|Alphabet expected to show off new Pixel smartphones and other gadgets Wednesday|
Alphabet Inc. will look to impress gadget lovers Wednesday with a new line of devices for the holiday shopping season, but the company's event will also be important to determine if the money Google is spending to produce its own hardware and challenge Apple Inc. is worth the cost.
Much of what Google will unveil at the San Francisco event has been reported, thanks to a series of leaks last month. Two new Pixel phones (https://www.droid-life.com/wp-content/cache/page_enhanced/www.droid-life.com/2017/09/19/google-pixel-2-xl-exclusive/_index.html) -- one larger than the other -- a new high-end Chromebook (https://www.droid-life.com/wp-content/cache/page_enhanced/www.droid-life.com/2017/09/19/google-pixelbook-chromebook-price-release-date/_index.html), a mini version of Google's Home smart speaker (https://www.droid-life.com/wp-content/cache/page_enhanced/www.droid-life.com/2017/09/19/google-home-mini-exclusive/_index.html) and an updated Daydream virtual-reality setup (https://www.droid-life.com/wp-content/cache/page_enhanced/www.droid-life.com/2017/09/19/new-google-daydream-view-exclusive/_index.html) are expected.
While the surprise element may be missing from the event, there is still much anticipation to see what Alphabet (GOOGL) (GOOGL) can do in challenging Apple (AAPL) directly with its own high-end hardware. More than anything, Wednesday's event will need to convince investors and the media that the company's hardware strategy is a bet worth making.
"I think they need to convince everyone that their hardware strategy is justified, this is a very expensive endeavor," said Creative Strategies Principal Ben Bajarin. "If this is a strategy they need to remain committed to, they need to take meaningful share. These new products need to be able to compete with some of the other strong product lineups, and it's not as easy as it once was."
Google appears to be doubling down on the bet it made last year in introducing the Pixel to challenge Apple's iPhone, after previously leaving most hardware design and manufacturing to partners like Samsung Electronics Co. Ltd. (005930.SE) . Last month, Alphabet committed $1.1 billion in a deal with HTC Corp (http://www.marketwatch.com/story/google-htc-sign-11-billion-cooperation-agreement-2017-09-20).(2498.TW) that will bring hardware talent and licensing from the hardware partner that has been essential to the Pixel line.
See also: Why Google's HTC deal may be different than the Motorola bomb (http://www.marketwatch.com/story/why-googles-htc-deal-may-be-different-than-the-motorola-bomb-2017-09-21)
Alphabet is making that commitment while the opportunity to profit from sales of its own branded smartphones, Chromebooks and smart speakers is not guaranteed. Alphabet's hardware sales are bundled with all non-advertising Google revenue in a bucket of sales that grew 62% to $3.4 billion in last year's holiday shopping quarter, but that amount is dwarfed by the rest of Google's business and profitability is a real question mark.
Analyst Jan Dawson of Jackdaw Research believes Google has sold about 2 million Pixel phones -- Apple sold that many iPhones in half a week, on average, last year -- and still has a lot to learn about the business. One of the reasons the last Pixel models did not see Apple-like numbers of units was that Google initially gave Verizon an exclusive deal to sell the phones, Dawson says.
"The devil is in the details," said Dawson over the phone. "The reality is they sold 2 million phones because of limited supply, limited distribution and that they were not differentiated in the market. Unless those things change, it's not going to be that material to Google's sales. Even if they move twice as many units, that's still a tiny fraction of the global smartphone market."
Don't miss: Google Finance as you know it is going away -- here is what will remain (http://www.marketwatch.com/story/google-finance-as-you-know-it-is-going-away-here-is-what-will-remain-2017-09-27)
Google could juice its revenue from the Pixel with a new pricing strategy for its phone lineup, much like Apple's iPhone X announcement earlier this month (http://www.marketwatch.com/story/new-apple-iphones-key-feature-is-its-price-tag-2017-09-09). Dawson says that it would not surprise him to see a price increase in the new Pixel phones driven by more expensive components and rising memory costs.
"It's quite possible that Pixel devices will be more expensive than last year," Dawson said.
Google could go the other way, however, and look to offer the Pixel at a much lower price than the iPhone X to disrupt sales of Apple's latest and greatest smartphone, which will begin preorders later this month. While it could weigh on Alphabet's profitability, a larger quantity of cheaper sales could have a better chance of making a difference for a company expected to surpass $100 billion in annual revenue for the first time this year, and would fit the Android vs. Apple rivalry as it has been known so far.
To compete, the display and camera are the two features "Google needs to be competitive with" Apple and Samsung, Bajarin said. Specifically, the camera needs to be "top-notch," perhaps with some kind of three-dimensional sensing, and the display needs to be bezel-less, he says.
Related: Nvidia adds Google Assistant to Shield streaming device (http://www.marketwatch.com/story/nvidia-adds-google-assistant-to-shield-streaming-device-in-challenge-to-apple-tv-2017-09-28)
While the phones might be the gadgets that consumers and investors watch closest, Bajarin also said that Google's expected Home Mini smart speaker might be most exciting. The new Home, and its big brother, can showcase the products Google is best at: search and giving users the data they want.
"Nobody saw the volume of speakers coming, Amazon (AMZN) has sold 25 million to 30 million to date, which is a lot given how new a category it is," he said. "It's a category with a lot of opportunity and a great play if the margins are there. But again, they've got to prove themselves that they can take smart-speaker share."
Alphabet's Class A shares have gained 22.1% and Class C shares have added 23.5% so far this year, outpacing the S&P 500 index's 13% growth but trailing Apple's gain of 32.8%.