Google To Buy Part Of Phone Firm HTC -- WSJ

By Jack Nicas in San Francisco, Dan Strumpf in Hong Kong and Dana Mattioli in New York Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 21, 2017).

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Alphabet Inc.'s Google said it would buy part of struggling Taiwanese smartphone maker HTC Corp. for $1.1 billion in cash, as it accelerates its efforts to crack the handset market.

Google said an HTC team that helped develop Google's flagship Pixel smartphone will join the company. The Mountain View, Calif., company will also get a nonexclusive license to HTC intellectual property.

HTC was hired by Google to be the contract manufacturer for the Pixel, a high-end smartphone that was launched last year, in part to better compete with Apple Inc.

"We are investing for the long run," Google hardware chief Rick Osterloh said. The HTC employees joining Google are "amazing folks we've already been working with closely on the Pixel smartphone line, and we're excited to see what we can do together as one team."

Before the deal, HTC's market capitalization was about $1.9 billion. The size of the division that Google is buying isn't clear.

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HTC once held a commanding position in the handset market. Its global market share peaked at 9% in 2011, when it shipped about 45 million units of its branded phones, according to Counterpoint Research. By last year, that share had plummeted to less than 1%, or 12.8 million phones. Its market share data doesn't include the Pixel phones, which sold about one million units last year, Counterpoint said.

It's not clear how many HTC employees will join Google. HTC is retaining the remainder of its handset business, including its manufacturing and research and development teams. It is also retaining the division that makes its virtual-reality headset Vive, which is one of the top sellers in the nascent category. HTC plans to use the proceeds from the sale to invest in its virtual-reality and own handset businesses.

The deal shows "Google is very serious about building its own hardware," said Jan Dawson, chief analyst at Jackdaw Research.

Google has made an aggressive push into hardware over the past 18 months, including its Pixel efforts, a voice-controlled home speaker and a virtual-reality headset.

Google doesn't disclose its hardware-sales figures, but the segment that includes the business grew by 42% to nearly $3.1 billion in the second quarter from a year earlier. That segment also includes its fast-growing cloud business.

The HTC deal is Google's second acquisition of a phone maker. In 2012, Google bought Motorola Mobility for $12.5 billion. The deal was widely seen as a bid for Motorola's large trove of patents, rather than a serious move into hardware. After hiving off some assets, Google sold the phone business to China's Lenovo Group Ltd. three years later for a fraction of the price.

Last year, Google hired Motorola's former president, Mr. Osterloh, to run its hardware business, which will include the HTC unit.

Google tried to run Motorola as an independent business, but that increased tensions with other phone makers that use Google's Android smartphone software. Those companies didn't like relying on Google for software while also competing with it in the hardware market.

The HTC deal could re-inflame those tensions. Google's Pixel competes with Android-using devices like those from Samsung Electronics Co.

Buying the HTC unit should enable Google to develop the phone in closer cooperation with the Android software team, which will further differentiate the Pixel from competing products, Mr. Dawson said.

Google realized that if it wanted to improve the Android software experience, it needed more control over the hardware, Mr. Dawson said.

"Google didn't have the creative freedom as if it was designing the phone completely from scratch" when HTC was the manufacturer, he said.

Google first launched its Android operating system -- a rival to Apple's iOS -- in 2008 on an HTC-made cellphone called the G1, said Neil Shah, an analyst at Counterpoint. That early tie-up gave HTC an edge over competitors just as smartphones began taking off, he said.

The rise of other Android-based smartphone makers, including Samsung, LG Electronics Inc. and Huawei Technologies Co., eroded HTC's dominance. HTC posted a loss of $351 million last year, while revenue fell 36% to $2.6 billion.

The decline came even though HTC's smartphones were well received by critics. Mo Jia, a smartphone analyst at research firm Canalys, said HTC's latest flagship phone, the U11, features a smooth user interface and impressive camera. But it hasn't stood out in the crowded, low-margin smartphone market. In China, HTC cut the price of the U11 by more than $200 to revive slumping sales, he said.

Write to Jack Nicas at jack.nicas@wsj.com, Dan Strumpf at daniel.strumpf@wsj.com and Dana Mattioli at dana.mattioli@wsj.com

(END) Dow Jones Newswires

September 21, 2017 05:15 ET (09:15 GMT)