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Google Signals Apple-like Direction for Nexus Phones

Google CEO Sundar Pichai and his lieutenants have signaled to colleagues and outsiders that the company wants to take greater control over its program for making “Nexus” smartphones, which are powered by Google’s Android software. The change would effectively reduce the level of involvement of hardware partners that make the phones with Google, a group which has included Samsung, Motorola, LG and Huawei.

The move would be the latest step by Google to make Nexus phones more like the iPhone, which is controlled by Apple top to bottom, and strengthen Android’s brand overall in order to capture more share at the high end of the market that Apple dominates. Google doesn’t want its revenue-generating services for high-end smartphones to be at the mercy of Apple like they are now.

The Takeaway
Google’s ongoing push to make Android smartphones more competitive with Apple’s iPhone has led to changes for Google’s Nexus phone program. Google has discussed taking more control over the building and branding of Nexus phone, a step toward being a more vertically integrated phone maker, like Apple.

The big open question is how much money is Google willing to pour into marketing future Nexus phones to actually make them somewhat competitive with the iPhone or even with Samsung’s Galaxy phones. The amount it spends will directly impact sales volume. If it doesn’t commit to a big, multi-year effort, then why bother? The phones also will need new features and industrial design that captures the imagination of smartphone buyers; those things aren’t exactly in Google’s wheelhouse, and they take years to develop.

Until now, the Nexus program was something of a partnership between Google and the hardware brands who would take turns making a Nexus phone every year (and two phones in 2015). Teams of engineers from those companies would work out of Google’s headquarters for months at a time. And the hardware brands would have their names displayed on the phones, alongside Google’s.

In the future, based on comments from Googlers to colleagues and outsiders, hardware makers will be much more like order-takers, similar to the way contract manufacturers like Hon Hai (Foxconn) follow Apple’s directions for producing the iPhone. Mr. Pichai also has said future Nexus phones may have only Google’s brand on them.

Google may be better off working directly with contract manufacturers rather than phone brands themselves under the new arrangement. But Google likely doesn’t yet have enough hardware expertise to go that route for phones the way Apple does.

Several of the phone brands might not participate in the program rather than capitulate to Google in such a way. One company that has been in talks with Google for a Nexus phone this year is HTC, says one person briefed on the matter. The person added that given the new arrangement Google has been aiming for, participation has been a controversial topic inside of HTC. After all, HTC was once was a contract manufacturer of phones that turned itself into the first major consumer brand for Android phones. It produced the first ever Android phone in 2008 and the first ever Nexus phone with Google in 2010. But for a variety of reasons, HTC’s consumer brand fell as quickly as it rose and the company is now a shell of its former self, though it still makes high-quality phones and is pushing into virtual reality and wearable devices.

Google has been comfortable with HTC’s engineering chops, and because of its experience producing devices, it might make sense as a partner for Google’s Nexus ambitions in the near term. While HTC is proud of its consumer brand, the company is likely desperate for more revenue and unit-sales volume. It’s possible there are financial or other considerations in its agreement with Google that make it more palatable. Spokespeople for Google and HTC did not comment.

Apple Envy

The shift at Nexus, according to people inside and outside of Google, would be just one of several tactics Google is pursuing to ensure that it can make money from mobile services in the long term. While Google’s Android continues to dominates the smartphone market, Google generates most of its mobile revenue from services on Apple devices. There have been longstanding fears at Google that, over time, Apple would take steps to curtail Google’s ability to make advertising and other revenue from services on the iPhone. Apple highlighted its own focus on generating more service revenue when it released its latest quarterly earnings on Tuesday. CEO Tim Cook said in the first fiscal quarter of 2016, the company generated $5.5 billion from services revenue like iTunes music and app purchases, Apple Music, Apple Pay and iCloud.

“I do think that the assets that we have in this area are huge, and I do think that it's probably something that the investment community would want to and should focus more on,” Mr. Cook said.

