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Now That Google Makes Phones, Are Smartwatches Next?

By Evan Niu, CFA – Oct 14, 2016 at 1:42PM

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Even though it makes less sense, Google will still probably pull the trigger.

Android Wear smartwatches. Image source: Google.

Google's new Pixel phones represent an important strategic shift for the company. It's the first time that Alphabet's (GOOG -0.57%) (GOOGL -0.49%) Google has designed phones from the ground up, in contrast with prior Nexus devices where Google merely collaborated with hardware original equipment manufacturers (OEMs). The timing is a bit peculiar considering the ongoing maturation of the global smartphone market, combined with the fact that phones are so good nowadays that there's not a whole lot of potential hardware innovation left.

But now that Google has embarked upon this path, we have to wonder what other products the company may have in the pipeline. Over the summer, Android Police reported that Google was working on a pair of Android Wear smartwatches, that would feature deep integration of Google Assistant, the revamped virtual assistant and spiritual successor of Google Now. The site subsequently snagged some renderings of what the pair of smartwatches might look like, which Android Police says are code-named Angelfish and Swordfish.

Image source: Android Police.

While these rumors remain unconfirmed, with no indications at Google's recent product event that it had such devices in the works, investors should consider if it makes sense for Google to design smartwatches, since the company is clearly making big moves into hardware.

Why the smartwatch category is different

Intuitively, you might think that of course Google would make a smartwatch since it has expressed a clear ambition to take greater control of the hardware that delivers its software. The search giant now makes phones, virtual reality headset accessories, Wi-Fi routers, speakers powered by virtual assistants, and more. Smartwatches are the newest computing product category, so it stands to reason that Google would jump in there, too. It does make more sense to enter into a nascent market, since there is greater opportunity to have an impact.

However, there's a huge difference between Android and Android Wear: OEM customization. On smartphones, Google allowed OEMs to make all sorts of modifications and user interface (UI) customizations, which OEMs took full advantage of in an effort to differentiate themselves. They also added a wide range of additional software features, for better or for worse. But this created layers of fragmentation within the platform, and things got out of hand -- fast. In response, Google launched its Nexus program as a way to offer stock Android, while setting an example of what a flagship Android phone should be. Pixel is just an evolution of that same strategic purpose.

But Google decidedly does not allow OEMs to add UI customizations to Android Wear, implicitly acknowledging that OEMs went overboard, potentially to the detriment of the operating system. OEMs aren't particularly happy with this decision; Huawei publicly called on Google to open up Android Wear to customizations last year. But this position makes sense from Google's perspective, since standardization can translate into a more consistent and potentially better user experience.

If there's more standardization within the platform, there's less need for Google to take matters into its own hands if OEMs are merely being relegated to what they're good at: hardware.

Still probably happening

While there may be less strategic value relative to smartphones to design its own hardware, I still think Google will likely pull the trigger here. Smartwatches are too important of a product category for Google to leave to the OEMs alone. Indeed, industry leaker Evan Blass says Google's pair of smartwatches will be released in Q1 2017. Presumably, they'll bear the Pixel branding.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). 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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