Google Built Its Name on Free Services. Why Is It Suddenly Going After Rich People's Money?

Pixel, a new phone priced on par with the iPhone, is Google's attempt at a new business model.

"At first we built a search engine. Everyone could find anything they wanted."

"Now the real world needs some help too — photos, phones, videos, schedules, texts, friends, travel, reservations... Wouldn't it be nice to have a Google of your own?"

At a launch event during the National Day holiday, over soft music and the kind of female voiceover you hear in commercials, Google used a video to lay out how it imagines the future of artificial intelligence — the Google Assistant:

User: How long does it take to get from my house to downtown Chicago?

Google Assistant: About 18 minutes, given the traffic right now.

User: What restaurants are there?

Google Assistant: Here are a few... (lists restaurants)

User: Then book a table at Quatino.

Google Assistant: Done.

There is no doubt about it: Google, the world's largest artificial intelligence company, has built the world's smartest AI assistant.

While Siri and Cortana still struggle with the simplest requests, Google Assistant can already follow "what restaurants are there." Once the table is booked, it watches the traffic and tells you when to leave.

Unlike Siri, this assistant doesn't need a screen of its own to be summoned. While texting friends in Allo, you type "@Google" and it appears, recommending the films now in theaters.

It can be called up from almost any screen on the phone, and it does different things in different apps.

Having got the whole world using its search engine, Google now wants to use artificial intelligence to change the relationship between people and machines.

But unlike the free search engine, the free Gmail — unlike almost every other Google service — this time you cannot have Google Assistant for free.

To use it, you have to buy a new phone called Pixel, which costs about what an iPhone 7 costs.

A Phone "Made by Google"

The Pixel doesn't stand out much. In its details it looks a lot like an HTC phone.

What is unusual is the back: a third of it is a single sheet of glass, a design no other phone on the market has.

Beyond that, there is the "G," everywhere. A large letter "G" sits on the back cover. On the front, the Google search box that used to sit on the Android home screen is gone, replaced by another prominent "G" in the top left corner.

Google Pixel

This is the message Google keeps repeating: Google made this phone.

There are plenty of other details like it. Before the launch, Google opened a site devoted to its hardware, madeby.google.com. After the launch, the words "Phone by Google" turned up everywhere — in the most prominent spot on the Pixel product page, and in Pixel's ad copy.

The rest of the hardware is much like any other Android phone:

• reportedly the best camera available today;
• a camera that doesn't stick out the way the Galaxy S7's or the iPhone 7's does;
• 15 minutes of charging for 7 hours of use;
• Qualcomm's current top-end Snapdragon 821 processor;

It isn't hard to see how much Google is counting on this phone: it built a tool that moves your iPhone data across in one tap, iMessage texts included.

On price, Google has squared off with Apple too. The Pixel starts at 32GB and costs exactly what the iPhone 7 costs.

After the launch, Ben Evans, a partner at the investment firm A16Z, ran a poll on Twitter: why do you think Pixel exists?

Most people chose this answer: it's Nexus with a new brand on it.

Evans made his name as an analyst, and the people who follow him know the tech world well.

Search "Pixel" on Zhihu and you will find plenty of the same opinion.

But it isn't that simple.

Pixel Is Not the New Nexus

Nexus was born in January 2010. The first one, the Nexus One, carried both the Google and the HTC brand.

Android was still a niche system then, and every phone maker's version of it looked completely different. HTC's Android phones looked like its Windows Mobile phones; Samsung's looked like its feature phones. Every company cared more about its own brand than about what Google thought.

Out of that mess, Nexus appeared as an "Android reference design": the phone makers designed the hardware, and Google controlled all the software inside.

A year later Nokia collapsed, Android became the biggest phone system, and Google began thinking about building phones itself.

In 2011 Google bought Motorola's handset business for US$12.5 billion. But in 2013, seeing that neither the Moto X nor the Nexus 6 was going anywhere, it handed the handset business to Lenovo.

Nexus phone release timeline

• 2010.1 Nexus One, co-produced with HTC, US$529
• 2010.12 Nexus S, co-produced with Samsung, US$299
• 2011.10 Galaxy Nexus, co-produced with Samsung, US$399
• 2012.11 Nexus 4, co-produced with LG, US$299
• 2013.10 Nexus 5, co-produced with LG, US$349
• 2014.10 Nexus 6, co-produced with Motorola, US$649
• 2015.9 Nexus 5X and 6P, made by LG and Huawei respectively, US$379 and US$499

Apart from the 2014 Nexus 6, every Nexus cost far less than an iPhone. Google put almost nothing into marketing them either — no TV ads, no billboards, just a few slots on its own search pages.

This time Google is doing the opposite of what it did with Nexus.

