Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google has a renewed interest in hardware. Selling its own smartphones is good for GOOGL stock in two ways: it’s revenue from a source that isn’t selling ads, but it also gets stock Android in more hands to ensure Google services are there to continue driving that ad revenue.
Taiwan’s HTC — the company that manufactured Google’s Pixel phone — is struggling. Its Vive VR business has been rumored to be for sale, and now its smartphone business appears to be on the block.
According to reports, the two stories could converge, with GOOGL buying HTC’s smartphone business as soon as the end of this year.
Report: Google Buying HTC Smartphone Division
Business Insider is reporting that Google and HTC are in the final stages of acquisition talks. The deal would be for HTC’s smartphone business only. Terms have not be revealed, but it was noted by CNBC that with $95 billion cash on hand, Google buying HTC smartphone operations would be “immaterial” to parent company Alphabet. Neither Alphabet nor HTC has officially commented on the reports of the acquisition, and GOOGL stock hasn’t seen any meaningful movement based on the rumors.
HTC’s Struggles
There are few companies involved in the smartphone business that have had it as tough as HTC. It has put out premium flagship smartphones that offer impressive design and innovative features, but just seem to be incapable of competing with the Samsung Electronics Galaxy series.
HTC gets its smartphones into U.S. carriers and its design chops are good enough that Google partnered with HTC for its Nexus One smartphone in 2010 and again for the Nexus 9 tablet. HTC was also the manufacturer Google chose to make last year’s Pixel — still one of the best smartphones on the market.
Regardless, HTC continues to bleed money and in 2016 its annual revenue was down by over a third compared to 2015. Digitimes reported its August revenues were the lowest monthly level in 13 years.
Rumors have been swirling that the company may sell its Vive virtual reality business, or even try to find a buyer for its mobile division. At this point, Google Buying HTC’s smartphone business may be HTC’s best option for survival.
Does Google Buying HTC Smartphones Make Sense?
Google has been down the path of buying up a struggling smartphone manufacturer before. In 2012, it spent $12.5 billion for Motorola Mobility, then dumped it just two years later, selling it for $2.9 billion to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY).
What’s different this time?
While GOOGL stock is hugely dependent on selling ads, the company is increasingly emphasizing hardware. That ramped up last year when it created a new division dedicated to making devices, including the company’s Nexus line of smartphones developed with third-party partners. Google’s hardware ambitions continued to accelerate. Several months later, the company hired away a key mobile chip architect from Apple Inc. (NASDAQ:AAPL).
Google then wrapped up 2016 with the release of the Pixel, its first ever Google-branded smartphone — manufactured by HTC.
With the Pixel, Google showed it is serious about being in the smartphone business and it’s taking the Apple approach. It already owns Android — the operating system that powers the vast majority of smartphones. With the Pixel phone, Google kept some Android features as launch exclusives, and it was able to optimize the hardware for the operating system to provide a superior user experience.
It’s got a chip architect and could move to creating its own customized mobile CPUs. A Google acquisition of HTC’s smartphone team would be the final piece of the puzzle. It would give the company complete control of its smartphone hardware, for even closer integration with Android, giving Google the advantage it needs to claw marketshare from entrenched leaders Samsung and Apple.
Google is clearly in smartphones for the long haul. The acquisition would offer revenue diversification, while also protecting access to Google services that drive the company’s critical ad revenue. Both factors are important to the long-term growth of GOOGL stock. Google buying HTC’s smartphone business is a strategic move and the time is right — for both companies.
