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It's Official: Google Now Builds Hardware In-House

Nicholas Rossolillo, The Motley Fool

Late in 2017, Google parent Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) announced it would be purchasing a division of Taiwanese device manufacturer HTC (NASDAQOTH: HTCKF). The deal is now complete, setting the stage for a new era in the search engine company's history, and for the technology industry in general.

What Google did

Last year, Google announced that it would be acquiring HTC's design team for $1.1 billion, and the deal is now complete. It nets Google about 2,000 new employees, including engineers and support staff, who will remain in Taiwan. The team is involved in device research and development and gained fame for producing Google's Pixel line of smartphones.

HTC said it will maintain an in-house R&D team and will keep making its own line of smartphones. But the company has been on a downward trend in recent years, with increased competition chopping down its already small global market share into insignificance. The HTC transfer to Google reduces its workforce by about 20%.

Google's hardware lineup, including two phones, a 2-in-1 laptop, smart home devices, earbuds, and a camera.

Google's lineup of hardware. Image source: Google.

Why this move matters

Google's slice of the smartphone industry appears to be on the rise. Phones using the Android operating system are knocking on the door of 90% total global market share. The company doesn't provide specific numbers for its branded devices and its new Pixel lineup, but management did say it was a contributing factor to growth during its fourth quarter 2017 update.

The segment that contains hardware sales, labeled "other revenues," grew 38% to cap 2017. The division also contains Google's cloud computing business and Google Play online store. Though its growth rate is outpacing the rest of the company's, it still represents only 15% of total revenue. That makes its foray into hardware a big potential payoff for investors. So far, so good, as management said "made by Google" device sales doubled during the last holiday shopping season.

But why move the Pixel phone team in-house? It seems it's all about greater control. Devices licensed out bearing the Google badge are on the rise, and the company's strategy has been -- and still is -- to push much of that work to hardware developers. The idea behind the Pixel lineup, though, is to offer a higher-end product where the hardware and Google's software are more closely aligned. Think better integration with Google Assistant, Play store, and YouTube.

That strategy of keeping the hardware and software package neat and operating together seamlessly has worked wonders for Apple (NASDAQ: AAPL) over the years. Google's path seems to be putting it on a direct collision course with its other highfalutin rival, and Google intends to win. The new Pixel 2 and Pixel 2 XL start at $649 and $849, respectively. In contrast, the iPhone 8, iPhone 8 Plus, and iPhone X are $699, $799, and $999, respectively. Perhaps in light of the price undercut by rivals, Apple recently issued some cautious sales guidance during its fourth-quarter report.

This battle extends beyond just smartphones, too. Pixelbook, designed as a high-end tablet, looks like a first attempt to square off against Apple's MacBook. Then there is Google Home with built-in Google Assistant, looking to carve out a niche in the smart-home market against Amazon's Echo and Apple's upcoming HomePod. A full-on technology platform war is upon us.

In short, it looks as if Google and parent Alphabet weren't content with licensing out Google's up-and-coming hardware business anymore. The smartphone market is huge, so a $1.1 billion price tag to enter it directly could end up being money well spent.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Alphabet (C shares) and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.