Google buys big piece of HTC in billion-dollar bet on devices

Google is biting off a big piece of device manufacturer HTC for $1.1 billion US ($1.4 billion Cdn) to expand its efforts to build phones, speakers and other gadgets equipped with its arsenal of digital services.

The company is buying the HTC team that built the Pixel smartphone for Google in a cash deal, they said in a joint statement Thursday. Google is also getting a non-exclusive license for Taiwan-based HTC's intellectual property to help support Pixel phones.

The deal underscores how serious Google is becoming about designing its own family of devices to compete against Apple and Amazon in a high-stakes battle to become the technological hub of people's lives.

"For Google, this agreement further reinforces its commitment to smartphones and overall investment in its emerging hardware business," the statement said.

Over the past decade, Google had focused on giving away its Android operating system to an array of device makers, including Taiwan's HTC, to ensure people would keep using its ubiquitous search engine, email, maps, YouTube video service and other software on smartphones and other pieces of hardware.

But that changed last year when Google stamped its brand on a smartphone and internet-connected speaker. HTC manufactured the Pixel phones that Google designed last year, paving the way for this deal to unfold.

Although Android powers about four out of every five smartphones and other mobile devices in the world, the software can be altered in ways that result in Google's services being de-emphasized or left out completely from the pre-installed set of apps.

Fragmentation threat

That fragmentation threatens to undercut Google's ability to increase the ad sales that bring in most of the revenue to its corporate parent, Alphabet Inc., as people spend more and more time on smartphones and other devices instead of personal computers.

Apple's iPhone and other hardware products are also particularly popular among affluent consumers prized by advertisers, giving Google another incentive to develop its own high-priced phone as a mobile platform for its products and ads.

Google also wants to build more internet-connected devices designed primarily for home usage, such as its voice-controlled speaker that's trying to catch up with Amazon's Echo. The Home speaker includes a digital concierge, called Google Assistant, that answers questions and helps manage people's lives, much like the Alexa in Amazon's Echo.

The purchase is a gamble on several fronts for Google and Alphabet but analysts said this deal will likely be more successful than its Motorola deal.

Google's previous forays into hardware haven't panned out to be big winners so far. It paid $12.5 billion US ($15.5 billion Cdn)for smartphone maker Motorola Mobility five years ago only to sell it off to Lenovo Group for less than $3 billion US ($3.7 billion Cdn) after struggling to make a dent in the market. And in 2014, Google paid more than $3 billion ($3.7 billion Cdn)for home device maker Nest Labs, which is still struggling to make money under Alphabet's ownership.

Expanding into hardware also threatens to alienate Samsung Electronics, Huawei and other device makers that Google relies on to distribute its Android software.

Analysts are optimistic that the deal will give a financial lifeline to Google's struggling Taiwanese partner while giving the Silicon Valley giant access to the strong research and development talents that it needs in order to expand its share in the premium smartphone market.

"To have a tighter integration of hardware and software and build own branded products, Google needs access to a good R&D team," said Neil Shah, research director at Counterpoint Technology Market Research.

HTC has been Google's partner since 2008 but its market share dramatically shrank in the last decade even with its top-notch phones as the company struggled to market and sell its devices. Counterpoint's data shows HTC's market share at less than 1 per cent last year, compared with nearly 9 per cent in 2011.

"So this investment, while is a business decision to have access to one of the best R&D team but also I believe is a sort of emotional decision to save its close partners," Shah said.

Samsung loses?

Analysts predicted Samsung to be the biggest loser in this deal, as Google's Pixel phones can undercut Samsung's smartphone business. Samsung's rise to the world's largest smartphone maker around 2011 stems largely from its early bet on Google's Android operating system. But the South Korean company has increasingly become a competitor to Google as it created its own mobile software and apps that can replace the Silicon Valley giant's services. It also fostered a closer tie with Facebook, Google's rival, highlighting the partnership on virtual reality by inviting Facebook CEO Mark Zuckerberg to its stage in 2016.

If Samsung is unable to justify the high price of its Galaxy phones with new hardware features, consumers who seek more reasonably priced phones with the newest software by Google can opt to Pixel phones.

"If differentiating phones with hardware becomes increasingly difficult, Samsung could lose its battle in terms of making good value for money phones" to Google, said Kim Young Woo, a tech analyst at SK Securities in Seoul, South Korea. "It will be a more successful deal than Motorola."

Kim said HTC's virtual reality devices could also be Google's target.

But Samsung won't be just a loser. Samsung Electronics supplies advanced mobile displays and chips to handset makers around the world and Google's new Pixel phone is widely expected to use advanced displays called OLED made by Samsung and LG.

• Why Apple, Amazon, Google and Microsoft are all betting on smart speakers