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Google moves into hardware production, and out of its comfort zone

Software giant Google is beginning an aggressive foray into hardware production with the launch of a smartphone and other devices that will bring the company into direct competition with other leading tech firms, including its longtime partner Samsung.

Tuesday’s launch signals a major shift for one of the world’s most profitable companies as it seeks to adapt to a technology landscape increasingly dominated by mobile and other connected hardware. Google must find a way, analysts say, to keep acquiring user data for targeting ads as web search – traditionally done from laptop or desktop computers – is supplanted by newer technologies.

Google’s new smartphone, the Pixel, will employ artificial-intelligence technology that users can converse with, allowing them to sidestep keyboards as they access online information and make purchases such as movie tickets, say people familiar with the company’s plans who spoke on the condition of anonymity to reveal information ahead of its official release.

The company also plans to release other new hardware, including a voice-based assistant for the home to rival Amazon’s Echo and a virtual-reality headset to rival Facebook’s Oculus.

These moves push Google beyond its traditional comfort zone – industry-leading online portals for web search, and popular apps for e-mail and maps – and into the harshly competitive world of hardware design, production, sales and customer service in which the company has only dabbled. The company has relied on partners such as Samsung and Huawei to sell devices loaded with free Google software, including the Android mobile operating system.

“Android is ubiquitous now, but as people shift into these new patterns for interacting with the web, Google has less and less reach,” says Benedict Evans, partner at the Silicon Valley venture capital firm Andreessen Horowitz. “They have you for web search, but not for the other things that you increasingly do. This is both an existential and a strategic problem for Google.”

The launch of the Pixel will test Google’s mettle in a new kind of business. The shift towards hardware also puts the company on a collision course with Apple, Amazon and Facebook, and with partners such as Samsung that have used Google’s free Android software to build their own global smartphone empires. Samsung’s Galaxy phones are the most popular high-end smartphones in the United States after Apple’s iPhone.

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Samsung and Google have engaged in a tug of war in recent years, each trying to shake free of its dependence on the other, said people familiar with the situation. Google in recent years has tested the hardware market, with a spotty record, including limited efforts to sell its own line of smartphones, its purchase (and later sale) of Motorola and release of other troubled products such as Google Glass. Samsung, meanwhile, has gone so far as building its own mobile operating system and app marketplace, Tizen, as a hedge against the company’s dependence on Android.

Samsung declined to comment.

“Google’s challenge is that Android’s success has also been its greatest weakness,” says Jeffrey Hammond, principal analyst at Forrester.

The Android operating system is used by Samsung, Huawei, HTC and dozens of other manufacturers. But Google’s licensing deals with manufacturers – offering the smartphone operating system and the popular Google Play Store app marketplace to manufacturers only if they agree to bundle it with other Google apps – has generated antitrust scrutiny in Europe.

It has also left Google with little control over the devices, opening them to security flaws while hampering the company’s ability to leverage the popularity of Android as a path to other Google-provided services, such as the growing market for artificial intelligence.

Many technology companies have tried and failed to produce smartphones. Smartphones released by both Facebook and Amazon over the past two years have flopped. Microsoft – another software giant that moved into the hardware business – sold Nokia two years after buying it. In 2011, Google bought smartphone maker Motorola for US$12.5 billion and sold it for less than a quarter of that amount three years later, reportedly because the ownership of Motorola caused problems with its other manufacturer partners.

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The Pixel will be manufactured by HTC and cost about US$650, according to people familiar with the company’s plans, though different payment options will be available. The Pixel is also expected to be branded exclusively as a Google phone. This stands in contrast to the packaging for Nexus phones, the largely obscure line of Android phones that Google has produced with manufacturer partners since 2010, which had the names of both manufacturers and Google on its packaging.

Google plans to build out an extensive customer service and marketing operation to accompany the Pixel devices, said individuals familiar with the company’s plans.

Google thinks that if it waits longer to make a major push into hardware, it risks losing control of the Android device market. Moreover, the search giant sees an opportunity as consumers become more comfortable buying smartphones directly from manufacturers and carriers and dropping two-year contracts that lock customers in, said the people familiar with the company’s thinking.

Samsung’s recent recall of its flagship Galaxy phone, the Note 7, because of battery explosions, is a vulnerability Google could exploit, said Charles Golvin, research director at Gartner.

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Today, Google’s core search advertising business is still a cash cow, but Wall Street thinks that search advertising is a maturing industry. The queries that people type into Google on a smartphone today could, in the near future, be asked aloud to a device in the home or in a car, Evans said.

“If you have a device in your home, they would like you to be asking Google – and not Amazon’s Alexa – what the weather is or telling Google to play you this music,” Evans said. “Google sees there is a new endpoint emerging beyond smartphones.”

The new smartphones will come equipped with Google’s latest artificial-intelligence software, a souped-up voice-based helper called Google Assistant, that can do things such as buy movie tickets when asked. The phone will come with software that works smoothly with Daydream, the company’s virtual-reality platform and headset, and with the home appliance Google Home. Like Apple and Microsoft, which have built clusters of devices that sync in the hopes of keeping consumers wedded to their products, Google expects that consumers will be motivated to buy more of the products if any one of them takes off.

Google has made organisational changes across the company as part of its dive into hardware. In April, Google rehired Rick Osterloh, who was president of Motorola when the handset maker was owned by Google, to run a new hardware division.

Osterloh, who managed the relationship with Google’s Android team during his tenure at Motorola, has consolidated the company’s various hardware initiatives, including Chromecast, Nexus, Google Glass, the Nest thermostat, and now Pixel, into a single unit. He is building out a customer service operation and has appointed a design chief to oversee all the company’s hardware. A separate unit manages the relationships with manufacturer partners.

“He’s one of the elite few who understands that the new wave of innovation will go beyond smartphones and combine software and hardware,” says Jason Rosenthal, chief executive of virtual-reality start-up Lytro, where Osterloh sits on the board of directors.

“There are just few very executives who have worked on both.”