Episode 45 HTC, Google and the Future of Mobile

In episode 45 of Acquired, hosts Ben Gilbert and David Rosenthal provide real-time analysis of Google's acquisition of a portion of HTC's team and intellectual property. They discuss the strategic implications for Google's hardware ambitions, particularly in relation to their Pixel smartphone line, and consider the broader impact on HTC's future operations. With a live component to the episode, they incorporate the latest developments and speculate on Google's intent to strengthen its position against competitors like Apple by integrating hardware and software more closely. The episode also touches on the role of acquisitions in tech, the importance of supply chain management, and the potential challenges of cultural integration following such a deal.

• Ben Gilbert and David Rosenthal are hosting episode 45 of Acquired, which covers technology acquisitions and IPOs.
• The episode is being recorded live as Google is rumored to be acquiring part of HTC.
• The hosts are actively refreshing their browsers for the latest updates.

"Welcome back to episode 45 of Acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert." "David Rosenthal, and we are your hosts." "Today. We are live covering the leaks as they come out."

The quotes introduce the hosts and set the stage for the live coverage of the rumored acquisition of HTC by Google, highlighting the immediacy of the information being discussed.

• Ben Gilbert and David Rosenthal discuss their assumptions regarding the acquisition.
• They believe Google is about to acquire a significant part of HTC's engineering team.
• They acknowledge the possibility of needing to revise their statements based on new information.

"So we decided that the way we want to structurally do this is we'll sort of state our assumptions about what we know because Dave and I were talking about it, and we're pretty sure that we know the majority of the information that will be announced tomorrow."

This quote explains the hosts' approach to discussing the acquisition, which is based on their current understanding and the information available at the time of recording.

• The episode acknowledges the time zone differences affecting the release of official news.
• The hosts note that it is already morning in Asia, where the official announcements are beginning to emerge.

"Yeah, there's some serious time travel going on in this episode because you guys will be listening to this in the future. Obviously, we're here in the evening, Pacific time on September 20. It's already morning in Asia."

The quote highlights the temporal complexities involved in reporting live events that span different time zones, with Asia being ahead in releasing official news.

• A public announcement indicated that HTC would not be trading due to an impending announcement expected to impact shareholders significantly.

"And the most obvious one, that's not a leak, that's a public announcement, is that HTC will not be trading tomorrow because of a large announcement that is likely to significantly impact shareholders."

This quote points to the seriousness of the upcoming announcement, which has led to a suspension of HTC's stock trading, underscoring the potential magnitude of the Google acquisition.

• Pilot is a sponsor of the Acquired podcast, offering accounting, tax, and bookkeeping services.
• Pilot is now the largest startup-focused accounting firm in the US.
• The service is endorsed for helping startups focus on their core product and customers by outsourcing accounting tasks.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds."

This quote introduces Pilot as a sponsor and highlights its relevance to startups and growth companies, tying it back to the podcast's theme of technology acquisitions and IPOs.

• Google is expected to acquire a large portion of HTC's engineering team for just over a billion dollars.
• The acquisition includes approximately half of HTC's employees, specifically the hardware team that worked on the Google Pixel phones.
• HTC will continue to operate as an independent company with its own brands and non-Google smartphone efforts.

"Right, so tomorrow, September 21, it's looking like it will be announced that Google is going to acquire a large portion of the engineering team at HTC."

This quote provides specific details about the anticipated acquisition, including the focus on the engineering team and the financial aspects of the deal.

• HTC was founded in 1997 in Taiwan and initially worked as an OEM (Original Equipment Manufacturer).
• The company has been involved in the design and manufacturing of various tech products, including PDAs and early smartphones.
• HTC was a key player in the early smartphone era, manufacturing the first Android phone and being part of the Open Handset Alliance.

"HTC, it's a household name in the US, but only recently, however, has been involved in many products over the years that our listeners will probably recognize."

This quote sets up a discussion on HTC's history and contributions to the tech industry, framing the company as an influential but sometimes underrecognized player.

• HTC's stock has declined by 90% since its peak in 2011.
• The company's market cap was just under $2 billion US dollars before trading was halted.
• HTC faced challenges in maintaining its position as a dominant device maker.

"Unfortunately, since 2011, at its high point, that has not happened over the last five to six years, and the stock is down 90% since then."

This quote summarizes HTC's decline in market value, providing context for the significance of the Google acquisition.

