Android & HTC

On 5 November, Google finally officially announced its mobile strategy. Actually, the Open Handset Alliance made the announcement, but for all intents and purposes, this is Google’s party.

The Open Handset alliance announced Android, an integrated mobile software stack that consists of an operating system (OS), middleware, user-friendly interface and applications.

No real surprises.

Android looks like the real deal and promises to shake-up business as usual in the mobile marketplace. Having spent hundreds of millions of dollars on Android, Google’s plan is to turn around and give Android away for free.

If all goes according to plan, the payback for Google will come not from either software or hardware sales, but from mobile advertising.

The Open Handset Alliance is made up of Google and 33 partners, including a number of mobile handset makers, cellular carriers and other technology companies. SanDisk has not signed up — yet.

Unless there are IP issues precluding SanDisk’s involvement, I figure its only a matter of time before SanDisk licenses Android. After all, Google and friends have exactly what SanDisk needs– a robust open-source OS, tailor-made to take on the iPod touch and other such products.

During the announcement conference call, a number of folks tried to pin Google down about whether there will ever be a Google-branded phone. Google CEO Eric Schmidt danced around noting that:

“The deal of course is that we don’t actually pre-announce products and we also don’t want to foreclose any options in the future. In order for there to be a gPhone, you need to have an operating system. That OS has to have the right capabilities, architecture, developers, and applications, which is why I said, that if there were to be a gPhone, Android would be the correct choice.

Another way to think about the gPhone is that you will have a thousand different choices. Some of which you will love and some of which you won’t. But the important point is that this is really a platform play around innovation. Its not a product announcement in the way that you think of it traditionally.”

Although we don’t have a Google-branded phone yet, it looks, like we’ll be getting something mighty close from High Tech Computer (HTC) who has been working on this project with Google for 2-3 years and is likely behind the “Dream” prototype.

HTC is interesting because of its msystems connections. HTC was one of msystems largest embedded mobile customers. If HTC is up to its eyeballs with Android-optimized hardware, this can’t hurt SanDisk’s prospects.

More importantly in the big picture Android-powered phones, whether from HTC or others, promise to consume a loads of flash memory: removable cards, embedded, and (in some cases) high capacity SIMs. Such trends are SanDisk’s friends.

More Memory

Shortly after the initial Android announcement, TheStreet.com ran an article that suggested that phones based on Android will not need significant onboard memory– embedded and/or removable. The argument was that online storage will work just as well. Pretty weak argument.

The more a mobile device targets media rich services, as Android does, the more memory is needed. Mobile will be the last platform not to need onboard memory. The pipe to the phone is thin indeed and intermittent as well.

I expect that high-end Android-powered phones will have the same memory requirements as the iPhone. Requirements for music, photo and videos will be the same.

That said, the typical Android-powered phone likely will depend more on the added flexibility provided by memory cards. The iPhone doesn’t have a memory card slot. The typical Android-powered phone will. This is not a problem for the king of mobile cards– SanDisk.

Bottom line, the Google Android Mobile Platform looks to be every bit as big a NAND demand driver as the iPhone, likely far bigger as Android is all about volume.

Google wants nothing more than to spread its platform as fast and as far as possible. For Google, this is all about eye balls. More is better. Anything Google can do to expedite volume will be done. And Google has deep pockets.

Google made every effort in the Android-announcement call to sound as if it were hardware agnostic. Google wants as many as possible to push Android product and hardware makers are key. At this stage, better not to be perceived as a competitor. Hence no branded gPhone.

On the other hand, if the first hardware doesn’t kick ass, Android is dead in the water. Google appears to have covered their backsides, thanks to HTC.

HTC

HTC appears ready, willing and able to be the first with the slickest Android hardware. This isn’t by chance. A couple of years ago, Google decided that HTC had what it takes. And to its credit, HTC wasn’t one to let such an opportunity slip by.

According to the Goldman Sachs (GS) HTC report of 8 November, HTC started to work with Google on Android 2-3 years ago and committed significant resources of its own to Android. (Excerpts from this GS report can be found below following this post.)

Google got hot prototypes to show off. HTC got a head start on the competition. And Google seems assured of at least one high-end Android-optimized handset in 2H:2008.

Google has been using prototypes of Android-powered phones internally, and showing them off privately — including a high end model code-named “Dream.” It appears that the “Dream” comes from HTC.

HTC OMNI Surfaces at Google as HTC “Dream” with Android OS:

“The phone, code-named ‘Dream’ inside Google, looks somewhat like Apple’s iPhone: It is thin, about 3 inches wide and 5 inches long, and features a touch-sensitive, rectangular screen… The bottom end of the handset, near the navigational controls, is slightly beveled so it nestles in the palm. The screen also swivels to one side, revealing a full keyboard beneath. (The screen display changes from a vertical portrait mode to a horizontal display when someone uses the keyboard.)”

htc-omni-horizontal.jpg

Seems like Google chose a low-end model for the Android public show-and-tell, but behind the scenes they were pushing some slick stuff as the image above illustrates.

SSDs look to be shaping up as a great story 2008- 2010, but the mother-of-all-markets still looks like mobile. Android is only going to help.

