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Alphabet, Inc. Just Proved It Really Is Making a Big Bet on Hardware

By Daniel Sparks - Sep 21, 2017 at 6:41PM

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Investors shouldn't underestimate Alphabet's ambition to grow its Google-branded hardware business.

Hardware is one of Google's "three most promising bets," right alongside YouTube and Cloud, according to Google CEO Sundar Pichai. And now Alphabet's (GOOGL -0.04%) (GOOG 0.01%) Google is taking its investment in its 2016-launched Made by Google products even further. Google is acquiring part of smartphone-maker HTC in a $1.1 billion deal to "fuel further innovation and future product development in consumer hardware," Google said in a press release on Wednesday.

The deal has big implications for Alphabet. Namely, it reinforces the company's growing efforts to ramp-up its Google-branded hardware efforts, proving Alphabet is taking the opportunity as seriously as it says it is.

A man takes a photo with a Google Pixel smarphone.

The Google Pixel smartphone. Image source: Google.

A $1.1 billion deal

Under Alphabet's $1.1 billion cash deal to purchase part of HTC's business, a team from HTC's hardware business will join Google's hardware organization. Many of these employees were already working with Google to develop Pixel smartphones, Google said. As part of the purchase, Google will also obtain a non-exclusive license for HTC intellectual property.

Before this acquisition, Google had contracted out engineering talent at HTC to help Google bring to market its first Pixel smartphone last fall. Now Google can insource every aspect of designing its Pixel smartphones and only outsource manufacturing.

Though HTC will be losing about 2,000 of its employees to Google, HTC believes its branded smartphone strategy will continue to be supported by what's left of its business. The deal enables "a more streamlined product portfolio, greater operational efficiency and financial flexibility," read HTC's press release. 

HTC asserts that it still has "best-in-class engineering talent" to work on its next flagship phone. Further, HTC plans to continue building its Vive virtual reality headset. Though HTC CEO and Chairwoman Cher Wang admitted that the talent it lost to Google will "supercharge" Alphabet's hardware business.

Google's growing hardware business

Last fall, Google upped the ante in hardware with a new Made by Google hardware division, launching its new Pixel smartphone, its Google Home smart speaker, a streaming TV device, and more.

A Google Home alongside different colored, interchangeable bases.

Google Home. Image source: Google.

The success of Google-branded hardware is evident by its impact on Alphabet's fast-growing "other" segment, which accounts for about 12% of Alphabet's revenue. In Alphabet's second quarter, the segment's revenue soared 42% year over year. Management cited Google-branded hardware, the Android app store, and cloud services as the primary drivers for the growth.

In Alphabet's second-quarter earnings call, management said growth in Hardware was "substantial." Alphabet also said the Pixel phone "continues to be really popular...."

Alphabet's purchase of part of HTC's business comes just weeks before Alphabet's launch of its next-generation Pixel phone. Alphabet is holding an event on Oct. 4, exactly one year after it unveiled its Made by Google products last year, to announce its latest Google-branded hardware.

Investors should expect hardware to become even more integral to Alphabet. "We're excited about the 2017 lineup, but even more inspired by what's in store over the next five, 10, even 20 years," Google Senior Vice President of Hardware Rick Osterloh said in a blog post after the HTC purchase. "Creating beautiful products that people rely on every single day is a journey, and we are investing for the long run."

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

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