• HTC acquired a majority stake in Beats in 2011 but divested it in 2013.
• The company has a history of partnering with other tech firms to innovate, as seen with the HTC Vive in collaboration with Valve.

"So in 2011, right at its peak, HTC acquired, I believe, a 51% stake in beats."

This quote offers an example of HTC's strategic moves in the tech industry, highlighting its partnership with Beats and its eventual divestment.

• Google's acquisition of Motorola in 2011 was partly to address Samsung's dominance in the smartphone market.
• Google was concerned about Samsung's approach to Android and the potential threat to its ecosystem.
• HTC's partnership with Google on the Pixel phones represents a continuation of its collaborative approach to innovation.

"Google at that point, Samsung, Google sort of had a problem that Samsung had taken Android."

This quote explains Google's strategic considerations in the smartphone market, which have influenced its relationship with HTC and decisions regarding acquisitions.

• Google acquired Motorola's smartphone manufacturing business for $12.5 billion, including a large patent portfolio.
• They operated Motorola for about two and a half years, releasing various smartphones that weren't particularly successful.
• Google sold Motorola to Lenovo for approximately $3 billion, keeping the patents and selling a piece of the business related to cable boxes.
• The net cost to Google for Motorola was around $10 billion, considering the partial sale to Lenovo and the cable box business.
• This initial foray into smartphone hardware was not successful for Google.

"They operated Motorola for about two and a half years, and they released a number of devices, smartphones kind of at all ranges from low end to high end, weren't particularly successful."

This quote explains that despite Google's varied attempts at creating smartphones through Motorola, the venture was not fruitful, leading to a lack of success in the smartphone hardware market.

• Google's purchase of HTC's smartphone team is seen as a repeat of the Motorola strategy, with Rick Osterlow, a former Motorola executive, leading Google's hardware division.
• The HTC deal includes a non-exclusive license for HTC intellectual property.
• Google paid $1.1 billion for the HTC team, a calculated move focusing on acquiring the hardware engineering team and associated IP.
• The acquisition is termed an "agreement," not a purchase, indicating a strategic partnership rather than a full takeover.

"Google signs agreement with HTC, continuing our big bet on hardware."

This quote from Rick Osterlow's announcement emphasizes Google's commitment to hardware development through strategic partnerships, as seen in the agreement with HTC.

• Google's acquisition of Motorola was speculated to be primarily for the IP, which was retained by Google and considered protective for Android.
• The emphasis on IP was reiterated when selling Motorola, suggesting the hardware venture was secondary to the IP acquisition.
• The HTC agreement also includes access to HTC's IP, bolstering the value of the deal for Google.

"The deal also includes a non-exclusive license for HTC intellectual property."

This quote indicates that Google's agreement with HTC includes access to valuable intellectual property, which can enhance Google's hardware capabilities and protect their Android ecosystem.

• HTC's financial struggles are addressed by the $1.1 billion capital infusion from Google.
• The sale of the smartphone team to Google allows HTC to focus on other aspects of its business, like handset manufacturing and the Vive VR system.
• The future direction of HTC is uncertain, with possibilities including becoming a contract manufacturer or shedding consumer brands.

"This gives them $1.1 billion of a capital infusion to do something with their business."

This quote highlights the financial benefit HTC gains from the deal with Google, providing the company with resources to potentially redirect its business strategy.

• Google's move to acquire HTC's team indicates a blend of horizontal and vertical market strategies, competing with other Android partners while also developing its own hardware.
• The acquisition allows Google to streamline operations and reduce inefficiencies by merging the HTC team with their own hardware division.

"They're still again deciding to be both a horizontal and a vertical player in this space."

This quote points out Google's dual strategy of providing Android as a platform (horizontal) while also creating its own devices (vertical), which could lead to a conflict of interest with other Android device manufacturers.

• The acquisition of HTC's team brings supply chain expertise to Google, a critical component in the tech industry dominated by companies like Apple.
• Google's lack of supply chain DNA could have been a factor in the Motorola failure, and the HTC deal aims to address this gap.

"This buys them a meaningful amount of supply chain expertise."

This quote emphasizes the strategic value of acquiring supply chain knowledge and experience, which Google gains through the HTC deal, potentially giving them a competitive edge in hardware production.

• HTC's path forward may involve focusing on contract manufacturing, similar to Foxconn's model with Apple.
• The specifics of HTC's role in the value chain, whether as a manufacturer or designer, remain unclear and will influence their future strategy.

