Smartphone Intelligence Service

November 2016

technology.ihs.com

IHS TECHNOLOGY Insight Report

Smartphone

Intelligence Service

IHS

™

TECHNOLOGY

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Territories covered

World

Company Symbol

Apple NASDAQ:AAPL

Google NASDAQ: GOOGL

Samsung KRX:005930

Google Must Work Hard to Drive Sales of its

Impressive Pixel Smartphones

Ying Yang, Analyst, Ian Fogg, Senior Director

Google announced two premium smartphones on October 4th, Pixel and

the larger screen Pixel XL. Unlike Google’s previous co-branded Nexus

smartphones developed with partners such as Samsung, Motorola, HTC,

LG and Huawei, the new Pixel Phone is entirely branded as Google. HTC is

manufacturing for Google more in an Original Device Manufacturer (ODM)

role than the Original Equipment Manufacturer (OEM) role of Google’s Nexus

partners. Google claims to have designed all the Pixel Phone hardware itself.

As Google unveiled this new Android premium phone in the aftermath of

Samsung Note 7 recall, Google aims to ﬁll in some of the gaps left by Note 7’s

failure. But we believe the amount of additional sales Google can pick up from

Samsung is small, because of low Pixel production volumes and high pricing.

Instead, the biggest immediate beneﬁciaries will be Apple’s iPhone 7 and 7

plus.

We expect Google Pixel phones will have modest sales volumes in the short

term for the following reasons:

• Google is yet to build up strong carrier and retail relationships. Because

Google worked closely with OEMs on older Nexus devices, it relied on their

carrier relationships, rather than having its own.

• The prices will hold back some potential buyers. The price of the Google

Pixel phones match the iPhone and are signiﬁcantly higher than Nexus models.

• The initial production volume of Pixel phones is moderate. IHS believes

Google’s planned 2016 Pixel production is around two million units.

• Google is not known as a hardware brand, yet. While smartphone buyers

may have conﬁdence in Google software products but not necessarily in its

hardware gadgets. Google must re-position its brand and compete with the

enormous brand marketing spend of the smartphone market leaders, Samsung,

Apple and Huawei.

Analyzing the Potential for the Google

Pixel Phone

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

In the long run, if Google manages to handle the problems above, whether Pixel can be a great success will rely upon

several factors. Notably, Google must be prepared to spend signiﬁcant amounts on marketing and channel incentives and

be prepared to follow up the initial Pixel models with further strong smartphone designs in 2017. Google has to win three

battles:

• Google Android phone (Pixel) vs. iPhone

• Google Android phone (Pixel) vs. all other Android phones, which are made by almost all the existing smartphone

makers

• Premium vs. mid to low-end phones.

Google needs to build up strong carrier and retail relationships in many countries

As of now, people in US, Canada, Australia, UK and Germany can buy the Pixel phones via Google’s local exclusive carrier

partners. The Pixel phones also work with Project Fi, the company’s own MVNO programme which is available in the US

and uses with Sprint, T-Mobile and U.S. Cellular networks alongside public WiFi.

Pixel phones are also available direct from Google without subsidy on the online Google Store and sold by several retailers

which mostly focused on local markets unlike the global retailer Amazon.

Although Google’s carrier partners are among the biggest operators in their own countries, their combined size still

represents a small market compared with Apple’s reach or the wide availability enjoyed by other established smartphone

makers. As a new entrant, Google will inevitably need to work on its channel relationships.

In addition to the Pixel’s ﬁve initial developed markets, it’s worth noting Google has set eyes on India as well. India is

signiﬁcant because it will be a large volume smartphone market to drive future smartphone growth. Pixel phones are

available on three Indian retailers - Cromā, Reliance Digital and Flipkart.

