Why Google’s Pixel Is More About Strategy Than Smartphones

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In early October, Google unveiled two devices that have been rumored in tech blogs for months: the Pixel smartphone and its larger sibling, the Pixel XL. The touchscreen phones look very much like high-end iPhones and Samsung devices. They are priced similarly as well, and have generally received positive reviews: Veteran tech journalist Walt Mossberg opined that the Pixel was “easily the best Android phone I’ve ever tested.” It is the first smartphone that is completely designed and engineered by Google, with high-end finishes and features that aim to deliver a pure Android experience.

The Pixel comes in either a 5-inch or 5.5-inch Gorilla Glass display with a 12.3-megapixel rear-facing camera. It promises fast charging: 15 minutes provides seven hours of usage. The smartphone can record video in 4K ultra HD and comes with a headphone jack, although it is not water-resistant. Google provides 24/7 customer service for Pixel and unlimited cloud storage of photos and videos in full resolution. Virtual helper Google Assistant is preinstalled, along with the Google Duo video chat app. It is compatible with Google’s Daydream virtual reality viewer. Prices start at $649.

“It looks like a very nice, high-end device,” says Michael Sinkinson, Wharton professor of business economics and public policy. “This is what Google thinks what a high-end phone should look like.” The Pixel marks a change in Google’s phone strategy of the past, in which its Nexus phones had lower prices and were marketed less aggressively. With Pixel, Google is pricing and marketing the device to go head-to-head with Apple and Samsung. It is also the first time the company has put its name on a smartphone.

But to see the Pixel as simply another smartphone rollout by Google is to miss the point. At the launch event for the smartphone, Google CEO Sundar Pichai reflected on the big shifts in computing that come about every decade or so. Personal computers arrived in the 1980s, the world wide web came about in the 1990s and smartphones changed mobile in the 2000s. Another shift is coming. “When I look ahead to where computing is headed, it’s clear to me that we’re heading, evolving, from a mobile-first to an AI-first world,” he said.

“The main business of Google is enabling their advertising revenue model. Hardware is always going to pale in comparison.” David Hsu

AI, or artificial intelligence, is the science behind making computers intelligent. One facet of AI is machine learning, where computers adapt and grow as they get more data. AI is the future and “at the heart of these efforts is our goal to build a Google Assistant,” Pichai said. Assistant, as the AI in Pixel, goes beyond Apple’s Siri and Microsoft’s Cortana by pulling data deeply from your Google accounts and apps and allows two-way chats.

For example, when you ask Google Assistant to call Uber, it engages the Uber app, which converses with you about where you’d like to go and which type of Uber car service you prefer. As the Assistant learns more about you, it gets smarter. “Our goal is to build a personal Google for each and every user” that can search your photos, emails, calendar, trips and others, Pichai said. Assistant would help you sift through the disparate data in your world.

Rick Osterloh, the head of Google’s newly formed hardware unit, said at the Pixel launch event that a renewed push into hardware was motivated by the rise in the volume and complexity of information. People are taking more photos, sending more messages and listening to more music than ever before. “Building hardware and software together lets us take full advantage of capabilities like the Google Assistant,” he said. “It lets us harness years of expertise we’ve built up in machine learning and AI to deliver the simple, smart and fast experiences that our users expect from us.”

Indeed, a research report published in October from Needham & Co. says that Pixel’s advantage comes from its ’brain’ — Google’s AI capability, its expertise in search and maps and its broad suite of applications including YouTube and Google Cloud. “By bringing the entire hardware and software design in-house, we believe the product should provide a faster, cleaner and more cohesive Android experience than its predecessor phones.”

Wharton management professor David Hsu says the decision to develop Pixel is “driven by perhaps what they think of as enabling their software AI business, which is how they could get good data.” He notes that the big challenge confronting AI today is how to search through non-text content like photos without the need for humans labeling them. A search engine that can look through non-text content raises Google’s ad game. “The main business of Google is enabling their advertising revenue model. Hardware is always going to pale in comparison,” Hsu says. “They’ve shown time and time again they’re willing to defer to their main revenue model.”

To be sure, Google can integrate Assistant into the Android operating system — which IDC says is used in 87.6% of smartphones globally — without having to develop its own hardware. But the Pixel does provide a benchmark to the industry of a pure Android experience, Sinkinson says. To date, the Android experience for users is famously fragmented; the quality fluctuates depending on the smartphone maker. In contrast, Apple, by controlling both hardware and software, has provided a consistently high-quality experience. The Pixel is Google’s opportunity to do the same with Android.

Google’s Smartphone Flip-flop?

