Edison Investment Research

Google – Brain distribution pt. II.

Samsung presents Google with a unique opportunity

 The combination of more than 10m potential buyers and surprisingly good reviews coming in from the Internet presents Pixel with a great and unexpected opportunity.
 On first glance, the Pixel is a mediocre looking device coming at a premium price but there is far more under the hood than one would presume.
 I am certain that this is because, for the first time, Google has been able to control both the hardware and the software and make them work seamlessly together.
 The fact that Huawei declined to manufacture this device is a good indication of just how much control Google has over this product.
 Furthermore, we think that this is just the first iteration as the Google hardware business has not been formed very long and there are parts of the Pixel that are off the shelf.
 A good example of this is the processor.
 Google is hard at work developing its own silicon but because this is not ready yet, the Pixel uses the Snapdragon 821 from Qualcomm.
 This in itself is an excellent product but the iPhone benchmarks clearly show the advantages in performance that can be achieved by designing hardware and software together in house.
 When it comes to differentiation, Google has clearly put a lot of effort into the camera with good results but it is the software ecosystem where the opportunity lies.
 At the top of this list is Google Assistant which is deeply integrated into the device (unlike it is on iOS) and its performance leaves everything in its wake.
 This is because Google Assistant is powered by Google’s AI which is easily more clever and intuitive than anything else on the market.
 This leaves Google with the classic software / hardware problem.
 One can have the best software in the market but if the software finds its way into the hands of only a tiny number of users (as Nexus has done) it is effectively useless.
 This is why the combination of good reviews from commentators highlighting the screen, camera, design, software and ecosystem combined with Samsung’s woes offers Google a unique opportunity.
 Samsung would most likely have sold over 10m Galaxy Note 7’s during the next 6-9 months and these buyers will now all be looking purchase another device.
 I continue to believe that these users are unlikely to switch to the iPhone leaving the way open for both Google and Huawei in particular.
 The key to this will be execution.
 Google needs to massively ramp up its launch plans and ensure that when these users turn up to buy a device, it is present and available.
 The fact that it is exclusive with Verizon will help with those users but AT&T and T-Mobile users will have to go to retail.
 If we were Google, we would also be running a lease scheme like the operators do to make it easier for users to purchase the device through retail.
 We see the aim of Pixel being to put Google’s brains as close to the user as possible and to make it very easy to access and use.
 The real return will be earned through what Google learns from users making use of its brain which will be used to generate targeted advertising as well as improve the quality of the services themselves.
 Google has the best AI but has really been struggling to get it properly into the hands of the user which is why the volumes that these devices ship will be of critical importance.
 Outside of this perfect world, Google’s ecosystem runs on horribly fragmented software over which Google has no control and no ability to add new features or fix problems.
 This is why we continue to believe that Google will make Android effectively proprietary as only then will it have a chance to challenge the dominance of the Apple ecosystem and hold off the threat posed by Facebook
 Alphabet shares are still reflecting all of the good news and none of the bad which is why we remain cautious on their performance.
 We prefer instead Tencent, Microsoft, Baidu or Apple for the long term.

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