Three years in, Google’s hardware honcho is just getting started
When Google senior VP of devices and services Rick Osterloh greets me at his offices and leads me up a sweeping staircase to a second-floor conference room, he doesn’t have to begin our chat by reminding me that the hardware team he leads has been busy. The fruits of its labor are all there, neatly arranged on a couple of islands of wood shelving outside the room, where they look like the goods at a tasteful store that sells nothing but Google gadgets.
Osterloh marked his third anniversary in charge of Google’s device business on April 18, but the company’s serious investment in making and selling its own hardware still feels like only partially charted territory. “Google has had an unbelievably incredible history as a software and services company,” he says. “And we’ve got the opportunity of a lifetime to try to help add a new capability to the company. We’ve had a pretty good start on that road, but there’s miles ahead that we’re really excited to travel down.”
[Photo: courtesy of Google]
Gauging Google’s success as a hardware maker in a purely bottom-line sense is not easy. Alphabet doesn’t break out numbers for Osterloh’s group, which are lumped into a line called “Google other revenue” that, in total, amounted to 15% of company revenue in the first quarter. One analyst estimated that Google made $3 billion in profit on hardware in 2018, up from an estimated $900 million in 2016, Osterloh’s first year on the job. Google prefers to share less specific tidbits reflecting the traction of various products: Pixel is the fastest-growing smartphone brand in the U.S., for instance, and Google Wi-Fi is the country’s best-selling mesh router system.
But Google’s foray into hardware has never been solely about turning a profit on gadget sales. Even if it remains at heart a cloud computing company–one whose services are used by virtually everybody on devices of all sorts–it concluded that it sometimes needed to build what Steve Jobs used to call the whole widget. “A lot of the new innovations are going to require development of a service and oftentimes a new hardware product,” says Osterloh. “Sometimes even silicon developed in conjunction to achieve an end result. And you can see that in our work in data centers, you can see that in our work in consumer electronics. It’s a very new time.”
Osterloh’s explanation of his organization’s overall mission remains in sync with the pitch he gave me back in October 2016, when he had only been in his job for a few months and had just presided over a product launch event featuring devices that had been works in progress when he arrived, including the original Pixel phones and Google Home speaker. That launch “was pretty much a tip to the future, which is, we’ll be much more regular about how we produce products,” he told me at the time. “We’ll go after key initiatives in software that’ll come to life with the co-design of hardware and software. You saw that a little bit with the Pixel and Google Home in particular, with the Google Assistant at the middle of it.”
The fact that Osterloh is still at Google, expressing the same vision that he did early in his tenure is a sign of progress in itself. Before the company formed a single hardware group and put him in charge, its consumer-electronics efforts mostly amounted to a series of quirky fits and starts, typified by the famously unloved Google Glass AR goggles. Google never actually shipped its first official consumer gadget, the whimsical spherical Q audio streamer. Many of its Nexus phones and tablets were pretty spiffy, but since it rotated between hardware partners, the line never evolved in the way that the iPhone and iPad have. The company also spent $12.5 billion to buy Motorola’s mobile business–and put Osterloh in charge–but then sold it to Lenovo just two and a half years later.
Google’s most serious hardware gambit was paying $3.2 billion for smart-home pioneer Nest in 2014. But in August 2015, when CEO Larry Page broke out non-core businesses into arms of a new holding company called Alphabet, Nest stopped being part of Google. That spinoff, which happened about eight months before Osterloh was named to run Google hardware, was a striking act of decentralization.
In February 2018, however, Nest became part of Osterloh’s group, undoing the arm’s-length relationship and giving Google a much fuller line of gizmos it could tie together with technologies such as the Google Assistant. “If we wanted to participate in a broad way in solving user problems, we realized that we had to have a broader portfolio, and that was pretty much Nest’s mission,” he says. As much as any development during Osterloh’s first three years, this merger is evidence that Google is serious about putting as much muscle as possible behind one unified approach to consumer electronics.
Pixel progress
The reintegration of Nest into Google was the company’s second big-bang expansion of Osterloh’s domain, coming less than five months after it acquired most of HTC’s smartphone design group to buttress its ability to build world-class smartphones without outsourcing most of the heavy lifting. That added 2,000 engineers in Taiwan to the Google devices team in one fell swoop. (Osterloh won’t provide a total headcount for the operations he oversees.)
Of all Google-branded devices, the Pixel phones have benefited most from the kind of iterative progress that happens when a company commits to a product category. The original Pixel from 2016 and and 2017’s Pixel 2 got respectful reviews. But the line came into its own last fall with the Pixel 3 and Pixel 3 XL, which received raves and were widely regarded to have the best cameras on the market. “We now have a capability that the company never had before to create an end-to-end phone,” says Osterloh.
[Photo: courtesy of Google]
Though Verizon has remained the only U.S. wireless carrier to sell the Pixel, a recent report showed Google surpassing LG to become the third-largest seller of premium smartphones in the U.S., after Apple and Samsung. The day before I talked with Osterloh, however, on Alphabet’s quarterly earnings call, CFO Ruth Porat had said that Pixel 3 phone sales were down over those for the Pixel 2 a year earlier.
According to Osterloh, the dip isn’t so much about Pixel’s competitive position as it is about overarching issues for the smartphone market. “It’s slowing down as people are extending their buying periods from 24 months to 36,” he says, adding that sellers of phones offered special promotional deals in first quarter, sacrificing revenue in favor of unit sales. He also notes that Apple’s recent quarterly results showed a 17% year-over-year revenue decline for the iPhone.
