On Thursday, September 21, Google announced that the company had agreed to purchase a part of the HTC mobile division. Initially, this operation and interest in hardware may seem surprising. As the reader may remember, Google bought the Motorola Motorola in 2011, but had to sell it to Lenovo after just three years and with a financial loss of between six and nine billion dollars. Hasn’t the search giant learned anything since then?
In fact, Google has no choice but to try again. The reason is that Android is developing itself into a serious strategic failure despite its dominant market share as an operating system.
First, Android has become an extremely fragmented operating system. Historically, different vendors have installed different versions of Android in their mobiles. In the vast majority of cases, these versions are older and often with an own appearance, the so called skins which differs from the original Android version developed by Google, the so-called “stock Android”. Other manufacturers, like Amazon or Chinese Xiaomi, have simply developed their own independent operating systems, the so-called “forked Android”.
This fragmentation not only represents a serious security threat. It represents a real obstacle to the distribution of revenue-generating services and new innovations for Google.
The business logic that Android should represent as a distribution channel for all Google services is also under strong pressure. Samsung has achieved a fairly dominating market share, especially in the United States. This means Google has to pay the Korean giant over three billion dollars a year to have their search engine installed as default. This is called Traffic Acquisition Cost or TAC. It i a very serious metric that investors and analysts follow with special attention. In addition, Google has to pay to Apple and to some telecom operators equivalent amounts for the same purpose. This type of cost already represents twenty-two percent of Google’s advertising revenues, grows sharply, and puts financial margins under pressure.
However, the development of artificial intelligence and digital assistants is likely to concern Google most. In this field, the giant of Mountain View meets real competition from Apple Siri and Amazon Alexa already. The problem is that the manufacturers of smartphones (and other types of hardware) have begun to install the digital assistants they themselves prefer without asking Google for permission. Some of them actually use Alexa. Samsung has gone one step further and has developed its own, called Bixby.
For Google, to take control of the Android ecosystem is thus becoming a matter of urgency. However, the only practical way to accomplish this is to create its own hardware and integrate it closer to the operating system, just as Apple does. Google knows this and launched last year Pixel, its own smartphone with stock Android. A new model has been confirmed for launch this year. However, up to now Pixel phones have remained a market anecdote, without significant market shares. To make Pixel relevant, the next generation must be mass-produced, an area Google does not have enough experience with, but HTC has. The acquisition is thus strategically impeccable.
However, the strategy may not work. Producing and marketing a new mobile phone is an expensive affair. Massive market shares are needed globally to earn money. Among all Android-based smartphones, only Samsung is delivering consistent positive results, while everyone else loses money. Will shareholders in Google withstand huge losses while the Pixel experiment fights for market shares in an ultra-competitive market? At the same time, such a strategy can encourage mobile manufacturers to seek greater independence from Google. Both Samsung and Huawei have plans with their own operating systems if necessary. Does Google afford a direct confrontation with its still indispensable partners?
For Google, it’s now or never. If the strategy works, the company can develop into an even more formidable player in the internet economy. If it fails, it may mean a steadily increasing income and cash flow erosion, ever less self-interest in the further development of Android and a greater dependence on leading smartphone manufacturers and Apple.
This blog post is a translation into English of my comment in the Norwegian publication E24.no.