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With Pixel 2, Google Is Borrowing a Page Out of Apple's Playbook

By Evan Niu, CFA - Oct 5, 2017 at 8:30AM

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In more ways than one.

Alphabet (GOOG 0.45%) (GOOGL 0.52%) subsidiary Google hosted its big product event yesterday, and it was chock-full of new products that all feature Google Assistant. The Pixel 2 smartphone was the main headliner, and the stakes were high following the original Pixel's launch last year, as well as the fact that Google made headlines just a couple weeks ago by announcing it would acquire HTC's Pixel team for $1.1 billion. Assuming that deal closes in early 2018 -- which it should, since there aren't likely to be any regulatory challenges -- then Google will be much more vertically integrated and its future smartphones will be all the more promising.

With the Pixel 2 and Pixel 2 XL, the search giant is borrowing a page out of Apple's (AAPL -0.23%) playbook.

Pixel 2 and Pixel 2 XL

Image source: Google.

Two can play

Every year, Apple introduces new iPhones and cascades older-generation models down to successively lower price points (in $100 increments) before eventually being discontinued. While Apple took a different approach this year by introducing three new models for the first time and moving upmarket to establish a new $999 price point, it still stuck to this strategy with the iPhone 6s and iPhone 7. Google is doing likewise with the first-generation Pixel and Pixel XL, which are still available but now at lowered price points of $549 and $669, respectively.

Similar to Apple's ambitious move upmarket, Google is attempting to compete in the highest ends of the smartphone market. There is now a hefty $200 premium associated with upgrading to the 6-inch Pixel 2 XL, an incremental increase compared to the $120 premium associated with opting for the larger display in the first-generation models. If you want a Pixel 2 XL and also decide to upgrade the storage to 128 GB for an extra $100, the total rises to a whopping $949 -- the same price as a 256 GB iPhone 8 Plus and just a stone's throw from the iPhone X's $999 starting price tag.

Here's Google's new Pixel lineup:

Device

Display Size

Base Price

Pixel

5-inch

$549 (32 GB)

Pixel XL

5.5-inch

$669 (32 GB)

Pixel 2

5-inch

$649 (64 GB)

Pixel 2 XL

6-inch

$849 (64 GB)

Data source: Google.

You can compare this to Apple's arguably overcrowded lineup.

Moving on up

Competing with premium smartphone leaders Apple and Samsung is no easy task, particularly for a company with as little hardware experience as Google. Sure, it's been collaboratively designing phones since the Nexus days, but the original Pixel was the first that Google truly designed throughout, earning the "Made by Google" title that now characterizes its entire first-party hardware lineup.

If you ignore the oversimplified camera comparisons that are based on DxOMark scores, the Pixel 2 does not stack up that well competitively against the iPhone 8 and Galaxy S8. For starters, the new A11 Bionic chip is a beast that makes short work of the Qualcomm Snapdragon 835 that powers the Pixel 2 (and the Galaxy S8). For the larger models, the Pixel 2 XL starts at a higher price ($849 vs. $799), and when upgrading, offers less storage than the iPhone 8 Plus (128 GB vs. 256 GB). The dual-camera system is a strong selling feature for Apple's Plus models.

Both Pixel 2 models have a few advantages, like screen resolution and size, memory, and battery capacity. Overall, the Pixel 2 looks reasonably competitive with the iPhone 8, but the Pixel 2 XL is relatively less competitive with the iPhone 8 Plus. In other words, the higher that Google goes in terms of price, the harder it's going to be to justify those price points. But that doesn't appear to be stopping Google from trying.

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 shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of QCOM and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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