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Google's Answer to Apple's iPhone Dominance: The Pixel Phone

Written by Jason Stutman
Posted October 9, 2016

Since its entry into the world of tech, Google Inc. has long struggled to gain any meaningful penetration in the consumer electronics market. Despite its domineering software presence in mobile through Android (~88% market share), Google has long relied on outside hardware partners to get its apps into the hands of consumers.

In 2011, Google first revealed its ambitions to change this status quo. In what would become the firm's biggest takeover to date, Google announced it would be acquiring handset maker Motorola Mobility for $12.5 billion. Less than three years later, though, it ditched the Motorola unit for just $2.9 billion.

On the surface, the Motorola deal seemed like a major blunder. It looked like Google's foray in smartphone production was a total failure. After all, headlines were showing a $9.6 billion loss, and analysts were reaming Google for the sale. In the eyes of CNET, it marked “one of the worst investments in Google's history.”

But things weren't quite as simple as they seemed...

For one, that $9.6 billion figure left out a number of crucial details. At the time of purchase, Motorola had $3.2 billion in cash. Jointly, Google saved somewhere around $2.4 billion in deferred tax assets. Prior to selling off Motorola for good, Google also managed to spin off various components of the former company totaling $2.5 billion.

Factoring in these numbers, as well as an estimated $2 billion in operating losses from the Motorola unit during ownership, Google was only in for about $3.5 billion. For perspective, Google last reported $78 billion in cash and short-term investments.

More importantly, though, Google managed to leverage the Motorola unit to keep Android hardware giant Samsung in its rightful place. Prior to the acquisition, Samsung was behaving like a dog that hadn't been housebroken yet, defecating in the very house Google was sheltering it in. It threw its own skin over stock Android to make it seem like it had a unique OS. It swapped out Google's stock apps in favor of its own. It even began building Tizen, an Android rival, that threatened to knock Google out of the game.

But Google was too smart and too influential to let any of that stand. With Motorola under its control, third-party hardware partners like Samsung were suddenly forced to comply. Stop messing with Android, or Google would ramp up handset production and cut them out. That was the unspoken threat.

Samsung quickly folded, and as part of a decade-long patent deal, it agreed to stop favoring its own apps over stock Android and to tone down its mobile skin. Two days after reaching this agreement, Google announced it would be selling the scraps of Motorola to Lenovo. It was a backhand of the highest order.

At the time of sale, Google retained an estimated $5.5 billion worth of Motorola intellectual property (the majority of 17,000 issued patents and 7,500 applications) as well as its advanced research lab — all for around $3.5 billion. What the media had painted as a disaster was actually an incredibly well-executed plan — one that's still playing out today.

Pixel: Google's Smartphone Resurrection

Earlier this week, Google made it perfectly clear that the sale of Motorola was not the concession of its hardware efforts that the media once suggested. In a highly covered reveal, the company showed off a slew of new devices on Tuesday that strongly indicate Google is making a serious effort to break into hardware. Only this time, it's doing it all under the Google brand and with 100% control over design.

Newly revealed Google devices include a new home speaker (similar to Amazon's Echo), a Wi-Fi system, an updated Chromecast, a new virtual reality headset, and its Pixel phones — the first end-to-end handsets by Google. As VP of product management Brian Rakowski explains in a blog post, the Pixel finally “brings hardware and software design together under one roof.” The only other company to do this successfully has been Apple Inc.

Of course, the difference is that while Apple's ecosystem accounts for a paltry market share of less than 12%, Google's Android system now has an 87.6% stranglehold. After securing software control, the company finally seems ready to leverage that footprint to break into premium device sales.

Google's full-fledged entry into the smartphone market is impeccably timed, too. Apple, for one, is coming off its second straight quarter of iPhone sales declines (after 13 straight years of consecutive growth), a 21% decline in iOS market share, and an incredibly tepid iPhone 7 launch. Samsung is also facing its own nightmare scenario thanks to a mass recall of exploding phones and replacements that are still setting aflame — on passenger airplanes to boot.

From a product spec standpoint, there actually isn't too much differentiation between Samsung and Apple's seventh-generation phones and Google's Pixel. Sure, Google can boast that the Pixel charges seven hours worth of battery in 15 minutes, has a beautiful AMOLED screen, and comes with the “highest rated camera phone” ever, but those aren't even the major selling points.

The main draw for Google's Pixel phones comes not from hardware but from compatibility with Google's widely used and highly polished ecosystem. Unlike third-party Android phones, the Pixel:

  • Automatically installs the latest Android updates and security features as they roll out.
  • Comes with unlimited picture and video storage through Google's cloud service.
  • Was built to fit with Google's new Daydream View VR headset (inarguably the best-looking VR headset to date).
  • Comes with Google Assistant, the firm's compelling answer to competing personal AI assistants like Siri.

The kicker here is that all of these bonuses will not be shared with other Android phones right away. To get the full “Google experience,” users will need a Pixel. VR and AI are the next frontiers in tech, and Google is poised to box out the opposition — at least for the time being.

Most importantly, Google controls the data, which is where the true power of an AI assistant comes from. Google knows where you work, your travel plans, when you take lunch, what music and shows you like, etc. In collecting this data, Google Assistant will better understand context than any other AI out there, which makes the Pixel an incredibly compelling piece of hardware.

If the Pixel manages to take hold, then Google will truly hold all the cards. Unless Samsung and Apple can respond, both will be left out in the cold.

Until next time,

  JS Sig

Jason Stutman

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