11/10/22, 4:04 PM Facing Threat From Apple, Google Tries New Hardware Playbook — The Information

Facing Threat From Apple, Google

Tries New Hardware Playbook

As Google grows concerned that its partner Samsung is losing customers

to Apple in mature markets, CEO Sundar Pichai believes Google investing
more in its own devices “best positions the company to be protected,” a
senior executive said.

Art by Mike Sullivan

ByJon
Jon
Jon
JonVictor
Victor
Victor
VictorandAmir
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Oct. 18, 2022 6:00 AM PDT

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11/10/22, 4:04 PM Facing Threat From Apple, Google Tries New Hardware Playbook — The Information

t may be Google’s worst nightmare. Apple’s iPhone is stealing share from Samsung phones

I
powered by Google’s Android software. At the same time, U.S. antitrust regulators are
scrutinizing Google’s search deal with Apple, raising the prospect that Google’s search
may lose its favored position in the Safari browser on iPhones.

These twin developments, which threaten Google’s mobile ads business, have prompted the
tech giant to take a big gamble. It is doubling down on investment in its own hardware,
including its Pixel phones, including by moving product development and software
engineering staff working on features for non-Google hardware to work on Google-branded
devices, according to an internal document viewed by The Information.

THE TAKEAWAY

• CEO said accelerating Google device production keeps company “protected”

• Executives consider moving staff from car and TV software to Google devices

• Google is concerned that Apple is consuming Samsung’s market share

Google isn’t reducing support for Android devices made by top partners including Samsung,
but it’s hedging its bet more against further decline on the part of the South Korean electronics
maker. A senior Google search executive, Sissie Hsiao, recently told some colleagues that
Google CEO Sundar Pichai believes Google making its own devices “best positions the company
to be protected” from shifts in the broader mobile market, said a person with knowledge of
Hsiao’s comments. Hsiao also told colleagues Google was concerned that Samsung was losing
customers to Apple.

Google’s decision to shift engineering and development staff to Google-branded hardware

partly reflects economic pressures flowing from a sharp slowdown in the digital ad market.
Pichai said both publicly and privately last month that he wanted the company to be 20% more
efficient, and he suggested that hiring and budget cuts were coming. Since then Google has cut

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the budgets of some groups considered less critical to its existing business, such as a startup
incubator within the company that has had mixed results.

That attitude has been reflected by Google’s decision to invest less in developing its Google
Assistant voice-assisted search for cars and for devices not made by Google, including TVs,
headphones, smart-home speakers, smart glasses and smart watches that use Google’s Wear OS
software, the document showed.

Hsiao, a vice president in charge of Assistant, which is similar to Apple’s Siri voice assistant,
has told some colleagues at Google that the Android Automotive operating system, used by
carmakers including Volvo and BMW to power their infotainment systems, could soon generate
about $1 billion in revenue for Google annually. That amount is too small to make a difference
for the company, whose revenue last year was $257.6 billion, Hsiao said, which is why she has
considered diverting some head count away from the effort, she said, according to a person
briefed about the comments. She oversees more than 2,000 people.

From left, Google CEO Sundar Pichai, hardware chief Rick Osterloh, and Google Assistant chief Sissie Hsiao. Credit:
YouTube

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Google separately offers a version of Android Auto that Android phone customers can plug into
their cars to project their device contents on the car’s display, similar to Apple’s CarPlay
software, and there is no sign Google will slow its work on that feature.

Executives also have discussed moving some product managers working on Google TV software
for television sets to a team developing software for Google-powered wearable devices, Wear
OS, and a team developing a tablet that’s still under wraps, said a person with knowledge of
the discussion.

These changes could be bad news for a slew of hardware makers and auto manufacturers that
do business with Google. Google has singled out Samsung and Chinese brands OnePlus and
Xiaomi as premium Android phone partners for which it should develop the best Google
services. But that leaves a long list of other manufacturers that may not get the same attention
from Google groups like the Assistant team.

Strategic Shift

The cost-cutting sparked by the ad slowdown has coincided with Google executives deciding
that for strategic reasons they need to focus more on their own hardware than on supporting
the hardware made by other companies.