Carriers*1 oering the Google Pixel phone

Name Country

Scale, in mobile

subscriptions *2

Rank in country by

subscriptions

Verizon US 128 million 2nd

Deutsche Telekom Germany 40 million 2nd

EE UK 24 million 1st

Telstra Australia 17 million 1st

Rogers Canada 9.9 million 1st

Telus Canada 8.5 million 2nd

Bell Canada 8.2 million 3rd

*1 T-Mobile in the US introduced a limited time oer at the end of October 2016. Customers who own an unlocked Google Pixel phone will

receive a bill credit worth $325 if they sign up for T-Mobile One plan.

*2 as of end 2015

Retailers oering the Google Pixel phone

Name Available Country/Countries

Google Store Australia, Canada, Germany, United Kingdom, United States

Best Buy US

Wirelesswave Canada

Dixons Carphone UK

JB HI-FI Australia

Reliance Digital India

Cromā India

Flipkart India

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

The high prices of Pixel phone will discourage potential buyers

The design of Pixel phone is a standard premium Android phone with the Qualcomm Snapdragon 821 chipset and the

OLED display. The pricing indicates Pixel is competing with Apple iPhones and Samsung Galaxy S and Note phones. But

Pixel phones do not have any dierentiating hardware innovations or designs to justify the price such as the dual camera

on iPhone 7 Plus, or the curved screens on Samsung’s premium phones.

Partnerships with carriers and retailers will allow payment by instalment to reduce the up-front cost, but these oers are

not widely available yet because of Google’s limited channel relationships. The high prices will hold back some potential

buyers, especially those who are sensitive to pricing. Increasingly, consumers are oered high end smartphone hardware

at signiﬁcantly lower prices from Huawei, Oppo, Xiaomi, OnePlus, and ZUK. One US example is another new market

entrant LeEco’s Le Pro3, which features Snapdragon 821 and costs just $399. But while LeEco has done well in China,

its US oer will have niche appeal because it is available exclusively via retail channels rather than through the large US

carriers where almost all smartphones are sold in the US.

Google’s biggest selling point is its powerful software support - the Google applications and clean Android user experience

on Pixel includes the latest version of Android, 7.1 and for now exclusively oers Google Assistant, the company’s AI agent.

Assistant competes with Apple’s Siri, Microsoft’s Cortana and Amazon’s Alexa.

The clean up to date software and Google Assistant will attract a group of enthusiastic users but not likely the general

audience. Nexus phones, although with aordable prices, previously appealed to this niche group. Nexus devices were

often labelled as geeky phones and didn’t reach the mass market.

In the last year, the then current Nexus smartphones, shipped a total of 4 million units. This was split 45.3 % to the

Huawei Nexus 6P and 54.7 % to the LG Nexus 5X. IHS expects initial Pixel shipment volumes in 2016 to be a similar order

of magnitude.

2014 2015 H1 2016

LG Nexus 4 LG Nexus 5 LG Nexus 5x Motorola Nexus 6 Huawei Nexus 6P

Shipments of Nexus 4, 5, 5x, 6 and 6P

Source: IHS Technology

shipments (million units)

The share of active Nexus phones in the Pixel’s initial launch countries are all below 4.5% of the total active smartphones.

Google has to work on its marketing muscles to make the Pixel phones known to the mass market and to dierentiate

them from other phones.

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Active Nexus phones *

Source: IHS

Share of the total active

* include Nexus 4, Nexus 5, Nexus 5X, Nexus 6 and Nexus 6P

Google’s display choice helps Daydream VR, but limits its ability to increase production

IHS estimates Pixel’s production is being restricted by the supplies of the OLED displays and IHS estimates initial

production volume was only about 2 million units, shared 70% to the XL model and 30% for the standard 5” Pixel.

