Interesting times ahead for Android ecosystem

Singapore

ANYONE reading the news that Google is buying a significant chunk of Taiwanese phone maker HTC for US$1.1 billion - after months of speculation - could be excused for getting a sense of deja vu. Is it a kind of redux to Google's highly publicised US$12.5 billion purchase of iconic mobile phone maker Motorola?

While the whole world knows that Google has hardware ambitions, most industry watchers have been of the view that this ambition was one of its long-term KIVs (keep in view). Ditto for its parent, Alphabet.

And why not?

The search giant has a cool gig going - its Android OS (operating system) powers nearly 90 per cent of the world's smartphones, and crucially, in the growing developing markets such as India, that proportion is even higher. This ubiquitous presence allows Google to push its cash cow products such as search, e-mail and cloud services to millions of users around the world, many of whom are coming online for the first time over a mobile device. Google is also using its wide user base to push new products, such as online payment service Tez (fast in Hindi) in India.

Make no mistake, it's not an India-specific product; Google has copyright to the name in several developing nations. If one were to recall the time Google bought Motorola in 2011, Google's Android platform was under attack from Apple with a slew of court cases on alleged IP (intellectual property) infringements. This was a hangover from the late Steve Jobs' "thermo-nuclear" war threat after the Android platform was launched. Google paid a pretty penny for Motorola to acquire its 17,000 highly valuable mobile patents to better protect the then fledgling Android ecosystem. Once it got its hands on the patents, Google followed a very hands-off strategy with respect to Motorola's devices business.

In 2017, Google has a far more serious hardware ambition than it had in 2011.

Rick Osterloh, Google senior vice-president for hardware, was explicit in his blog post on Thursday. "Our team's goal is to offer the best Google experience - across hardware, software and services - to people around the world. Last fall, we introduced our first family of Made by Google products, including Pixel smartphones, Google Home, Google Wifi, Daydream View and Chromecast Ultra, and we're preparing to unveil our second generation of products on Oct 4. We're excited about the 2017 line-up, but even more inspired by what's in store over the next five, 10, even 20 years."

The HTC acquisition is meant to bring the company's highly regarded design and engineering team in-house to boost the hardware push. Under the deal, Google is picking up the "Powered by HTC" R&D (research and development) division, which is the team behind Google's Pixel phones. This means roughly half of HTC's 4,000-strong R&D team is moving to Google. The deal also gives Google a non-exclusive licence for a large part of HTC's intellectual property.

It helps Google in several ways. As Thomas Husson, Forrester's vice-president, principal analyst - marketing and strategy, tells The Business Times, Google has not yet been successful at selling consumer devices. "Acquisitions of key HTC's assets will give them the hardware technology expertise, the design skills and the experience in smartphone retail distribution they badly need."

Mr Husson's point about retail distribution is very important. As an example, while Google's Pixel smartphones were very well received in the US and Europe, they barely made it to Asia, which is the only really fast growing market. The HTC deal could give Google better retail distribution expertise that would allow it to get its products to a wider set of consumers.

The deal also shows that Google is looking beyond smartphones to newer technologies. As Mr Husson notes, new technologies such as augmented reality (AR) require deeper integration with hardware.

"Due to Android's massive fragmentation, Google needs to control the distribution of its services and to reduce its traffic acquisition costs. Two weeks ahead of the likely announcement of new Pixel smartphones and other emerging hardware devices, HTC's acquisition illustrates Google's commitment to the consumer device space. Official release of new products on Oct 4 is likely to demonstrate that Google is finally serious in controlling the device ecosystem."

Anshul Gupta, research director at Gartner, adds: "Google's intent in HTC is more to bring device capabilities in-house which is different from Moto's acquisition. Google is getting serious in building some truly differentiated devices, be it smartphones, wearables or smart home devices. Google has strong capabilities in the area of AR/VR (virtual reality), AI, computer vision, software, services to build differentiated devices to compete in the market now. It will be interesting to see Google expanding its devices portfolio to compete with the leaders."

One reason Google has always been a bit cagey about its hardware ambitions is that it does not want to upset hardware vendors who use Android to power their smartphones.

However, technology is rapidly evolving and Google itself is changing from being a search and advertisement-driven company (though these will continue to remain important revenue earners) into more of an artificial intelligence (AI) and data-driven company. For it to be able to offer these services in a seamless manner in a mobile first world, it needs more control over the hardware and this is where its HTC acquisition comes in. The acquisition, thus, is not a short-term tactical play. Rather, Google is looking at the long term as devices change and new AI-driven "smart apps" become mainstream.

As Mr Husson puts it: "I think such an approach will take a long time to pay off but makes sense for new emerging devices and form factors. They will only deliver best of breed experiences a la Apple for their flagship devices to showcase to other OEMs (original equipment manufacturers) what's the art of the possible but this is also likely to make their relationships with other manufacturers more complex."

It remains to be seen how Google's relationship with its large hardware vendor partners such as Samsung evolve as it makes a more serious hardware play. Interesting times are ahead for the Android ecosystem.