years: grow user base as quickly as possible and then monetize the customer data. That worked for Search and YouTube where Google has billions of global citizens engaged. It tried the same model for Android. It worked as it got the users, from those that can afford a $40 phone to people that can pay excess of $500 for a phone. But Google is not happy: it has the users, but it does not have the profits. Another company, a mortal competitor in mobile called Apple is eating all the profits.
Yesterday, Google took action. It is buying the HTC unit that made its high-end smartphone called Pixel. This is a new strategy from the typical Google playbook as I noted earlier today.
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.
What Google is doing now is to change how it does business on mobile. For years, through its success on Search, Google has focused on scale, knowing that transaction cost for adding new users in Search is low. In short, the marginal cost of a new user in Google Search is zero. In other words, it does not cost Google anything for a new user that uses Search. And with more users, Google gets better: with more user data, the product becomes better and ultimately the best. So with massive scale, Google will make money and dominate the category. That was what happened in Search as Google took down AOL, Yahoo and Microsoft Bing (or its predecessor).
But when you come to mobile, the game changes: acquiring a new user on mobile does not carry a marginal cost of zero. A partner-company to Google has to make a physical device which a customer will buy. That means the phone costs the partner money. And of course, it costs the customer something also. Unlike in the search business where there is a zero marginal cost to Google for that new user, and practically zero cost (sure, besides the access cost to the web) for the user of Google Search, the mobile device commands cost.
Google did not notice that as it worked on the Android business model. As more affluent people move from Android to Apple, Google now knows that Apple has become a destination for the graduated Android users. Yes, they use Android but once they begin to make enough money, they move to Apple. For Google, that is bad, because it keeps missing the opportunities to deliver services like Play Store to more affluent customers.
For a phone business, the marginal cost is non zero because a physical device is made. So having all the users does not guarantee profit because more phone sold comes with more expenses. You have to find a way to make profits on the phone. Selling phone was not a Google business. But Google was in the services phase which is correlated with the quality of the people using the phone. For the Google Play and other services, a rich man holding a phone has more value than a kid with no money. So, all those elements are all connected. If you have richer people using your phone ecosystem, they can spend more on the services like Music, apps, etc.
It does not stop there: because a phone can be a luxury item, differentiation matters, unlike Search which cannot be further differentiated beyond the results (few care if you searched with Windows, Mac, Android devices; what mattered was that you searched using Google). Yes, a phone has more values beyond just making and receiving calls. Phone is a symbol of affluence and people play it. Today, Google wants to connect to that message by going to that upper echelon for the money. The $30 Android phones are good for statistics but Google needs to sell items on apps, music, etc which is not a new category in mobile. It needs people with the money in its ecosystems.
This HTC deal is part of that learning curve to get Google to the position in mobile where it can make more money. Apple is the leader and Google wants to get in the mix. The path to the lowly-priced Android devices has not worked out excellently. The deal, possibly, will help Google pursue the rich where the money is, not just for the phones, but for the services which are sold in mobile ecosystems. This is an evolution for Google.
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