Organic Light-Emitting Diode (OLED) displays are one of the most sought-after components in the smartphone industry

because OLED panels have very fast refresh rates which are suited for Virtual Reality (VR), vibrant colors and low power

consumption. Companies are looking to have OLEDs to enable more functionalities on their ﬂagship devices. Samsung

Comparison of Google Pixel phone and selected ﬂagship phones by other brands

Google Apple Samsung LG Huawei

Pixel Pixel XL iPhone 7 iPhone 7 plus

Galaxy S7 Galaxy S7

edge

Note 7 V20 P9 P9 plus

Chipset Qualcomm Snapdragon 821 Apple A10 Fusion

Snapdragon 820

or Exynos 8890

Exynos 8890

Snapdragon

820

HiSilicon Kirin 955

Display

5” 5.5” 4.7” 5.5” 5.1” 5.5” 5.7” 5.7” 5.2” 5.5”

AMOLED LED-backlit IPS LCD Super AMOLED

Super

AMOLED

IPS LCD

IPS-NEO

LCD

Super

AMOLED

OS Android 7.1 Nougat iOS 10 Android 6.0 Marshmallow

Android 6.0

Marshmallow,

upgradable to

7.0 Nougat

Android 7.0

Nougat

Android 6.0

Marshmallow

Camera 8 MP front /12.3 MP rear

7 MP front/

12 MP rear

OIS

7 MP front/

dual 12 MP

rear OIS

5 MP front /12MP rear

OIS

5 MP front

/12MP rear

OIS

5MP front/

16MP +8 MP

dual rear OIS

8 MP front /dual 12

MP rear

Other

notable

features

- Highest DxOMark-scored

smartphone camera

- Google Assistant

- Compatible with Daydream

- IP 67 Water resistance

- Dual cameras on iPhone

7 plus

- Siri

- IP68 water resistance

- Double curved screen

- Compatible with Samsung

Gear VR

- IP68 water

resistance

- Iris scanner

- Stylus

- Dual rear

camera

- Leica certiﬁed dual

rear camera

SIM-free

price*

32 GB -

$599

128 GB -

$699

128 GB -

$819

32 GB -

$649

128 GB -

$749

256 GB -

$849

32 GB - $769

128 GB -

$869

256 GB -

$969

32 GB -

$699

32 GB - $770 64 GB - $850

64 GB -

$749.99

32 GB -

$440

64 GB -

$545

64 GB -

$589

128 GB -

$648

* Retail prices in the US. Huawei P9 is not available in US hence the price is adapted from UK.

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

Display is currently the only supplier that has the capacity of mass producing the smartphone OLED displays. LG, another

key supplier in the industry and the supplier for Apple, is still deploying LCDs on its ﬂagship phones such as the latest

V20. Apple is using LCD but IHS believes Apple will adopt OLED technology in future, most likely in 2017’s iPhone model

refresh. Chinese OEMs such as Xiaomi, OPPO and Vivo are also in the queue for the OLED supplies.

More OLED manufacturers will eventually emerge driven by the growing demand, but it will take time. Google as a

newcomer has not only entered the sales war but also the supply chain competition. It will need eorts to stand out of the

queue by proving good sales record and maintaining good relationships with Samsung.

Google’s choice of OLED panel makes the Pixel perfectly suited to support Google’s new Daydream VR headset, but also

makes it harder for Google to quickly raise Pixel production following the Note 7 cancellation because high quality OLED

panels are in short supply and neither production partner HTC nor Google are high priority customers because of their

lack of track record of large smartphone shipment volumes in the recent past.

Smartphone buyers may have conﬁdence in Google as a software product brand, but

not for hardware

The Google brand itself has a halo eect among users and the company take prides in its software innovations and

products. But Google’s hardware developments lack the same reputation and have had an uneven record. Google Glass

has been halted. The modular phone project Ara has been shelved this September, just four months after the Ara team

announced a new project plan at Google I/O 2016. Google’s best known hardware is probably Chromecast, which is a

cheap $30 smartphone streaming accessory. Google needs to boost users’ conﬁdence in Google hardware products. It must

convince users that their phones will be taken good care of throughout the life cycle.

The company has promised the Pixel phones will receive security updates for at least three years after the launch, or at

least 18 months from when the Google Store last sold the device. It’s also running a 24-hour phone support service which

allows users to share their screen while reporting the problem. Nevertheless, customer support will struggle to match

established players. Apple has a particular advantage because Apple’s physical stores can be found in all major cities and

the genius bar in every store is able to facilitate much easier customer interactions for troubleshooting or training.

