Google deepens smartphone operations with HTC asset purchase

Google is set to deepen its smartphone manufacturing operations with an agreement to buy assets from the struggling Taiwanese hardware maker HTC.

The purchase highlights the growing importance of hardware to Google as it seeks to entrench its advertising and internet services, particularly in the high end of the smartphone market, while also laying the ground for wider use of its artificial intelligence. The purchase involves part of HTC’s design and engineering operations, as well as some of the Taiwanese company’s intellectual property, according to two people familiar with the terms.

The purchase price was likely to be between $500m-$1bn, the sources said. Google created its own hardware division last year and launched the Pixel, the first smartphone to feature only the Google brand and to be designed in-house.

It hired HTC as the contract manufacturer for the phone, extending a close handset partnership that stretches back to the first device to carry Google’s Android operating system, in 2008. The latest purchase will reinforce Google’s manufacturing capabilities for future handsets and make it less reliant on the struggling Taiwanese manufacturer, according to analysts. “They are buying a future for Pixel, if you assume HTC wouldn’t go on much longer on its own,” said Carolina Milanesi, an analyst at Creative Strategies. Boosting smartphone manufacturing could also provide a stronger hedge against Google’s heavy reliance on Samsung, which has become the dominant supplier of high-end smartphones using Google’s Android operating system.

“If Samsung were to falter, there’s no other brand with the scale to compete against Apple,” said Geoff Blaber, an analyst at CCS Insight. Google “has to take control of Android in the high tier.” The dependence on Samsung also leaves Google exposed if the South Korean manufacturer pushes ahead with creating a rival ecosystem of software and services. And there have been growing worries on Wall Street this year about the higher amounts that Google has had to pay device makers and other companies for traffic to its advertising services, adding to the incentive to reach consumers direct. Google first broke into smartphone manufacturing through its $12.5bn purchase of Motorola Mobility in 2011.

That deal was prompted mainly by Motorola’s extensive patent portfolio, which Google needed to defend itself against a tide of intellectual property lawsuits. It went on to run Motorola’s handset division as a stand-alone operating unit, before selling the business to Lenovo in 2015 for $3bn. Since then, however, hardware has taken on a greater strategic importance for the biggest internet companies, as they experiment with a growing range of devices to reach consumers and build a platform for AI. Amazon has opened a new route to reach consumers with its Echo “smart speaker”, prompting Google last year to respond with a copycat device of its own. Moving deeper into hardware just two years after bailing out with the sale of Motorola “is going to raise some eyebrows,” said Mr Blaber.

He added that Google needs “hardware endpoints in a number of categories” to collect data to feed its machine learning systems, and to act as a platform for an intelligent digital assistant. While adding to Google’s capabilities, the HTC purchase will now be “a game-changer,” said Mr Milanesi. To give the Pixel a significant boost against Apple and Samsung, Google would have to be get far more aggressive in its marketing and distribution of the device, she added. On Wednesday, HTC announced a trading halt on the Taiwan Stock Exchange but said it would not comment on speculation about the sale.

Earlier this month, Taiwanese newspaper China Times reported, without providing a source, that Google was already in the late stages of discussions to buy HTC’s smartphone research and development team.

Taipei-based Yuanta Securities analyst Jeff Pu said at the time most of the company’s elite engineers had already left the company for other smartphone manufacturers, including Huawei, Lenovo or ASUS.