Google leaders have become increasingly concerned about Apple’s monopoly over the high end of the smartphone market, the inability of Google to influence Android phone hardware so that it can enable new experiences, and the inability of the Nexus program to gain traction with consumers beyond a relatively small group of Android enthusiasts.

Nexus phones haven’t been a huge commercial success to date, in part because of a lack of marketing and the high price points of the phones. The most that any single Nexus phone has sold is believed to be several million units, and typically, it’s much less than that. (The 2013 Nexus 5, produced by LG, is said to be the biggest Nexus hit.)

The primary purpose of Nexus phones, which showcase the newest Android software releases, has been to help the participating Android hardware firms improve the perception of their brand among industry partners, and to understand how to build better Android phones on their own. It also shows non-participating brands what’s possible for them to build with the newest Android software. Google has been increasing its marketing for the devices, though sales of the most recent Nexus phones haven’t hit their optimistic goals, says one person briefed on the situation.

Several of the phone brands might not participate in the program rather than capitulate to Google in such a way. One company that has been in talks with Google for a Nexus phone this year is HTC.

Last fall, debate ramped up inside of Google about designing and developing a phone on its own, given the aforementioned concerns and despite the obvious challenges it would have. But without a sustained—and costly—ad campaign to accompany a Google-branded phone, the way Apple and Samsung do for theirs, it won’t get very far. Google is no stranger to big brand-advertising campaigns, including on TV, though its most recent ads for Nexus are anything but creative or inspiring.

And if Google chose to ramp up marketing, it would raise numerous questions about how competitive it would be with its existing Android phone partners. Not that those partners have much choice but to work with Android, given the lack of a third smartphone “ecosystem” beyond that one and Apple’s, whose iOS software is not available to other hardware makers. (Microsoft and Amazon both have somewhat retreated from building an alternative to Android phones.)

For now, though, it seems the best that Google could hope for from future Nexus phones is to serve as inspiration or as a road map for other Android hardware brands, who have been struggling to keep up with Apple in terms of hardware innovation because of their slim profit margins.

Unequal Partnership

Over time, Google has taken steps to assert more control—and get more revenue—from Nexus phones. Google currently keeps around 15% of the sales price of Nexus phones that it sells online, says one person who’s had access to the figures. That keeps the profit margin for the manufacturer small compared to other devices they make. Initially, Google didn’t keep any percentage of the sales price, says another person who’s had access to such data.

In addition, Google now often takes responsibility for handling online sales of the devices for the top 10 markets for the Nexus phones, with the partners getting control over all others. Google has partnered with companies like Amazon.com and Best Buy to sell the devices, though it wasn’t able to get U.S. wireless carriers to sell the Nexus phones at launch—a big source of consternation for people involved with the Nexus program.

Established hardware makers are unlikely to want to work with Google in a more subservient role. For many, the Nexus program is already an unequal partnership, and changing it to a Google-branded product would be largely symbolic. One person who was recently involved with a Nexus device says Google micromanages the hardware development, asking for tweaks to minutiae, like screws. Because of the low profit margins on the phones, it's harder for brands to spend any money to market the devices. As a result, they have to cede all marketing to Google, which is typically cagey about its plans and doesn’t commit much to the cause. “They were so prescriptive on the way they wanted us to work,” this person says.

Google may need to incentivize wireless carriers, particularly in the U.S., to agree to sell future Nexus devices, given lackluster sales volumes in the past and the fact that Google is competing somewhat against carriers with its Project Fi wireless service. (Nexus phones are the only devices that are compatible with Project Fi.) Google also has pushed back on wireless carrier requests to enable Nexus devices to handle “carrier aggregation,” which is when carriers combine multiple, smaller bands of wireless spectrum into one bigger band.

—Jessica E. Lessin contributed to this article.

This article is part of a series on the future of Android. Other articles in the series are at the bottom of this page: With Apple in Mind, Google Seeks Android Chip Partners


Amir Efrati is executive editor at The Information, which he helped to launch in 2013. Previously he spent nine years as a reporter at the Wall Street Journal, reporting on white-collar crime and later about technology. He can be reached at [email protected] and is on Twitter @amir