I/O Preview: Alphabet Inc (GOOGL) Has Difficult Decisions to Make

GOOGL - I/O Preview: Alphabet Inc (GOOGL) Has Difficult Decisions to Make

Alphabet Inc (NASDAQ:GOOGL), the software artists formerly known as Google, holds its annual I/O developer conference starting Wednesday. And GOOGL stock analysts will be looking for progress in areas where the company is not seen as the leader.

I/O Preview: Alphabet Inc (GOOGL) Has to Make Some Difficult Decisions

Amazon.com, Inc. (NASDAQ:AMZN) dominates voice control. Microsoft Corporation (NASDAQ:MSFT) is seen as having a lead in virtual reality, where games are the key application area. The lesson is that Google is not a products company, but increasingly, control over technology depends on selling products people buy.

Alphabet enters Google I/O 2017 from a position of strength in a few areas. Android is the dominant mobile platform, and the company will be releasing Version N of the software and starting testing of Version O, already dubbed Oreo. The new software is expected to focus on increased battery life, a continuing user headache.

But for Alphabet, Android is a service, not a product. Therein lies a problem.

Can Google Sell Things?

Alphabet knows how to get good reviews for its products, like the Pixel Phone, but it doesn’t sell many. The phone exists to showcase software, not to compete with the Apple Inc. (NASDAQ:AAPL) iPhone.

But augmented reality, first seen in the Pokemon Go game, and virtual reality, which first came to attention when Facebook Inc (NASDAQ:FB) bought Oculus, require custom hardware. Google has a camera and sensor assembly called Tango, and a virtual reality headset system called Daydream, but it faces the problem of getting this software to market in hardware.

It is making a start. Daydream is implemented in a Google headset called View, and Google recently bought a studio called Owlchemy that produces VR games. But the company is far behind in gaming.

The problems of Tango and Daydream illustrate the loss of control that comes from only offering operating system software, and the lack of a custom manufacturing base that could let Google get to market on its own. Google Home is getting killed in the market because Amazon saw voice as a product, and delivered millions of Echo speakers and Echo dots while Google was focused only on the software.

GOOGL does lead with phones, delivered through OEMs, and they will help it push its Internet of Things platforms, Brillo and Weave. But Echo dominates the home voice market. Google’s OEM strategy is killing Apple in mobile — 9 of 10 phones run Android instead of iOS — but Apple is grabbing most of the field’s profits.

In voice control, Home isn’t even getting the market share.

Herding Cats

The OEM model has scaling problems. Getting everyone on the same page is difficult. Amazon can make a support decision and have it followed in ways Google cannot.

Google’s approach of simply writing software and letting others take on the hardware risk is not working, as the success of Amazon Echo Show illustrates. It’s not hard to add video calling features to a voice interface that already has control over Wi-Fi, but GOOGL would have to announce the software, get OEM buy-in, then see a range of products hit the market to even compete. Amazon simply delivered product.

The OEM approach can still work in some areas. It’s working with the Google Chromebook, a browser-based PC that has now passed the Apple Macintosh in sales and is winning in the education market for its low price and cloud-based operating system, which means less built-in obsolescence.

But it’s clear the system won’t work for products like the View VR headset, or Tango augmented reality, or Android Wear watches. Google is accustomed to taking the lead from the market’s interest, implementing solutions, and leaving the risky business of getting products through sales channels to others.

Alphabet is now in a position of having to make hard choices, in areas where its approach to the market clearly does not work.

You won’t see answers to those business questions at Google I/O, but it’s time analysts and investors started asking those business questions of Google executives — before they start hurting GOOGL stock.

Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, AMZN and GOOGL.

Article printed from InvestorPlace Media, https://investorplace.com/2017/05/alphabet-inc-googl-has-to-make-some-difficult-decisions/.

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