If consumers are holding onto their phones longer, it might be because the industry’s recent emphasis on super-deluxe models with prices to match has stifled the yen to upgrade. Smartphone makers, says Osterloh, “have been looking for ways to try to innovate and drive interesting new capabilities for users. A lot of those capabilities are expensive, and so prices have gone up. And in that process, a lot of users realize that they can’t afford it.”
More than most companies, Google might be well positioned to offer appealing phones without luxury-item price tags. Already, most of the most interesting things about its devices involve advances in software rather than hardware, such as the Pixel’s AI-infused Night Sight camera mode. “A lot of the future innovation, in our opinion, is going to come from software and AI work, and that’s a pretty interesting dynamic,” says Osterloh. “We see opportunity to come up with products that make for more accessible price points, with a great user experience.” That’s in line with leaks and rumors involving lower-cost Pixel phones being imminent. (Osterloh acknowledges that Google will have hardware news at its I/O conference next week.)
Beyond the phone
From the start, one key aim of Osterloh’s group was to build smartphones that were not only successful but also an example to the rest of the industry of how polished an Android phone could be. That, Osterloh says, “is a forever goal.” Just as important, though, the company wanted to bring a fully Google-y approach to emerging categories of connected gadgets, perhaps best typified by Amazon’s Alexa-powered Echo products. “Endpoints for computing have exploded in this era,” says Osterloh. “There’s just tons of new types of client computing devices, from smart speakers and now smart displays to wearables.”
[Photo: courtesy of Google]
Since their 2016 debute, Google Home speakers, which provide ambient access to the Google Assistant, have become a credible Echo rival. Research firm Voicebot estimates that Home has 24% of the U.S. market (compared to 61% for Echo) and added more U.S. users in 2018 than Echo did. Google says that 1 out of 7 new Google Home devices activated by consumers is a Google Home Hub, which sports a screen for Google Photos and YouTube videos (but no camera, eliminating privacy concerns associated with Amazon’s Echo Show).
Osterloh has tried to focus new gambits on those with clear value to Google’s overarching priorities: One of the first things he did upon joining the company was shut down Project Ara, an ambitious but improbable effort to build modular smartphones with components that snapped together like Lego. But the products the company sees as mission-critical have survived, even if they’re unlikely to sell in vast quantities. High-end Chrome OS laptops and tablets such as the PixelBook and Pixel Slate remain part of the mix: “We see an important place for these products, and we’ll keep making them because we think we’re getting a lot out of it,” says Osterloh.
Then there’s Stadia, an upcoming service that will stream console-caliber games to phones, tablets, and TVs, which Osterloh thinks “has a real opportunity to transform games, to make it so that you can have the richness of a AAA game on any device.” Whether or not it proves epoch-shifting, it sounds both like classic Google and something with a shot at achieving mass appeal.
Some of the products that have emerged from Osterloh’s group do still have a whiff of the earlier, more idiosyncratic era of Google hardware–usually to their detriment. In 2017, as Apple’s AirPods were on their way to becoming omnipresent, Google’s Pixel Buds got mediocre reviews that deemed them intriguing but clunky. But Osterloh emphasizes that even products that don’t take off can serve the greater cause. Google Clips, a tiny clip-on camera designed to intelligently capture video of kids and pets, didn’t go anywhere, but it helped the company develop some of the Pixel 3 phone’s signature photographic capabilities. “That’s not a product that sold in the millions, and it’s not something that we expected to,” says Osterloh. “But it did help us really improve our state-of-the-art and machine learning for photography.”
[Photo: courtesy of Google]
As for the emerging categories of computing experiences that aren’t even as far along as smart speakers and screens, Osterloh is particularly enthusiastic about augmented reality (AR)–which, since it often involves providing useful information at the exact moment people need it, would seem to play to Google’s strengths. At some point, an appealing AR headset–basically Google Glass done right–should arrive, whether it comes from Google or somebody else. Even once it does, Osterloh sees AR as something that has the potential to enrich all sorts of features on all sorts of devices. “If you’re using Google Maps, you’re going to want AR to be a part of that,” he says. “If you’re using a camera, you’d love to see image recognition be a part of that native experience. You’ll probably even want to invoke it in different ways that you haven’t thought of today.”
When I ask about virtual reality (VR), however, Osterloh’s exuberance fades. Google helped to democratize the technology with its Cardboard viewer, but Daydream, the company’s rival to Facebook’s Oculus, hasn’t gone much of anywhere and doesn’t seem to be a current priority. “We’re still in the very early days of VR,” he cautions. “I’m sure we’ll continue to invest in it in different ways, but where exactly we take Daydream remains to be seen.”
Another thing remaining to be seen: How Google will make money from the Assistant and other services deployed over its hardware. Figuring out how to deliver advertising via a voice-centric service like the Google Assistant in a way that’s effective rather than irritating will be a challenge, but Google has begun dabbling with strategies. An additional revenue stream might come from Google One, a new paid service that’s starting out mostly as a way to get more storage space for the likes of Google Drive. “We think it can become something more significant than that, where we start to offer a premium state for our users with Google One, offering them new capabilities that the company hasn’t yet developed,” says Osterloh.
For all the freedom Osterloh has to invest in new areas with monetization models that haven’t gelled, he says that Google looks at hardware “like a business, and we try to run it that way.” It just happens to be a business that’s part of Google–which means that expectations are high, the runway for critical initiatives is long, and the future, whatever it holds, is unlikely to be boring.
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