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Google Has a Good Problem With Pixel

By Evan Niu, CFA – Updated Jan 23, 2017 at 2:01PM

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The search giant simply can't keep up with demand.

Good luck finding a Pixel XL or one with more storage. Image source: Google.

Stop me if you've heard this one before: Major tech giant designs and launches new flagship phone but is unable to fulfill demand due to severe supply constraints and inventory shortages.

That may often be the case for a certain Cupertino company, but this time around, we're talking about Alphabet (GOOG 2.70%) (GOOGL 2.62%) subsidiary Google. The company's new Pixel phones, which are the first that were completely designed in-house, continue to suffer from inventory shortages. Prospective customers are having an incredibly difficult time actually getting their hands on the device, and it's not just a function of limited distribution since Google only has one exclusive carrier partner, Verizon (VZ 1.29%).

Survey says

Wave7 Research released some estimates just a few days ago (via FierceWireless), after conducting surveys at roughly 50 carrier retail stores. The researcher's data shows that the Pixel represented nearly 10% of all smartphone sales at Verizon in December. That's up from the 8% that the Pixel grabbed in November that Wave7 estimated in a separate report.

While Verizon remains the exclusive carrier partner that is authorized to sell and distribute the Pixel, it's still faring well at other carriers in terms of activations. Customers have to buy the device somewhere else, but can bring the device to other networks. We already know that T-Mobile is setting up Pixel displays at its retail locations, even if the Un-carrier isn't able to sell the device until Verizon's exclusivity runs its course.

As far as problems go, it could be worse

The Verge also notes that according to third-party online inventory trackers, some models have been out of stock at Google's online store since Nov. 30, which was nearly two months ago. The shortages appear to be concentrated on both the larger XL models, as well as those with 128 GB of storage -- that is, the most expensive variants. A Google spokesperson told The Verge:

We're aware about the inventory issues on the Google Store and Verizon. Honestly, demand has exceeded our expectations. We're doing our best to restock on an ongoing basis.

Of course, in the grand scheme of problems to have, demand vastly outstripping supply is as good as it gets. But it is a problem though, especially since most Android users aren't especially loyal to specific brands. The big risk is that a prospective Pixel buyer is unwilling to endure the wait and simply goes with another flagship Android device, of which there are many solid contenders. 

The shortages are a bit peculiar since Google tapped HTC to effectively serve as a contract manufacturer. While HTC has fallen far in the global smartphone market in terms of unit volumes and prominence, the Taiwanese company still has considerable experience shipping high volumes of handsets. Both Google and HTC likely underestimated demand and may need to shift production capacity away from other devices and make more Pixels.

How much of an impact Pixel will have on Google's financials remains unclear, as the company has never disclosed granular unit volumes for hardware products, including Nexus devices. For better or for worse, the situation reinforces why I don't believe Google intends to make Pixel a high-volume product.

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). The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

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