Google has long been pulled in two directions when it comes to consumer devices: Its roots in
internet software put it in a prime position to develop the most widely used mobile OS,
Android, which outflanked Microsoft’s mobile OS more than a decade ago. Google continues to
develop the software and works with dozens of consumer brands, including Samsung, that
manufacture Android-based devices. Yet Google has gradually put more emphasis on
developing its own hardware. Starting in 2015, Google began creating the Google-branded
Pixel smartphone, and a year later put it under the direction of Rick Osterloh, who had
previously run Motorola Mobility, a phonemaker Google owned from 2012 to 2014.

Google is yet to produce a big-selling phone. Pixel phone sales in 2021 amounted to 4.5 million
compared to 230 million iPhones shipped by Apple and 275 million shipped by Samsung,
according to research firm Canalys. But Google isn’t backing away. It has ramped up production
of the latest Pixel version, the 7, which went on sale last week starting at $599 for the basic
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model and $899 for a pro model, both priced lower than the latest regular and pro versions of
the iPhone. It has been diversifying
diversifying
diversifying
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the
the
thePixel’s
Pixel’s
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Pixel’scontract
contract
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contractmanufacturers
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device outside China. In recent years Google also acquired the Fitbit fitness tracker for $2
billion. And last year it launched its first chipset for mobile devices, similar to Apple’s longtime
efforts for the iPhone, so that Google’s machine-learning algorithms can run faster on its
devices.

One reason that Google is investing more in the Pixel is Samsung’s loss of market share to
Apple. For instance, Counterpoint
Counterpoint
Counterpoint
CounterpointResearch
Research
Research
Researchestimated that in June the iPhone accounted for
more than half the smartphones in use in the U.S. for the first time. Samsung in particular is an
important Google partner because it loads a slew of revenue-generating Google apps in its
devices under its licensing agreement for Google’s Android mobile OS.

‘Dominant Force’

As much as Samsung’s decline is bad for Google, the growing strength of the iPhone is also a
problem for Google. While Google Search is the default search engine in the Apple Safari web
browser, the profit margin that deal generates from ad sales is far less than what Google gets
from Android devices because Google pays a hefty cut of revenue to Apple. Plus, U.S. antitrust
regulators are trying to break Google’s default search deal with Apple as part of their effort to
rein in Google’s power in the search market. If regulators succeed, Google could lose a
significant chunk of search queries to rivals such as Microsoft’s Bing—which already powers
some searches that originate from Siri voice queries on iPhones.

In the past, Google’s consumer hardware business has suffered from a piecemeal strategy
because it used different brands for phones (Pixel), laptops (Chromebooks) and smart-home
devices (Nest), said Kirt McMaster, who is developing a blockchain-based wireless network.
McMaster previously ran Cyanogen, which designed phones based on a modified version of
Android. Still, Google “can’t afford to back off” because “Apple continues to gain market share”
even in mature markets like the U.S. and Japan, he said.

“Can [Google] do it in time? There’s a high likelihood they will not” because of the company’s
track record, he said. “Apple has become too much of a dominant force right now. Pulling away

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11/10/22, 4:04 PM Facing Threat From Apple, Google Tries New Hardware Playbook — The Information

from [developing] a cohesive hardware strategy now is really ceding power to Apple.”

Google’s trade-offs also mean it may pull back from investing in some of its own devices. Hsiao,
for instance, has talked about diverting Assistant resources from Google-made devices she
considers less important, such as some Fitbit devices that still run a non-Google OS, as well as
some laptops powered by the Chrome OS, the document showed.

Google spokespeople declined to comment on the record for this article.

Jon Victor is a reporter at The Information covering Alphabet. He can be reached at

jon.victor@theinformation.com or on Twitter at @jon_victor_.

Amir Efrati is executive editor at The Information, which he helped to launch in 2013. Previously
he spent nine years as a reporter at the Wall Street Journal, reporting on white-collar crime and
later about technology. He can be reached at amir@theinformation.com and is on Twitter @amir
@amir
@amir
@amir

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