But is Google now flip-flopping on its hardware strategy? Remember that it sold handset maker Motorola Mobility in 2014 to Lenovo for $2.9 billion after acquiring it two years earlier for $12.5 billion. Sinkinson says Google was interested in Motorola mainly for its patents and quickly spun off the hardware division because it didn’t want to manufacture phones and compete too directly with its smartphone partners. Pixel is actually made by Taiwanese firm HTC and the Nexus phones were made by either LG or Huawei. “They like having partners to work with on the hardware side,” he says. “They’re not a hardware-oriented firm, but that’s slowly changing.”

Google has had a checkered history when it comes to its hardware projects: Google Glass is in deep freeze while its tablet Pixel C and Chromebooks have not been standouts.

In addition to Pixel, Google recently unveiled the Google Home virtual assistant that would compete with Amazon Echo — both help you do things at home such as turn down the lights, play your favorite song or pull up an online recipe. Google also recently launched the Daydream virtual reality headset. It comes with a remote control that lets you draw and gesture within a VR environment — for example, you’re a wizard with a wand in an experience based on the J.K. Rowling movie Fantastic Beasts and Where to Find Them. It already owns smart appliances maker Nest.

Indeed, the Pixel smartphone is just one piece of Google’s overall hardware strategy for the consumer that encompasses all these AI-enabled devices. But it’s an important part. “The smartphone is the quarterback to all these things,” Hsu says. It can be the focal controller of other Google devices.

With Pixel, Google now has a high-quality Android phone that it fully controls. It has depended on smartphone manufacturers like Samsung, LG and HTC to reach most Android users and display its operating system in the best light, but “now with Pixel, the level of dependency goes down,” notes Wharton management professor Arkadiy Sakhartov. Moreover, by vertically integrating, Google will enjoy the same “economies of scope” as Apple by controlling its hardware and software in-house, he adds.

Google’s Hardware History

But Google has had a checkered history when it comes to its hardware projects: Google Glass is in deep freeze while its tablet Pixel C and Chromebooks have not been standouts. Also, Google Fiber, its pay TV service, has put its expansion on hold. Sakhartov adds that the company is divesting a robotics firm it bought a few years ago. “Google tries stuff out and they’ll do it big time. It will be a serious try out. Then they’ll see if it works and if it doesn’t, they’ll abandon it,” says Gerald Faulhaber, Wharton professor emeritus of business economics and public policy.

For Pixel to have staying power, it must have wide adoption and serve Google’s objectives for it. But the handset faces an uphill battle in gaining ground given a saturated smartphone market. According to a February 2016 report by comScore, nearly 200 million Americans already own smartphones. Forty-four percent own iPhones and 28% have Samsung phones. Moreover, Hsu says, people need a good reason to switch platforms, given the hassle. (Google added a connector in Pixel to help people switch their content.)

Unfortunately, the Pixel did not have the same shock-and-awe impact of the iPhone when it debuted in 2007. “You’re competing with the best — but you’re not beating them, you’re matching them,” Faulhaber says. “Where’s the big win here? I don’t see it. If they can do what Apple did with the iPhone 10 years ago and blow everybody away, then they’ve got something.”

“Where’s the big win here? … If they can do what Apple did with the iPhone 10 years ago and blow everybody away, then they’ve got something.” –Gerald Faulhaber

A new smartphone entrant must give users a compelling reason to switch. In the past, price has been the lure for Google’s Nexus phones. Not for Pixel. “My disappointment was … it was not priced aggressively,” Sinkinson says. Hsu adds that he doesn’t get Google’s strategy. If it wanted to make Pixel popular quickly, it should have offered more attractive pricing.

Another issue is pressure from its smartphone partners, which now have to compete with Pixel. Google has been providing Android free to smartphone makers so they will use it, although most also customize it for their users. Google gets something in return. “They don’t charge for Android but there are terms and conditions,” Sinkinson says. “I have to use the Google Play store and [Google as the] default search engine. It’s a little deceiving to say Android is free when there are conditions that come with using it.”

With the Pixel now competing with Samsung’s Galaxy S7 and the like, and promising faster software updates in a pure Android environment, “how will it affect the willingness of competitors to invest in the system?” posits Wharton management professor Minyuan Zhao. “This may even push Samsung and Huawei to escalate their investments in their own operating systems, which is already ongoing.” However, the experience of Windows Phone and BlackBerry operating systems shows that without a multitude of apps in their ecosystem, it’s hard to succeed.

Whether Pixel will stick around remains to be seen, Google’s pledges notwithstanding. “We’re going to see this roll out pretty much like these other things Google has done,” Faulhaber predicts. “They will do this and take a good shot at this. In a year, they’ll bring out a new [version] and see if they will make money off this. … What history teaches me about Google is, I think this will be around a couple of years and then this will go away.”

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