Alphabet Inc’s Google Buys HTC’s Pixel Development Team

The rumored deal between Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Taiwanese smartphone maker HTC is now official. GOOGL stock has gained steam based on the speculation the two companies were going to announce a deal, but the end result may not be what investors were expecting.

The terms of the Google acquisition do mean the search giant gets design expertise for its Pixel smartphones. However, it is not buying HTC — or its smartphone business — outright.

Predictions That Google Buys HTC in Deal Similar to Motorola

Rumors ramped up during September that Google was making a move to buy HTC’s smartphone business. The company had gone that route once before with Motorola without much coming of it — other than adding some patents to its portfolio — before selling that smartphone business off to Lenovo (OTCMKTS:LNVGY) in 2014.

2017 felt different. Google is now focused on releasing its own, branded smartphones. It has a focus on hardware, both to reduce its reliance on ad revenue and to ensure as many devices as possible have the Google services that drive that ad revenue.

The Google Pixel was released in late 2016, and its follow-up is expected in several weeks. HTC was the manufacturer of the Pixel, but if Google wants to take the same approach as Apple Inc. (NASDAQ:AAPL) — having full control over software and hardware — the scenario where Google buys HTC makes sense.

That wasn’t quite what happened, though.

Google Acquisition

HTC announced the terms of the Google acquisition and it wasn’t exactly what had been expected. The press release described it as:

“-a definitive agreement under which certain HTC employees – many of whom are already working with Google to develop Pixel smartphones – will join Google. HTC will receive US$1.1 billion in cash from Google as part of the transaction. Separately, Google will receive a non-exclusive license for HTC intellectual property (IP).”

That means roughly 2,000 HTC engineers and designers who have been working on the Pixel smartphone are now Google employees, and Google doesn’t have to worry about being sued for using design or technology that they may have been working on for Google while HTC employees.

In a blog post about the deal, Google’s SVP of hardware wrote:

“With this agreement, 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.”

Google Gets Expertise for Cheap, HTC Continues Making Smartphones

When Google bought Motorola Mobility in 2011, it paid $12.5 billion. Motorola’s poor health resulted in GOOGL stock taking hits as that division’s performance dragged down the company.

The terms of this Google acquisition — at a tenth of the price it paid for Motorola — are unlikely to spook investors. And unlike the scenario where Google buys HTC or HTC’s smartphone business outright, this time GOOGL stock is not in any way tied to HTC’s performance.

Google gets the engineers and designers who worked on the Pixel smartphone so it can move that hardware design fully in-house for complete control. It merely outsources the actual manufacturing of the hardware to another company — much like Apple does with the iPhone.

HTC can continue to manufacture its own smartphones, minus that external partner engineering team that’s moving to Google.

Bloomberg points out that HTC seems to have gotten the raw end of this arrangement. It gets a cash infusion and loses some expensive payroll that cuts its operating costs. But, the company is losing some of its top engineers, it still has the operating expenses of its factories and it’s helping Google’s Pixel smartphones to compete even more strongly against future HTC smartphones.

We’re expecting to see new Pixel smartphones on Oct. 4. The follow-up to that first Pixel is an important release for Google. But the 2018 version is now even more critical, with the potential to show this focus on hardware’s long-term impact on GOOGL stock.

That’s the Pixel smartphone where the Google acquisition of HTC talent will truly be felt, the first where the hardware is designed completely in-house, with no partner talent. 2018 will be the first Pixel smartphone that’s truly on even footing with the Apple iPhone.

And then things get interesting …

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