Google Bets $1.1 Billion More Brains Can Help Take On Apple

Google officially closed its $1.1 billion (roughly Rs. 7,000 crores) deal with HTC, adding more than 2,000 smartphone specialists in Taiwan to help the search giant chase Apple in the cut-throat premium handset market.

The deal will help Google design more of its own consumer hardware and could set it up to wade deeper into special-purpose chips -- like Apple. Google's most recent Pixel model came with a new image processor to improve the device's camera. More of this "custom silicon" will come in the future, Google's hardware chief Rick Osterloh said in an interview.

Osterloh brought in HTC engineers and designers to help Google control more of the design and production of its products, including working more closely with suppliers. Google previously focused on software and let manufacturers including Samsung Electronics and HTC handle the hardware. But modern phones offer features like augmented reality and artificial intelligence-based services that require close integration of software and hardware.

"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 separate statement that it plans to proceed with its next flagship smartphone and will focus its efforts in the segment. "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," Cher Wang, chairwoman at HTC said in the statement.

For Google, a bigger step would be to create its own "system-on-a-chip" -- the main processors inside phones that Apple now inserts into its devices. Qualcomm provides the bulk of these chips to Android phone makers, and Osterloh said Google will keep working with the supplier for the foreseeable future.

Still, by designing more silicon itself, Google could cut business for other suppliers. Apple released its first system-on-a-chip in 2010, and has added special chips to store fingerprint and payment data, track motion, crunch graphics and run AI algorithms on mobile devices.

Google's Pixel sales have been a fraction of Apple's, but another phone maker designing more of its own components is a bad sign for suppliers. Dialog Semiconductor slumped last month after telling investors that Apple, its biggest customer, could design its own power-management chips. Imagination Technologies Group suffered a similar fate last year after Apple stopped buying the UK company's graphics chips in favour of in-house designs.

The HTC deal is also bad news for manufacturers of phones based on Google's Android operating system. Most of these companies have struggled to make money selling premium handsets that compete with the iPhone, while Google benefited from distributing search and other lucrative software services on those devices. Now Google is making its own high-end smartphones. The Pixel phone sold 1.5 million phones in 2017, up from 1 million the year before, according to Counterpoint Research. By contrast, Samsung is estimated to have shipped more than 300 million smartphone units last year.

If Android partners aren't alienated by Google's entrance, they are at least uneasy. After the Pixel arrived, some major Android manufacturers, like Samsung and Huawei Technologies, began to roll out more of their own services on their phones.

Other Android manufacturers "know why we're doing this," Osterloh said. "Quite honestly, Apple is doing really well in developed markets."

After the HTC deal, Google plans to expand research and marketing, cut deals with more phone carriers and retailers, and move into new markets. Sales remain limited to nine countries, including the US, Germany and Singapore.

"China is obviously a very attractive smartphone market and we're certainly interested in going back to China in the future, but we don't have any plans to discuss and frankly it's complicated for the company," he said. Google pulled its services from mainland China in 2010 after refusing to censor its search results.

If Google's push into smartphones sounds familiar, that's because the latest deal echoes Google's $12.5 billion (roughly Rs. 79,600 crores) acquisition of Motorola Mobility in 2012. That experiment flopped. Google never integrated the business and sold most of it to Lenovo Group for $2.91 billion (roughly Rs.18,500 crores). In a blog post, Alphabet CEO Larry Page said Motorola would be better off with a company that's "all-in when it comes to making mobile devices."

Osterloh knows the history well. He was at Motorola after the purchase and stayed on to run it for the Chinese company.

So what makes things different this time around? "The context, the time, it's a different world than it was during the PC-era," said Osterloh.

© 2018 Bloomberg LP