"HTC could sort of move into that [contract manufacturing]."

This quote suggests a potential strategic pivot for HTC towards contract manufacturing, which could be a viable business model separate from consumer branding and design.

• Apple's integration of hardware, software, and operations is critical for features like Face ID.
• The engineering, hardware, software, and security teams work closely with operations and supply chain.
• This integration allows for micro-optimizations that, in aggregate, create a new class of products.

"At Apple, it was the security team working with them. And I remember him saying it was also the ops team. And our supply chain was a big part of that." This quote emphasizes the collaborative effort across various teams at Apple, highlighting the role of operations and supply chain in product development.

"You can't make the iPhone and you can't have all the stuff that Apple can do with the iPhone by integrating everything that leads to features like Face ID." The quote underlines the necessity of integration for the creation of complex features like Face ID, which is a result of combining hardware, software, and operational efforts.

• Google's supply chain and operational integration is not as advanced as Apple's, but they are improving.
• The partnership agreement with HTC is a step towards closing the gap.
• Google's core competency is in software and services, but they lack in hardware and supply chain operations.

"Before this partnership agreement that Google just reached with HTC, they were really hugely behind." This quote indicates that Google's recent agreement with HTC is an attempt to catch up in the area of supply chain and operational integration.

"Google is. Our core competency is software and services, but like hardware supply chain Ops, we have none of that." The quote highlights Google's strengths in software and services but acknowledges their lack of expertise in hardware and operations, which is increasingly important.

• Apple designs its own silicon, like the A11 Bionic chip, but does not manufacture it.
• They control the supply chain and design process, outsourcing manufacturing to TSMC and Samsung.
• This control over design and supply chain enables Apple to make powerful optimizations in their products.

"Apple makes their own silicon. That's not true. They design their own TSMC and they control all of the supply chain." The quote clarifies that while Apple designs their own chips, they do not manufacture them, instead controlling the supply chain and design process.

"Is there some optimization that happens between design and manufacturing where it's beneficial to actually start owning the manufacturing?" This quote questions whether there are further optimizations to be gained from Apple owning the manufacturing process, suggesting a potential future strategy.

• Google's business model relies heavily on advertising revenue, particularly from search ads.
• The creation of Android was strategic to reduce dependency on other platforms for search revenue.
• Google may need to shift towards a more vertically integrated model to stay competitive.

"The reason they create Android is to reduce the amount of licensing fees that they need to pay iOS or need to pay Apple to make Google the default search in iOS." This quote explains the strategic reason behind Google's creation of Android, which was to save on licensing fees and control the user experience.

"If the table stakes have now risen to the level where you need to do ridiculous hardware integration... Google's going to be hosed on this whole Android strategy if they don't have that." The quote suggests that Google's current strategy may be at risk if they cannot match the level of hardware integration that is becoming standard in the industry.

• The future of technology involves devices receding into the background and technology being part of ambient life.
• Companies like Apple and Snap are investing in this future through products like AR glasses and spectacles.
• Google's core competency in search may be challenged by this shift, as voice and AI change how users interact with technology.

"What is snap investing in? What are they doing? Like spectacles? What room is there for Google and Android in that world?" The quote questions Google's place in a future where technology is integrated into everyday life, suggesting that their current offerings may not fit into this new paradigm.

"Google's engineering, the things that make them good in engineering, are pushing them toward a future where they don't really show you a list of things anymore." This quote reflects on the potential shift in Google's business model due to advancements in voice and AI, where traditional search may become less relevant.

• Google may face an existential threat as technology evolves, possibly leading to a decline in search revenue.
• The company may need to consider a dramatic shift towards vertical integration to remain competitive.
• Google's expertise in machine learning and voice services could be leveraged to transition to hardware and user experience ownership.

"Maybe we just double down on that and actually own the full user experience at the hardware level." The quote suggests that Google could use its strengths in machine learning and voice services to transition towards owning the full user experience, including hardware.

"I guess the interesting thing is how fast will we get to a post search world? And is there anybody who can beat Google to that punch?" This quote poses questions about the speed of the transition to a world where traditional search is less dominant and whether Google can adapt quickly enough to maintain its competitive edge.

• Companies with a significant head start in their industry have a considerable advantage.
• The competitive landscape is dynamic, with companies being attacked from various angles and in different verticals.
• Incumbents can lose their edge as new players innovate and capture market share.

