Google (NASDAQ: GOOG) recently announced that it was acquiring part of HTC’s mobile phone business for $1.1 billion. This is the second time Google has made an acquisition in the handset space. While the first acquisition of Motorola was primarily for the patent portfolio, the HTC deal appears to be more for the hardware and design team than intellectual property. Through this acquisition, Alphabet will once again try to challenge incumbents Apple and Samsung for the premium segment of the hardware smartphone market. This time, the company could pose a credible challenge to these companies, as Google’s Pixel handsets have been positively received. Below we explore why this acquisition makes sense.
Alphabet Again Trying To Gain A Foothold In Premium Smartphone Market
Much of the profitability in the smartphone market comes from the high end. Apple’s iPhone generated an estimated 91% of the industry’s profits, despite accounting for 14% of the market as of Q1 2017. Given its premium price points, a new smartphone could prove profitable for Google, if it sells in sufficient volumes. Moreover, with the smartphone market saturating, a greater portion of sales are likely to come from customers upgrading to newer and more capable devices, providing opportunities for growth in the high end of the market.
A successful smartphone offering could also be key for Google as it tries to defend its mobile search ad business. A recent report from Bernstein estimated that Google will pay Apple $3 billion to remain the default search engine on the iPhone, despite the fact the iOS accounts for less than 15% of the smartphone market. This is because Apple users are typically more affluent, and advertisers consequently pay more per ad impression on iOS devices versus Android devices. Earning a bulk of revenues from a key rival’s platform poses a significant threat to Google, and Apple has recently been making moves that could hinder Google’s business on iOS devices. For instance, in the past, Apple removed Alphabet apps like Google Maps from the iOS home screen while promoting its own apps.
With the introduction of a successful smartphone, Google is looking to create a solid Android alternative to the iPhone, potentially allowing it to win over affluent customers. More importantly, it could introduce a new device to improve the overall quality of the Android experience. Having a better overall experience on its mobile OS would also be beneficial to its core advertising business.
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