Google’s $1.1 billion deal with HTC is about much more than taking on Apple in the mobile hardware market, according to MoffettNathanson.
It’s also a tactical move on two fronts against its partners that make Android-powered devices.
The two companies announced last night that Google would pay cash for part of HTC’s mobile personnel, many of whom are already working to develop Pixel phones. The news came less than 24 hours after HTC said shares would halt trading Thursday in advance of what had been described as a “major takeover” regarding the future of its smartphone business.
Several news outlets were quick to frame the acquisition as one that will pit Google more directly against Apple, with the internet search giant buying its way into the smartphone market once again and the iPhone vendor increasingly focused on digital services. Like Apple, Google will now be able to develop its mobile operating system and apps in conjunction with mobile devices, providing an opportunity to offer a tightly integrated phone free of bloatware from carriers and outside manufacturers.
“If Google can create a compelling-enough owned and operated handset, it may be able to effectively take back share of the smartphone market from not just Apple/iOS (at ~15% of smartphone shipments globally, IDC 1Q17), but also other Android OEMs like Samsung,” MoffettNathanson wrote in a note to investors.
And clawing market share away from Android manufacturers is important for two reasons, the firm continued. Google has paid its manufacturer partners an increasing amount of distribution TAC (traffic acquisition costs), “pressuring margins and represent(ing) a growing bear case for Google.
Secondly, Google has come under fire from the European Commission, which has accused the company of abusing its dominant position with Android by requiring manufacturers to preinstall Google Search and other apps on most Android devices sold in Europe, and to use those apps as default services.
“Google may lose share of its key pre-installed apps on these OEMs’ devices if the EU comes down on it hard in its current Android probe and blows up Google’s contentious MADA (Mobile Application Distribution Agreements) with OEMs, which set out a list of demands OEMs must meet to gain access to the key Google Play Store,” MoffettNathanson wrote.
Selling a lineup of Google-made phones and tablets would help address both concerns, then, enabling the company to hedge its bets against a crackdown by the European Commission and giving it an opportunity to lessen its outlay to manufacturer partners for traffic acquisition costs. Meanwhile, it could help lay the foundation for a broader hardware business that includes augmented reality and virtual reality devices, home automation offerings and other gadgets.
“All in, we view this as a low-risk and relatively inexpensive way for Alphabet to proactively challenge two major headwinds (i.e., growing TAC and increased regulatory scrutiny around Android) while enabling it to more aggressively move into new growth areas like AI, AR and VR,” the firm opined. “In addition, it’s good to see Alphabet put its $95 billion cash pile to use to materially improve its long-term competitive positioning.”