Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google launched its Pixel phone last October, the first phone that it fully designed from the ground up. There had been some analyst estimates that Google could grow the Pixel into a $4 billion business this year, if it sold somewhere in the neighborhood of 5 million to 6 million units. Early demand indications appeared strong, but Google doesn't disclose how the Pixel is performing officially, aggregating its financial results in its catch-all "other revenues" segment ($3.1 billion last quarter).
Still, there's now a clue as to how Pixel has been doing, as well as some other signs of where Google may take its smartphone strategy.
Hitting 1 million unit sales
Ars Technica has noticed that the Pixel Launcher, a home screen app that's exclusive to the Pixel and installed by default, just hit 1 million installations. Google Play displays large ranges of installation numbers, but the app in question just crossed the threshold into "1,000,000-5,000,000" territory. That data point is a strong indication that unit sales have just hit 1 million, which suggests that Google has generated somewhere between $650 million and $870 million in Pixel revenue (retail pricing ranges from $650 to $870 based on display size and storage capacity) thus far over the past eight months.
That's a respectable showing, even if Google remains a small player in the smartphone market; there were nearly 350 million smartphones shipped worldwide in the first quarter, according to IDC. It's safe to say that Google will fall short of some of the bullish analyst estimates for Pixel.
Pixel isn't intended to be a profit center
While $650 million to $870 million is nothing to sneeze at in absolute terms, it's a fairly small blip on the radar in the context of Google's results, and even smaller for Alphabet's. It's hard enough for most smartphone manufacturers to turn an operating profit, and it will be even harder for Google since it's not scaling unit volumes very much (which would spread out some of the costs across a greater number of units).
But here's the thing: Google doesn't care if Pixel makes money. In contrast to smartphone manufacturers, Google doesn't really need Pixel to be a profit center, as hardware is a side business for the search giant that provides strategic value in other ways. As long as Pixel can approach breakeven (not that investors would ever know), then that's just fine.
Pixel is the spiritual successor to the Nexus program, where Google's main goal was to push the platform forward by showcasing the best of Android, implemented as a competitive nudge toward Android hardware partners -- leading by example, as it were. To wit, here's Google CEO Sundar Pichai on the January conference call responding to an analyst question about Pixel's opportunity in the marketplace (emphasis added):
Look, I mean, we are in early days. I think it's really important when you work on a platform, you have to drive it forward. So we have always done by putting out the state-of-the-art. And I think it especially gets important in the vision we have for computing, where users are going to use it across many different contexts. And so, to do that end-to-end experience, it spans devices.
This is why I think bullish analyst estimates for Pixel are a little misplaced. It's not so much that Google would be incapable of growing a smartphone business -- it's that it probably has little interest in doing so. Third-party Android OEMs will always do the heavy lifting in terms of unit volumes, and Google wouldn't want its nudge to escalate into full-blown competition.
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 has a disclosure policy.