Beyond the short-term Google must overcome even more challenges

If Google manages to solve its initial Pixel launch challenges and gain a foothold in the smartphone industry, it will be

faced with more challenges, which will be much more dicult to address.

Google Android phone (Pixel) vs. all other Android phones

The release of Pixel phones is an attempt by Google to have full grip on the Android operating system and it will upset the

company’s Android ecosystem partners. All the major smartphone OEMs, excluding Apple, are manufacturing Android

phones and almost all of them have no alternative OS on hand.

Google’s partners may take pre-emptive actions and consider alternative solutions.

• Samsung will consider expanding use of its Tizen OS. The recent acquisition of Viv signals the company is setting foot

in the arena of AI, which is the dierentiator of both Google Pixel and Apple iPhone. Samsung uses Tizen on smartwatches,

smart TV’s and on a small number of smartphone models aimed at India and South Africa.

• OEMs may fork Android. Other OEMs, mostly China-based, may have less options as Samsung but the pressure from

Google may drive them to abandon Google Android and advance their own Android variants, or seeking partnership with

local tech giants such as Baidu.

• Microsoft may have a new opening for Windows 10 Mobile. Microsoft has failed with its smartphone eorts. But if

Google antagonizes its Android partners, Microsoft oers a potential alternative, if sucient investment goes in. Windows

will not gain traction in smartphones unless there is a major market disruption such as Google taking too much control

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

over Android and perhaps prompting a regulatory intervention which helps rival operating systems and approaches.

Google Android phone (Pixel phone) vs. iPhone

The industry sees Google’s launch event on October 4th as a shift towards an integrated hardware and software strategy,

an approach taken by Apple, and similarly underway through Microsoft’s Surface adventures in the PC market. But

Google’s entire hardware ecosystem is not as developed as Apple. The AI device, Google Assistant, is directly competing

with Apple’s Siri but it needs a big user base to contend it. Although Android is currently the dominant OS, Google

Assistant is so far only deployed on the Pixel phones and Google is likely to have the backﬁre from its Android partners

that are making the rest of Android phones. Google Assistant will be a much more successful AI agent if it is more widely

deployed on other OEMs’ phones and hence has access to a much larger training data set.

Another dierentiator of Pixel phone from iPhone is Google’s Daydream VR platform. But VR is yet to be a mainstream

product, and to be commercially viable among a general audience will take time.

Additionally, the Note 7 recall may have undermined people’s conﬁdence in Android phones and make buyers consider

turning to iPhones as a safe option. The halo eect of the Google brand may oset some of the negative impacts, but it is

unclear how much the Android brand itself is hurt by Samsung’s incident.

Premium vs. mid to low-end phones

The premium smartphone segment has been facing pressure from cheaper devices. IHS forecasts the premium market

will remain ﬂat and smartphone shipment growth will be mainly driven by mid to low-end devices.

We believe the entry of Pixel phones into the premium market is not likely to reverse this trend in short term. As set out

above, the Pixel’s dierentiators – VR and AI are not convincing enough for mass market to switch to Pixel phones at this

stage given the very high Pixel pricing.

-200

200

600

1000

1400

1800

2014 2015 2016 2017 2018 2019 2020

$30-$90 $90-$150 $150-$250 $250-$400 $400+

Smartphone Shipment and forecase by factory Average Selling Price (ASP)

Source: IHS Technology

IHS Technology |

Smartphone Intelligence Service

Analyzing the Potential for the Google Pixel Phone

Rising hardware commoditization will help Google’s uniﬁed software and hardware

strategy

Google may not be expecting a mainstream mass market instant success with Pixel. Instead, Google is maximising

its competitive strengths through its software, such as deep learning, rich user database and AI while delivering an

impressive high end hardware experience with a good camera.

When hardware innovation slows further, and it becomes impossible for smartphones to dierentiate by the hardware

components alone, then Google’s time will come because competition in the realm of software will become critical, rather

than simply important.

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