Google is Clearly Serious About Hardware, But Not About Selling Phones

on October 5, 2017
Reading Time: 5 minutes

Google’s announcement of its second generation of first-party hardware made clear something that’s been increasingly apparent over the past year: the company is very serious about this business. However, it also reinforced what continues to be a strange paradox: Google doesn’t actually seem to be very serious about selling at least some of that hardware, namely phones.

Another Solid Set of Hardware

Google’s first set of hardware was announced a year ago this week, and was already an impressive start. The Pixel phones were a decent pair of devices with some clever features, good cameras, and exclusive access – at least temporarily – to the Google Assistant which was then just launching. The Google Home was a prettier and in some ways more powerful answer to the Amazon Echo, at a lower price. Daydream VR was a prettier and more usable answer to the Samsung Gear VR. And Google WiFi leaned on Google’s partnership with a couple of traditional WiFi router vendors to create the first mesh WiFi system from a big brand. All told, the hardware released was solid, attractive, and competitive in its various markets.

This year’s hardware builds nicely on last year’s, with refreshed Pixel phones, two new Google Home devices either side of the first in the lineup, and new entrants in several other categories too. The new Pixel phones look like good upgrades on last year’s, and offer some interesting new features while not embracing some of this year’s big trends either entirely or at all. The new Google Home devices will help Google compete more effectively with the low end of Amazon’s lineup while also targeting a part of the market Apple had looked like having to itself. The Pixelbook laptop is as baffling a product as the first Pixel was – a premium device in a category notable mostly for its low prices. Google’s two new categories are wireless earbuds, where its PixelBuds serve as BeatsX competitors at an AirPods price point with a unique AI-based twist, and Google Clips seeks to create a new category which took a somewhat unwarranted chunk out of GoPro’s share price yesterday.

Again, all told this looks like a solid lineup. Google’s recent HTC deal, the fact that it’s updated and broadened the hardware line, and its ongoing public statements all confirm that it’s really serious about making its own hardware, offering a coherent set of products, and driving the same integration and optimization benefits as other integrated vendors have done before.

A Unique and Somewhat Puzzling Approach to Hardware

Google continues to approach the hardware categories it enters in a unique way, however. It downplays the role of hardware itself while playing up the role of software, clearly playing to its strengths as first and foremost a software company, and one which has had little control until now over the details of its hardware design in phones in particular. It’s the argument we would expect Google to make, and it’s clearly capable of achieving in software what others pursue through hardware, which is impressive.

Some of Google’s offerings also feel experimental, and the AI features in both the PixelBuds and Clips seem like good examples of that. Real-time translation and the idea of a camera that automatically takes the shots you want are both impressive demonstrations of Google’s AI chops, but neither is a product people are clamoring for, nor are the features ones people are actually likely to use regularly. How often do you need real-time language translation? And how likely is it that both you and your conversation partner will have the necessary hardware and software to make it happen? Google is honest about the fact that it doesn’t expect Google Clips to be a big seller, and that’s a good thing – creating new hardware categories is tough for anyone, but especially for companies without a significant presence or history in the space.

Given that ChromeOS has actually done pretty well in the segments where it feels relevant, while Android Wear continues to languish, some of Google’s choices about where to pursue a first party hardware strategy seem a little puzzling. Why not show the Android OEMs how to make a decent smartwatch, rather than ceding much of the market to two platforms – Apple’s and Samsung’s – it doesn’t control? Why pursue premium Chromebooks instead? Showcasing both Android apps and Google Assistant on a Chromebook would be just as possible at $500 as at $1000 if that’s the intention here.

Marketing Continues to be the Biggest Challenge

Above all, though, it feels like marketing continues to be Google’s biggest challenge when it comes to smartphones in particular. The products are there, but Google’s approach to the other 4 P’s of marketing continues to be lacking:

  • Price – last year Google matched iPhone pricing exactly, but this year it has a $200 price differential between phones which it explicitly said don’t have any feature differences, in a market where $100 size differentials have become the norm. That makes the Pixel 2 XL more expensive than Apple’s base iPhone 8 Plus, which seems an odd decision.
  • Promotion – as with pricing, much of Google’s marketing last year seemed aimed directly at the iPhone, not surprising from a company which doesn’t want to be seen to undermine its OEM partners. And yet all the evidence suggests that people tend to be fairly loyal to the two big ecosystems, and there’s relatively little switching from iOS to Android. Everyone else knows that Pixels are for Google-centric people, and Google needs to embrace that in its marketing rather than making sarcastic digs at the iPhone. Its advertising should be about what its phones do uniquely well for people who love Google and its services, because that’s the niche it’s really going after.
  • People and Placement – ever since the launch of the first Android phone, Google has underestimated the role of people in selling and supporting phones, and that still doesn’t seem to have changed. Its own channel is exclusively online, and it really hasn’t invested in the kind of third party retail presence necessary to effectively market a phone. But from a US perspective in particular the biggest stumble Google has made continues to be its exclusive relationship with Verizon on the carrier side. Carriers are by far the biggest channel for smartphone sales in the US, and limiting itself to one carrier – generally not the one seen as the most forward looking either – has been a huge mistake, one Google has repeated this year. (Indeed, I was told today that the Google-Verizon exclusive is a three-year deal, and if that’s true it means Google can’t extricate itself from this mess anytime soon.)

All of this adds up to a bizarre picture of a Google which is enormously serious about building the best possible hardware, but doesn’t seem very serious at all about actually selling it. Given the scale of both its organic investment in the Pixel line and now its billion-dollar-plus HTC deal, Google is pouring massive resources into this project, but it will never see a reasonable return unless these devices sell. It’s unclear to me whether this is a deliberate strategy on Google’s part to limit the negative impact on its hardware partners, or the result of organizational schizophrenia, but it simply doesn’t make sense. Either Google is serious about this market or it isn’t, and if it is it needs to bite the bullet and go ahead and compete with its OEM partners more directly. If that pushes them to do better, that’s good for Google too, and if it doesn’t Google gets a greater share of the premium Android smartphone market and gets to put its own services front and center. At this point, there’s no viable alternative to Android for independent phone makers, so there’s little if any risk to the strategy.