Pixel is the first smartphone Google has designed itself, under the name "Made by Google."

It still worked with HTC, but this time HTC's role looks more like that of a contract manufacturer such as FIH Mobile.

You can see how serious Google is about Pixel from the advertising.

In the two days after the launch, Google spent US$3.2 million on American TV ads for the phone — as much as Samsung and Apple spent on TV ads, combined, in the two days after their own new phones came out. In the Nexus years, Google mostly promoted its phones for free on its own search engine.

According to Mario Queiroz, Google's vice president of product management, this kind of spending may only be the beginning.

People are already guessing whether Google will buy Pixel ads for this year's Super Bowl — the most expensive advertising slot of the American year, and where Apple ran its famous "Big Brother" ad in 1984.

If the old Nexus phones were meant as a demonstration, Pixel — design, manufacturing, sales — is squaring up to compete with the phone makers.

Why Is Google Building Hardware Itself?

Asked that question, Rick Osterloh, who runs Google's hardware business, answered that building hardware and software together lets Google's artificial intelligence reach its full potential.

The odd thing is that Google Assistant doesn't use any special components.

And Google could push the Assistant onto every Android phone outside China without worrying that the manufacturers would refuse.

In 2011, for instance, Google launched the social network Google+, and it soon turned up on every Android phone outside mainland China.

That was not because Samsung, Sony or HTC loved a service nobody loved. It was because a manufacturer that didn't install Google+ couldn't install any Google service at all — including the ones users insist on, such as the Play Store and Gmail.

Google bundles all of its own apps into one set: to use any of them, a manufacturer has to install the whole list Google specifies, or it gets none. Users can't add them afterwards either, unless they know how to tinker with their phones.

With the Assistant, Google has not done that. It has said plainly that other Android phones will get Google Assistant only at some unspecified point in 2017.

It comes down to money.

Outside mainland China there are roughly 2 billion Android users, more than three times the total number of iPhone users. Even so, Google hasn't managed to make enough money from them.

It controls three times as many phones as the iPhone, and earns less than a third of Apple's annual profit.

Most of Apple's revenue comes from the expensive iPhone. Ninety percent of Google's comes from advertising, and most of that has little to do with Android.

In the PC era, the first thing a user did online, most of the time, was open a search page.

On phones, that changed completely. People who want to buy something open the Taobao or JD.com app; people who want to talk to friends open WeChat. Search is no longer essential.

This is not Google's problem alone. In China, the search engine Baidu faces much the same thing. Both engines were born in the PC era, and the growth of their ad revenue is falling fast.

Google needs a new source of revenue before its advertising growth stops.

Google Still Lacks a Lot of What It Takes to Build Phones

Google may be able to build the best artificial intelligence products, but phone hardware is an entirely different business.

Since it was founded, Google has released one free internet service after another. They were not always finished at launch, but free plus a good idea won users easily. After launch Google improved them quickly, and they got better and better. That was true of Gmail, of Maps, even of search itself at the start.

All of those services fed Google more information, helping it understand users and aim its ads more precisely somewhere else.

Google's structure today is built entirely around what users need online. Teams large and small are divided by product — Android is one division, Gmail another, YouTube another. Each has its own goals, and none of them has anything to do with selling phones.

A phone is different, especially a phone like Pixel that costs as much as an iPhone: it asks people to spend several thousand yuan at once. It has to be at its best the day it ships; you can't swap out the case or the camera afterwards.

Apple's whole structure is built around making better hardware and selling it. Its operating-system division and its internet services exist first of all to help sell more iPhones, not to get more people using the services.

Google's poor fit for hardware is plain enough: after more than six years of Nexus phones, only one of them, the 2,000-yuan Nexus 5, sold anything but badly.

Its other hardware — the expensive 2012 TV box Nexus Q, Google Glass in 2013, the smart-home company Nest it later bought — all of it failed.

The one Google-designed device that has sold well is Chromecast, a TV stick that costs US$35. Cheap, again.

Now that it is buying ads, investing in design and seriously building an expensive phone, the biggest selling point Google has to offer is still artificial intelligence and internet services.

Pixel's few months of exclusive access to Google Assistant is exactly the selling point the search giant has found for this expensive phone.

Is that enough? And if it isn't, will Google start limiting what its other internet services can do on other companies' Android phones?

Samsung is already worried. Soon after Google announced Pixel, Samsung announced it was buying the AI assistant built by the original Siri team, to put on all of its phones.

Whether or not Pixel can eventually take on Apple, the first phone it threatens is Samsung's Galaxy.

The iPhone runs a different system, and it works with the Mac and the watch. As a product, Galaxy is far closer to Pixel.

If Pixel does not repeat Nexus's failure, Google may go through the biggest change in its history.

Cover image: Google, VCG