Google agreed to buy part of HTC Corp’s engineering and design teams for $1.1 billion to bolster the US internet giant’s nascent hardware business. Alphabet Inc’s Google is taking on HTC employees including teams that’ve worked on its signature Pixel smartphone. The deal also comes with a non-exclusive licensing agreement for HTC intellectual property, the companies said in a statement.
Google gains tighter control over production of its Pixel smartphone and other devices, potentially helping sales. Those gadgets are becoming the pillars of Google’s strategic push to distribute critical software products like its voice-enabled assistant and better compete with Apple Inc. The search giant is preparing to unveil a second generation of devices in October, building on a portfolio that runs the gamut from its Google Home speakers to Daydream.
“It’s still early days for Google’s hardware business. We’re focused on building our core capabilities,” Rick Osterloh, senior vice president of hardware, said in a blog post. “A team of HTC talent will join Google as part of the hardware organization. These future fellow Googlers are amazing folks we’ve already been working with closely on the Pixel smartphone line, and we’re excited to see what we can do together as one team.”
It’s unclear what the departure of key engineering talent spells for the future of HTC, which once ranked among the world’s top smartphone makers but lost share to Apple, Samsung Electronics Co. and Chinese manufacturers like Huawei Technologies Co. It’s since waded into virtual reality with the Vive headset. HTC had been working with an adviser to explore selling its handset or VIVE virtual reality businesses, and Google had been talking with the company, Bloomberg reported last month.
Shares of the Taoyuan City, Taiwan-based company, were suspended from trading. They have fallen more than 12 percent this year.
“The Vive is its only growth engine,” John Butler, an analyst at Bloomberg Intelligence, wrote in a research note before the deal was announced. “Its smartphone share has dropped to the point where a recovery is almost impossible.”
Alphabet investors may be concerned about history repeating itself. In 2012, Google paid $12.5 billion for Motorola Mobility, then a leading Android handset manufacturer. In less than three years, Google sold it to Lenovo Group Ltd. for less than $3 billion, while keeping Motorola’s valuable patent portfolio. Owning Motorola had eroded Google’s profit margins and upset other phone makers that relied on its Android software.
The HTC transaction however costs a lot less and comes at a very different time — when Google and its biggest rivals are more focused than ever on consumer devices built around new artificial-intelligence and augmented-reality services.
AR demands powerful, expensive cameras and sensors working in sync with software to process and superimpose 3-D images on real world scenes. Having different Android partners making their own phones with different components makes this task more difficult for Google — especially compared with Apple, which can pick one set of AR hardware to marry to its software.
Google has also already launched its own phones, so Android phone makers have gotten used to their partner being a rival. The production resources of HTC, which assembled the first Pixel device and was key to the Nexus line, may support this existing phone operation. Greater control of hardware production would also give Google more control over the distribution of new services such as its voice-based digital assistant.
A more Apple-like approach would also let Google steer the Android mobile operating system in its preferred direction. The tech giant has struggled to get handset makers and carriers to ship Android devices with the latest secure software. The Pixel was designed, in part, to prompt other Android phone makers push out these updates faster. Still, some Android partners are moving ahead with competing software efforts — Huawei linked up with Amazon’s assistant, and Samsung has its own.
Google’s Pixel is far from a top-selling phone. External estimates pegged sales at 552,000 units during its first quarter. Yet selling Pixels has auxiliary benefits for Google, chief among them the boost to its primary sales. With each Pixel phone it moves, Google doles out less in traffic acquisition costs: it pays money to partners like Apple and carriers to install Google’s search service. That cost has risen steadily, pulling down its sales totals last quarter in particular.
A bigger hardware unit would offset such expenses, Eric Sheridan, an analyst at UBS, wrote in a recent research note. But it also comes with more spending, in maintenance and marketing. An HTC acquisition and larger Google hardware unit could hurt the company’s profit margins, Sheridan warned.
Evercore worked with HTC as the financial advisor, and Lazard advised Google.