Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google recently launched the Pixel C, a high-end 10.2" Android 6.0 tablet with an optional Bluetooth keyboard. The 32GB model costs $499 and the keyboard costs $149. At that price point, the Pixel C is clearly targeting the same 2-in-1 market as Microsoft's (NASDAQ:MSFT) Surface devices.
Unlike Google's Nexus devices, which were all manufactured by various OEM partners, the Pixel C was completely designed and manufactured by Google. Let's take a look at why Google launched the Pixel C, and whether it can challenge the Surface in the 2-in-1 market.
Tablets are failing, 2-in-1s aren't
Research firm IDC expects total tablet shipments (including 2-in-1 devices) to fall 8% annually this year and grow at a compound annual growth rate (CAGR) of just 0.7% over the next five years. During that period, shipments of Apple's (NASDAQ:AAPL) iPads and Android tablets are expected to post negative growth.
However, IDC believes that shipments of Windows-based tablets and 2-in-1 devices will surge 59.5% annually this year and grow at a whopping CAGR of 30.3% over the next five years. During that period, IDC expects the combined market share of Windows tablets and 2-in-1s to more than double from 8.4% to 17.5%. Back in August, IDC forecast that total shipments of 2-in-1s (mostly Windows devices) could surge 86.5% this year.
Those numbers indicate that demand for mobile OS-based slate tablets will slump as laptop users upgrade to Windows-based tablets and 2-in-1 devices that offer a better balance between mobility and productivity. That's probably why Microsoft's Surface devices reportedly outsold Apple's iPads in online sales in October, according to 1010data Ecom Insights Panel, and why Apple launched the iPad Pro and Google introduced the Pixel C.
Microsoft's OS advantage
However, challenging Microsoft in the 2-in-1 market won't be easy for Google. It previously promoted Chromebooks as cheap productivity devices, but those devices run on Chrome OS, which was designed for laptops instead of tablets. Meanwhile, early attempts to turn Android tablets into productivity devices flopped because many apps were still optimized for vertical smartphone and tablet touchscreens.
To address that problem, some have suggested Google is planning to merge the Android and Chrome OS to match the two modes of Windows 10 in the near future. However, doing so could cause a jarring ecosystem split between apps optimized for mobile devices and ones designed for laptop-like devices.
Microsoft has a major advantage over Google among upgrading laptop users because nearly 90% of PCs worldwide still run various versions of Windows. Upgrading to a Surface or Windows 2-in-1 device would keep those users in the same ecosystem. This upgrade path has proven popular among enterprise users, who need to retain compatibility with legacy software and data from older Windows devices.
Android's cheap tablet problem
Since Google is at a disadvantage in the PC market, its best shot at entering the 2-in-1 market is for Android tablet users to replace their aging devices with 2-in-1 Android devices like the Pixel C.
IDC estimates that about two-thirds of the world's tablets run on Android today. But according to Google's own numbers, only 30% of all Android devices (smartphones and tablets) worldwide have been upgraded to version 5.0 or above. Devices which run on older versions of Android have either been abandoned by the OEM or aren't powerful enough to support Android's new features. Therefore, the vast majority of existing Android tablets are likely low-end ones instead of high-end ones.
Since average low-end to mid-range Android tablets now cost less than $200, it could be hard to convince existing Android tablet users to pay $499 for a new Pixel C. Therefore, that upgrade path isn't nearly as balanced as the one from a laptop to a Surface 3 or Surface Pro 4, which can cost roughly the same depending on the configuration.
The Pixel C is just a tech demo
I doubt that Google plans to seriously challenge the Surface or iPad Pro with the Pixel C. Instead, it's a tech demonstration of Android as a high-end 2-in-1 productivity device. Google did the same thing back in March with the new high-end Chromebook Pixel, which merely demonstrated that a Chromebook could look as sleek as a Macbook.
In my opinion, Google's Pixel devices are simply intended to be reference designs for OEMs to follow. Interested OEMs can then improve upon the Pixel C's design and aggressively market them to counter Windows 2-in-1 devices and the iPad Pro. That growth can then help it widen its defensive moat against Microsoft-powered devices.