Alphabet‘s (NASDAQ:GOOGL) (NASDAQ:GOOG) Google recently hosted its Pixel release event, unveiling new phones, a home assistant, and a tablet. New hardware often steals the spotlight at functions like this, but Google’s release receptions have a different goal from others — like those of Apple, which has built its empire on the iPhone. For Google, it’s all about showing off software prowess.
Google the phone company
In early 2018, Alphabet purchased HTC‘s design team, which was responsible for the Pixel lineup of phones. That move was intended to bolster the internet search giant’s efforts to promote its tablets and ever-expanding lineup of home assistants. (Speaking of home assistants, that has arguably been Google’s most successful hardware category; Google has taken the lead in that industry ahead of Amazon and its Echo products.)
The Pixel phones have been a growing segment, but have been far less successful in gobbling up market share than other Google devices. Tech market researcher IDC says Google shipped 3.9 million Pixel phones in 2017, a respectable number for the first full year of production. However, even if shipment volumes grow from that base, Pixel is still just a drop in the bucket compared to the 1.45 billion global smartphone shipments that IDC estimates for 2018.
This means that Pixel phones (and hardware in general) are an almost insignificant part of Alphabet’s overall revenue. That’s OK, as very few hardware makers have been able to replicate the consistent success Apple has had with its iPhones — which generated 64% of Apple’s sales through the first three quarters of its current fiscal year. By comparison, nearly all of Alphabet’s revenue comes from advertising and related software services.
And that’s the whole point of the Pixel phones and other devices that recently debuted: It’s all about the software, and getting consumers to rely on Google even more.
Teaching hardware to do new tricks
The Pixel phones come loaded with lots of new software features, and the camera has been an area of focus to show those off. The Pixel 2 already had a best-in-class camera. The Pixel 3 builds on that with a new “Night Sight” mode for taking pictures in low-light environments, easier selfies taken with just a smile, and other photo-editing additions. If you point the camera at text and objects, the built-in Google Lens will use new artificial intelligence (AI) features to help users get directions, find local businesses, make calendar appointments, and take other actions.
The company is serious about promoting its other services, too. Pixel 3 purchasers will get a free YouTube Music Premium subscription for six months, and free unlimited picture and video storage. It’s also easy to upload pictures and videos to the new Home Hub smart display, and the two devices are designed to integrate with one another to create a seamless Google experience for users, wherever they are.
Perhaps the most controversial new feature is the initial rollout of Duplex to Pixel devices in November. Google thinks this new AI-powered communications software is ready to help people make appointments without making the call themselves. The “Call Screen” feature in Duplex will have Google Assistant take a call on the user’s behalf, then provide a transcript of the conversation. Unwanted telemarketers can be directed to place the number on their do-not-call list without ever having a conversation.
It’s likely that these new software capabilities will eventually make it to other Android phones, but Pixel owners get to be guinea pigs first. Google also says its own devices are the best way to get the most out of the various features. That could help the company dig deeper into the hardware world. But the software — and the recurring revenue that comes with it — is the real reason why Google is pushing new devices. They all feed into the company’s advertising and search business, as well as a growing list of subscription services. Android commands well over 80% of global market share of mobile devices, so adding new capabilities will help Google find new ways to monetize its users.
Don’t get me wrong: A robust hardware business to complement Google’s ad and software business would be great, and maybe that day will soon come. The real moneymaker for the foreseeable future, though, will be the software.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares) and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Apple and is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.