Google to Buy Part of Phone Maker HTC -- Update

Alphabet Inc.'s Google is set to buy part of struggling Taiwanese smartphone maker HTC Corp., according to people familiar with the situation, part of the search giant's latest effort to crack the handset market.

The acquisition, which could be announced as soon as Wednesday afternoon, is for HTC's mobile-phone original design operations, according to the people. Google chose HTC, a longtime Google supplier, as its contract manufacturer for the high-end Pixel phone that Google launched last year, partly as a challenge to Apple Inc.

HTC, based in Taiwan, suspended trading of its shares Wednesday pending an announcement. HTC's market capitalization is about $1.9 billion. The value or size of the division Google is set to buy is unclear.

HTC and Google declined to comment.

HTC once held a commanding position in the handset market. Its global market share peaked at 9% in 2011, when it shipped 44 million units of its own-branded phones, according to Counterpoint Research. By last year that share had plummeted to less than 1%, Counterpoint data show.

With the acquisition, Google may get deeper access to HTC's research and development, as well as sales and distribution channels, analysts said. That could help Google as it seeks to make a bigger splash in the increasingly competitive smartphone market as it prepares to launch an updated version of the Pixel this fall.

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

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

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

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

Taiwanese media previously reported the planned deal.

Google's interest in the HTC unit extends beyond the Pixel, one of the people said, as the assets could also come into play for future Google products. HTC's virtual-reality headset, called Vive, is one of the top sellers in the nascent category. It isn't clear if any Google acquisition would include Vive.

Google has made an aggressive push into hardware over the past 18 months, including with the Pixel phone, 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 $3.09 billion in the second quarter over a year ago. That segment also includes its rapidly 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 massive patent trove rather than a serious move into hardware. After hiving off some assets, Google sold the phone business to China's Lenovo Group three years later for a fraction of the price.

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

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

The purchase of HTC could inflame those tensions. Google's Pixel competes with pricey devices such as those from Samsung Electronics Co. that run Android.

Buying HTC's phone-design unit would enable Google to build the phone even more closely in cooperation with its Android software team and further differentiate the Pixel from other phones on the market, Mr. Dawson said. Google has realized that to improve the experience of its Android software, it needs more control over the phone's hardware, said Mr. Dawson.

"Google didn't have the creative freedom as if it was designing the phone completely from scratch" when HTC led the manufacturing of the Pixel, 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 net 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 been enough to stand 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 Dana Mattioli at dana.mattioli@wsj.com, Jack Nicas at jack.nicas@wsj.com and Dan Strumpf at daniel.strumpf@wsj.com

(END) Dow Jones Newswires

September 20, 2017 16:31 ET (20:31 GMT)