Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) new Google Pixel looks like a strong flagship Android phone, although it lacks some headline features that its high-profile competitors enjoy, such as water resistance or wireless charging. It's also the first phone to be entirely designed by Google (the search giant outsources manufacturing to HTC).
Well, Morgan Stanley is out with a fresh research report (via Business Insider) estimating that the Pixel could potentially bring in as much as $3.8 billion in revenue for Google next year. To get to $3.8 billion in revenue, Google will need to sell 5 million to 6 million units, according to the investment bank's estimates. That would be in addition to the $2 billion in revenue that Morgan Stanley thinks Google will generate in the fourth quarter of 2016 following the October launch.
How realistic are those estimates?
The biggest bottleneck
While Pixel is strategically different from its spiritual predecessor in the Nexus line of phones, it's operationally quite similar. Google hopes to sell Pixel primarily through its own online store, although Verizon is selling the device through its retail stores. That's the only major carrier to distribute the Pixel, although no carrier will complain if you want to bring one to their network (the unlocked model supports all four major domestic wireless carriers).
This will likely be the Pixel's most important limiting factor: distribution. While Android enthusiasts will happily buy a phone directly from Google in order to get a "pure" Android experience, the mainstream consumer still relies very heavily on carrier retail stores when it's time to buy a new phone. We're talking over half of smartphone customers in the U.S. prefer to just waltz into a carrier retail store, thanks to a broader selection of phones and the ability to modify their wireless plans as needed or take advantage of carrier promotions.
As far as country availability goes, Pixel is only available in Australia, Canada, Germany, the United Kingdom, and the U.S. Google has inked partnerships with several carriers in each of these international markets, but the U.S. is still the largest market of those listed.
Limited distribution is largely why Nexus phones were always relegated to the niche of Android enthusiasts, and the same will likely be true of Pixel.
The good news
That being said, there are a couple of positive data points thus far. Shortly after launch, Google said that initial pre-orders were exceeding expectations and early inventory quickly sold out. Shipping times had slipped, and the 5.5-inch Pixel XL is currently out of stock again.
Third-party researcher Wave7 also said last week that Pixel sales at Verizon have been strong, grabbing nearly 8% of activations over the preceding month thanks to promotions and aggressive ad campaigns. Supporting the importance of carrier distribution, Wave7 noted that Pixel activations at other carriers was negligible, even as the device is compatible with those networks if customers separately purchase their devices and bring them over.
More Android phones are coming
Google has never disclosed how the Nexus family performed, which was aggregated under Google's "Other Revenues" line item. Other revenue last quarter was $2.4 billion, up nearly 40% year over year, but a lot of that growth can be attributed to a growing hardware portfolio as well as Google Play content sales. It's worth noting that Google has admitted to falling Nexus sales in recent years.
Also, keep in mind that Samsung always launches its flagship Galaxy S series in the spring, and 2017's Galaxy S8 will be incredibly important for the South Korean company to overcome the Galaxy Note 7 debacle. You can expect Samsung's marketing department to act accordingly.
Generally speaking, most Android phones see sales weighted heavily toward their launch dates, and begin discounting within a matter of months. Pixel has a lot of attention right now, but it's hard to imagine it sustaining that throughout 2017. For the past five years, Google has had fairly predictable product cycles with Nexus phones, launching new models each fall. Now that Google is deeper in the smartphone hardware game than ever before, I would expect this to continue. It will be tough to hit Morgan Stanley's estimates, but it's possible.