"But I think they're getting attacked on all sides, right? It's getting chipped away bit by bit, vertical by vertical as well..."

This quote underscores the challenges established companies face from emerging competitors who chip away at their market share across different verticals.

• Booking.com spends a substantial amount on AdWords, around three to three and a half billion a year.
• Airbnb spends significantly less on AdWords but has established itself as the go-to platform for accommodations.
• A strong market presence can reduce the reliance on advertising spend.

"Because they've actually established that they're the place to go."

The quote highlights the importance of building a strong brand presence, which can lessen the need for heavy advertising expenditures.

• Consumers are increasingly starting their searches on platforms like Amazon instead of Google for products.
• The shift represents a significant change in consumer behavior and poses a threat to Google's traditional search business.

"What any of the figures are, but I've seen crazy graphs where it's like the shift of people starting their search on Amazon instead of starting their search on Google for products. That's very real."

This quote points out the trend of consumers favoring Amazon over Google as a starting point for product searches, indicating a shift that could impact Google's ad revenue.

• Changing a company's DNA to focus on vertical product integration is challenging.
• Companies need to excel in multiple areas, including hardware, software, and services.
• Apple, for instance, needs to improve its services to compete effectively.

"The question is, and this gets back to the culture question is, can you actually change the dna of a company and shift it to a vertical products focused company?"

The quote emphasizes the difficulty of altering a company's fundamental approach and culture to adapt to new market demands.

• Acquiring talent and capabilities through strategic acquisitions can be a response to competitive threats.
• Integrating an external team into an existing company culture is complex and risky.

"But I think if I saw this and I felt that these threats were real, what I wouldn't do is go in one fell swoop by 2000 engineers who I sort of know but don't really know and didn't hire and aren't part of my culture, and go graft them onto my company."

The quote criticizes the approach of acquiring a large team from another company without considering cultural fit and integration challenges.

• Companies transitioning from a horizontal to a vertical market strategy face significant challenges.
• Examples of such transitions include Intel's shift from memory to CPUs and Apple's bet on the iPhone.
• Disney's move towards a streaming service represents a vertical strategy.

"Has any company ever successfully done this? And is there like a high profile example of someone that shifted from being horizontal to being vertical in a big way..."

This quote questions the feasibility and historical precedence of companies successfully transitioning from a horizontal to a vertical market strategy.

• Google's strategy involves becoming more vertically integrated, like Apple.
• The acquisition of 2000 engineers from HTC is part of this strategic move.
• There is skepticism about whether Google can successfully integrate the new team and compete with Apple's established ecosystem.

"Well, wait, let me play devil's advocate real quick here. So the Pixel product is going quite well... Do you think by bringing this team in house it could get worse?"

The quote explores the potential outcomes of Google's acquisition of HTC's team and whether it will improve or worsen their competitive position.

• A company's culture plays a crucial role in its strategic decisions and outcomes.
• Google faces a cultural challenge in integrating hardware-focused engineers into its software-centric culture.

"They're bringing in these 2000 people who are hardware and supply chain and device people. And they're coming into a Google culture where the crown jewel of Google's mobile strategy is Android."

This quote discusses the cultural clash that may arise from Google's acquisition of a hardware-centric team, given its traditionally software-focused culture.

• The acquisition of HTC engineers may not work out favorably for Google due to cultural and strategic misalignments.
• The move is seen as Google's attempt to compete with Apple's vertically integrated model.

"I don't think this is going to work. Right. Like buying 2000 engineers from HTC halfway around the world that aren't part of your culture..."

The quote expresses doubt about the success of Google's acquisition of HTC engineers, considering the potential cultural misfit and strategic challenges.

• Google's shift towards vertical integration may alienate Android OEM partners like Samsung.
• The future of Android may involve a tighter integration with Google's hardware, similar to Apple's ecosystem.

"I think they've decided... Android and Pixel phones kind of need to become one."

The quote suggests that Google has made a strategic decision to more closely integrate Android with its own hardware, potentially at the expense of its relationships with other OEMs.

• The deal with HTC is considered not too expensive for Google, given its financial resources.
• The acquisition includes access to HTC's patent portfolio and talent, which may be strategically valuable.

"I think Google, if they can do this integration well, got a pretty good deal on hiring 2000 people that are strategically perfectly trained to do the thing that Google needs to do."

The quote reflects the opinion that Google may have made a strategic and financially sound decision in acquiring HTC's team and patents, provided they can integrate effectively.