Google has invested $1.1bn to acquire a part of HTC, including:
- A significant number of HTC employees, many of whom are already working on Google Pixel smartphones. This may comprise up to 2000 heads.
- A non-exclusive license for continued use of HTC intellectual property.
Google’s latest hardware investment demonstrates the importance it places on mobile hardware. This move enables Google to accelerate the creation of in-house expertise and, even more importantly, reduces the risk that HTC’s financial troubles undermine what Google aims to do with the Pixel smartphone line. In essence, Google is undertaking an “acquihire” of part of HTC. Without external financial support, HTC may have been forced to cut costs by reducing headcount in its Pixel-focused team.
The move also demonstrates HTC’s importance to the Pixel line which Google downplayed a year ago. Then, Google pointed to the sole branding on its phones as proof the Pixel phones were designed by Google and not its partners. Clearly, this is not the case, and HTC’s financial weakness a year ago meant it sacrificed brand visibility in its Google contract while still making a large contribution. Other OEMs, notably Huawei, have stated the lack of co-branding meant they were unwilling to work with Google on Pixel, as they had done previously on the co-branded Nexus 6P smartphone.
Each company gains from the agreement, Google:
- Stabilizes a partner, which Google may wish to collaborate with in the future or use to manufacture Google hardware.
- Reduces risk on the imminent Pixel smartphones. Google will unveil new hardware on October 4, it cannot afford to have problems with its partners or supply chain to be successful in the competitive smartphone market.
- Increases in-house mobile hardware expertise quickly. Smartphone hardware talent will help Google with hardware products in adjacent markets which are increasingly using smartphone-related application processors, sensors, software, and connectivity such as VR, AR, and smart home devices.
- Ensures continued access to HTC intellectual property. With HTC struggling, this removes the risk that IP access becomes problematic in future if HTC sells other parts of the company or is acquired.
Arguably, this is a better deal for HTC, and is a reflection of Google’s reliance on an external weak partner. HTC gains:
- A substantial investment. The $1.1bbn will help cushion the business as HTC transitions into new areas which have enormous growth potential, but which require research and development funding and are not yet profitable, such as VR.
- Significantly lower operational costs. HTC expects operational costs to drop 30-40%, and HTC has not had to fund redundancy payments to deliver this lower cost base. Like the sale of Nokia’s devices business to Microsoft, HTC is being paid by a partner to reduce its headcount.
- An ongoing warm relationship with Google. The agreement indicates discussions continue on collaboration in other areas, likely including these growth areas for HTC for example possibly around HTC-made standalone Daydream VR headsets.
- The ability to continue to make smartphones under the HTC brand. HTC retains smartphone research and development capabilities, Google is only acquiring part of HTC’s assets here.
This agreement does not solve either company’s strategic challenges. HTC needs to find a way to create profit and Google must scale its mobile hardware business while not antagonizing the smartphone OEMs – its current hardware customers – at least not until some point in the future when Google’s hardware business has become sufficiently large and profitable so Google no longer needs them.
For Google, there are many other smartphone makers making losses who will be open to acquisitions of all or parts of their business. Google’s challenge is to decide when to build, when to buy, and which external assets would fit best.
Yet this agreement confirms Google’s strategy for mobile. Despite the turbulent times at Nest following Google acquisition, and the sale then divestment of Motorola Mobility, Google is committed to hardware and is open to further acquisitions if they add useful assets. The smartphone industry and device makers in every other market that uses Google’s operating systems must continue to watch Google closely and continually re-assess the competitive threat.