The first thing I do when I purchase a new smartphone is go to the app store and download a bunch of apps made by Google -- Google Search, Gmail, YouTube, Google Maps, and Google Drive, to name a few. Even on an Apple (NASDAQ:AAPL) iPhone, I prefer to use a lot of the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary's services. And Google makes it easy to use its services regardless of what platform you're using.
Google's advertising business model relies on reaching the widest possible audience to maximize revenue. But Google's newest software -- a virtual assistant simply called Google Assistant -- is available only on the new hardware Google unveiled at the beginning of the month. (A less robust version of the software is available through its new chat app Allo as well.)
The decision represents a major shift in strategy for Google that bears further examination.
An AI-first world
At the top of Google's keynote earlier this month, CEO Sundar Pichai told the audience, "We are moving from a mobile-first to an AI-first world." The user interface has moved from desktop PCs, to the web, to mobile, and now you can literally have a conversation with your computer. Whether that computer is a PC, phone, watch, or some cross between a speaker and a HAL 9000 doesn't matter.
There are a growing number of AI assistants: Siri, Cortana, Alexa, Viv, and now Google Assistant.
Apple used Siri to further differentiate the iPhone, and clandestinely break its reliance on Google search. (Siri uses Bing for search results.)
Microsoft introduced Cortana to differentiate Windows Mobile, but it's since brought the AI to several platforms, including Windows 10, iOS, and Android.
Amazon.com introduced Alexa as part of its Echo speaker, and when the product took off, it extended it to its Kindle Fire tablets.
How else could Google compete?
Google finds itself competing against a range of competitors, all of which have established user bases: Siri on iPhones, Cortana on Windows PCs, and Alexa on Echo and Kindle. Google's ability to overcome the competition simply through releasing another app in the Play Store or App Store is doubtful. Instead, it opted to integrate the software in some new high-end hardware, and compete in that market.
Assistant functions as a differentiating factor for the Pixel and Home. Google showed off how much more powerful Google Assistant is compared with Alexa or Siri, since it's backed by Google's knowledge graph. The AI is one of the few things that differentiates the Pixel from other Android smartphones.
Google Assistant requires a different monetization strategy
The bigger problem for Google with Google Assistant is that the nature of the service is very hard to monetize. Unlike Google Search, which produces a list of query results that Google can easily slip some ads into, Google Assistant produces just one result per query -- hopefully the correct result. Ads don't fit into that model.
By only including Google Assistant on its own hardware, Google is effectively monetizing its service through hardware sales. That's more akin to Apple's business model, especially since it's started giving away macOS updates. It's a big shift for Google, but one necessitated by the nature of the Google Assistant service and the platform Pichai sees computing moving toward.
Why we may still see a wide release of Google Assistant
The primary purpose of keeping Google Assistant exclusive to Google's hardware may be to differentiate the Pixel and monetize the software. Still, Google Assistant has the potential to benefit the company's core search product.
The more people use the AI-powered assistant, the more data Google receives on its users and how they respond to certain answers. Google can feed that data back into its more easily monetized search engine and improve search results and the user experience.
Indeed, continually improving its search engine and giving users more and more reasons to use it will move the needle much more than selling a few devices. Google runs a $67 billion advertising business. For reference, Apple sold nearly 55 million iPads last year and generated just $23 billion in sales from the device.
The two factors that will affect Google's decision to extend Google Assistant to other devices are how well the Pixel sells and how much incremental revenue Google thinks it can squeeze out thanks to Assistant. Investors should look for additional information from management on its earnings call.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon.com and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, and Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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