Sunday, September 24, 2017

For Google, HTC deal is about the Pixel's next decade

Google wants to win the smartphone game, and with the recent HTC deal, there's a realistic roadmap to getting there.

When rumors began swirling about Google buying HTC's smartphone division, anyone with an opinion on the industry had thoughts; here's why it's good for Google; here's why it's a terrible idea. Both sides were probably right, to some extent.

Now that the deal is done, though, we have a more nuanced understanding of exactly what transpired, and why Google chose not to acquire HTC's entire smartphone division, but instead over 2,000 of its employees, most of which have worked in some capacity on the company's Pixel lineup. The deal ensures that the Pixel lineup is here to stay, that Google is not just invested in hardware as a division — this is not some ephemeral project that will dissipate into Google's core business as so many others have over the years — but in the Pixel smartphone as a concept.

Google was a very different company when it bought Motorola in 2012.

I agree with many things about Alex's beautifully-written Editor's Desk from a few weeks ago, but we divert in a couple of key matters — and I have the benefit of hindsight, so forgive me — when it comes to Google's past and future. For starters, I firmly believe that Google didn't buy Motorola primarily for its patents in 2012, nor did it "become a smartphone vendor by accident." That lets Google off too easily by allowing the company to reframe its enormous mistake in a way that, in retrospect, still makes sense. Yes, we lost a ton of money, but it was all about the patents anyway, so it was still a good deal for us.

Google definitely bought Motorola to become a smartphone vendor. It wanted to build Motorola into a tier one smartphone vendor to take on Samsung and Apple by reshaping the company in its own image. Under Google, Motorola went through a metamorphosis of simplicity and focus that, even under Lenovo today, from which it is still benefiting. Similarly, Google learned a tremendous amount about the smartphone industry, about making deals with wireless carriers, and about manufacturing smartphones, that likely led it to understand that it didn't want the overhead. If, under Google, Motorola had risen to sell tens of millions of phones a year and turn a handsome profit, Google would be boasting today of its success in delicately balancing the needs of Android the platform and its in-house smartphone division.

This is an oversimplification, but when Google sold Motorola to Lenovo in 2014 for less than a fifth of what it paid it also shed itself of the tremendous ongoing financial burden of actually owning the equipment, and maintaining the logistics and distribution deals, that go along with being a smartphone maker. It's tough, capital-intensive work — work that Apple, which makes the most money in the industry by an enormous margin, outsources to partners all over China. Apple may design an increasing number of components inside its phones, but it doesn't actually build, or employ people that build, any of them.

Google, by "aqui-hiring" a couple thousand HTC employees, and gaining non-exclusive access to the Taiwanese company's patent portfolio, is moving in that direction. It is setting itself up for the next ten years of the Pixel, building on the foundation of its relatively successful foray into smartphone collaboration with the Nexus line.

The first-generation Pixels have a lot more HTC DNA than Google is willing to admit.

When the Pixels were announced last October, it was no secret that HTC was heavily involved not only in the manufacturing of the phones but the designs as well. When the inevitable teardowns came in the days following their October 20 release, it became immediately apparent that these were HTC phones in nearly all but name; the internal designs, from the placement of the batteries to the choice of vibration motors, were all HTC. To be clear, Google enforced a set of rules for HTC to follow, and held its hand to finalize the design, ensuring that these would be the most "Google" phones released to date, but they still shared plenty of HTC DNA.

Google could work with the likes of Foxconn, Pegatron and other specialized manufacturing firms to build in-house-designed flagships, but that's a ways off. Spending $1.1 billion for more than 2,000 HTC employees, though, ensures that future is accessible when the time comes.

The Google that spent $12.5 billion for Motorola in 2012 is not the same one that spent less than a tenth of that amount last week. Back then, Google was run by Larry Page and Android overseen by Andy Rubin. Android, despite having been around for nearly half a decade at that point, was nowhere near the polished, mature, and capable operating system it is today. In late 2011, when Google announced it was purchasing Motorola, it was HTC, not Samsung, that dominated the ecosystem's conversation — and its sales. It wouldn't be until the following year, with the Galaxy S3, that Samsung would rightfully overtake HTC — and everyone else — in dominating the Android space. In the intervening time, Google worked with Motorola to build what is still today one of the most ambitious flagships of the last decade, the Moto X.

Flawed as it was, if Motorola had sold ten million Moto Xs instead of the same number of Moto Gs, the Android ecosystem today may look very different. But what happened happened, and Google has since hired Rick Osterloh, the man responsible for steering that unwieldy Motorola ship, to run its nascent hardware division. And under him, not only have we been given Pixels, but Google Home, Google Wifi, Daydream, and an emerging optimism for a Google that understands the types of hardware experiences people want.

The first generation Pixels are also flawed. They also didn't sell in the tens of millions. But Google just spent $1.1 billion to make sure that it can, and will, sell in that number sometime in the future. Because neither Apple nor Samsung, nor BlackBerry or Nokia before them, sold in those numbers in their first years. The phone business is a long-term investment, one that involves making hundreds of precarious right moves before finding true success. What this HTC deal tells me is that Google wants the Pixel line to be around in 10 years, and that it wants to compete with Samsung and Apple in every market, from hardware to machine learning and computational photography to smart assistants and media acquisition.

There's a reason I haven't talked much about the Pixel 2 and Pixel 2 XL in this column, the phones that Google wants us all to focus on right now. That's because this HTC deal will likely only bear fruit not in 2017 but in 2023. The HTC of 2017 helped Google build a smartphone; by 2023, Google hopes those same people will help it build an empire.

Here's what else is going through my mind this week.

That's it for me this week! Enjoy the rest of your Sunday, and I'll see you all here again tomorrow.

-Daniel



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