If at first you don't succeed, make another acquisition?
The Taiwan Stock Exchange has announced that shares of beleaguered Taiwanese smartphone maker HTC will halt trading tomorrow, Sept. 21, pending "the release of material information." Once said information is released, shares will resume trading. The announcement comes as speculation has intensified that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google could be interested in scooping up the original equipment manufacturer's (OEM) remaining assets.
Once a prominent smartphone brand, HTC has fallen out of favor in recent years, which is reflected in its financial results. HTC posted an operating loss of 2.2 billion New Taiwan dollars ($73.1 million) last quarter for an operating margin of negative 13.6%, revenue was down 15% year over year, and HTC's cash position is dwindling. Media reports from Taiwan have suggested an acquisition is imminent, which Bloomberg corroborated this morning. The search giant may reportedly acquire HTC's phone design team for $330 million, which would include the HTC brand and approximately 100 engineers.
Meanwhile, Google is preparing to unveil its Pixel 2 phones on Oct. 4, while HTC currently serves as the contract manufacturer for the first-generation Pixel.
Second time's the charm?
For Alphabet investors, the reports likely bring back unwelcome memories of the last time that Google acquired a smartphone maker: Motorola. That deal was predicated largely on intellectual property and Motorola's massive patent portfolio, but still ended up costing Google billions in operating losses and resulted in meaningful margin dilution throughout the duration of its ownership. Google ended up selling off basically everything but those patents.
If Google is really about to scoop up some of HTC's assets, there would be some notable differences this time, though. For starters, the rumored price tag of $330 million is a tiny fraction compared to Googorola's $12.4 billion price tag. Even if the deal is broader and includes HTC's manufacturing operations or virtual reality (VR) segment, which is possible and would increase the price tag, it would still cost substantially less. That could also mean that a deal is more targeted in order to bolster very specific areas where Google is lacking, compared to buying an entire company only to chop it up and sell off the pieces. Additionally, the smartphone market has mostly gotten less litigious since 2012, and this deal would decidedly not be about weaponizing patents.
The AR wars are heating up
There's also the long-standing challenge of getting third-party OEMs onboard with Google's vision for the future of Android. It's safe to say that we're on the cusp of a renaissance with augmented reality (AR), and Apple (NASDAQ:AAPL) has quickly taken the initial lead with iOS 11, ARKit, and iPhone X. By integrating AR features into its flagship, which tens of millions of users will purchase in the quarters to come, Apple hopes to single-handedly catalyze mainstream consumer adoption, which subsequently attracts AR developers.
Android's biggest weakness has always been fragmentation (in more ways than one). While Google recently released ARCore in response to ARKit, adoption within Android will lag compared to iOS for several reasons. ARCore is available on supported devices running Android 7.0 Nougat or later. Nougat was released over a year ago in August 2016, and is only installed on 16% of official Android devices.
Then there's the issue of hardware fragmentation. Google launched Project Tango in 2014, and Tango phones use sensors that are similar to what Apple is using in its new TrueDepth camera system to similarly enable 3D sensing and environmental mapping capabilities. As of now, three years later, there are only two Tango-supported phones, and neither are flagship devices that will sell in large volumes.
For a fundamentally fragmented platform like Android, pushing forward with AR requires concerted effort and immense collaboration between Google, OEMs, and developers in order to convince consumers to buy in. OEMs won't invest in developing the necessary specialized hardware unless they believe consumer demand exists, even if the underlying software support from Google is there. The risk is that AR on Android is relegated to a niche feature, while AR on iOS becomes a mainstream standard.
It's different this time
This could be Google's angle. In order to push third-party OEMs that will always drive the platform's unit volumes, it needs to drag them along more forcefully before it's too late by offering more "Made by Google" products as it increasingly expands its hardware ambitions. Motorola was never really about vertical integration, even if it appeared to be.
If an HTC deal is about vertical integration in pursuit of AR and greater control over Android's future, all while costing just a few hundred million, it could end up being well worth it.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Apple. The Motley Fool has a disclosure policy.