Last Friday’s not entirely unexpected news was that Google is planning to bid for wireless spectrum as part of the Federal Communications Commission auction scheduled to begin Jan. 24.

Apparently if it is going to take over $4.6 billion to secure the spectrum and an additional $5 billion to $7.5 billion to build out the network for national coverage, Google’s ready to give it a shot.

Google’s agenda is to drive media-rich mobile services which in turn will drive advertising. Whether successful or not on its own, Google looks like its going to push the mobile industry towards feature-rich, memory-hungry handsets. Only good news for SanDisk, longer term.

**** 8 November Goldman Sachs HTC update below ****

November 8, 2007
COMPANY UPDATE
High Tech Computer (2498.TW)
Buy

HTC analyst day – reaffirm our positive stance; maintain Buy

What’s changed

High Tech Computer (HTC) on Nov 8 held an analyst day where its CEO Mr. Peter Chou provided an update on growth potential and product opportunities. We have three key takeaways: (1) Google project: HTC will launch 2-3 new convergence models based on Google’s Android platform in 2H08, and expects margins for the Google project to be very similar to those for its operator customisation project; (2) Software innovation: HTC will roll out a new user interface (UI) in 2008 which Mr. Chou believes will be far more advanced and user-friendly than its current TouchFLO technology; in addition, HTC will take a more active stance in terms of M&A to enhance its software application capability and fully utilise its cash position; (3) Hardware expansion: HTC is also committed to rolling out WiMAX/TD-SCDMA devices in late 2008 or early 2009 to cover more market segments, and it is currently qualifying a 2nd 3G chipset supplier besides Qualcomm.

Implications
We maintain our Buy rating. Our bottom line: HTC continues to raise the bar for the convergence device industry through technology innovation, expansion of product offerings, and own brand strategy. Our take on the analyst day: (1) we expect HTC to be the first handset maker to launch Google-based handsets, and reap the largest financial reward; (2) new UI could further differentiate HTC’s product offerings and strengthen its brand recognition; (3) long term cost down potential from HTC’s dual-supplier strategy on operating systems (Microsoft/Google) and 3G chipset (Qualcomm/other) to offer more affordable convergence devices.

Key takeaways from HTC analyst day affirm our positive stance

Google project: more positive datapoints from this promising product opportunity

• HTC started to work with Google on this new open handset platform “Android” about 2-3 years ago, and both companies have committed significant resources to this project

HTC will launch 2-3 convergence models in 2H08 based on the Android platform

• Product margins for the Google project should be similar to its operator customisation project

Google/Linux does not charge any licensing fee for this new operating system (O/S)

• HTC believes that 3G (or above) will be the air-interface requirement for Android-based handsets, due to its internet-focused nature

• HTC will target both consumer and corporate segments for this project

Our view: While there are other handset OEMs (Motorola, Samsung, and LG) in the Open Handset Alliance (OHA) to work with Google, we expect HTC will be the first OEM to launch Android handsets, as HTC’s long history of working with Google, its rich experience in Qualcomm 3G solution, and its solid relationship with T-Mobile could be its greatest competitive advantages over other handset OEMs.

Management’s comment on Google product margins also supported our view that this is not a traditional ODM project, but more like an operator customisation project with strong margins.

Software innovation: continue to raise the bar

• HTC will launch new convergence models based on its upcoming new user interface(UI), which should be even more advanced and user-friendly than its current TouchFLO technology on its “Touch” series handsets

• Such new UI technology is HTC’s proprietary intellectual property (IP)

• HTC will continue to enhance its capability on software applications on handsets(whether on Windows Mobile or Android platform) through a more aggressive M&A strategy

• Windows Mobile 7 could be launched in 2009, meaning there is no major Windows Mobile platform transition from now until the end of 2008

Our view: We expect HTC’s new UI could further raise the bar for other Taiwanese ODMs to follow, and could significantly strengthen its brand recognition among end users. We also highlight HTC’s efforts to expand its software capability and utilize its large cash position, as we believe active M&A should be the correct strategy for a company to pursue growth, not just reactively reducing capital or issuing cash dividends. Hardware expansion: more product offerings & cost down potential

• HTC is committed to launching WiMAX or TD-SCDMA devices beyond its current focus on 3G WCDMA/CDMA-EVDO platform

• HTC will qualify another 3G chipset supplier very soon besides its current partner Qualcomm

• HTC will select ODM projects carefully that will be strategically complementary to both sides; they will turn down those ODM projects that are just competing on pricing

Our view: While we believe WCDMA technology should remain the mainstream segment for the 3G market, we believe HTC’s platform expansion to WiMAX (positioned as 4G) or TD-SCDMA could result from requests from its strategic operator customers; this should help HTC expand its product coverage and reach more end users.

Besides, we view HTC’s qualification of a 2nd 3G chipset supplier as constructive to its cost structure, given the fact that the 3G chipset is a big cost portion. As HTC continues to diversify its O/S suppliers (from Microsoft to Google) and chipset suppliers (from Qualcomm to the other), we expect more cost-down potential could lead to a more affordable pricing point for convergence devices and ultimately attract more handset users.

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3 Responses to Android & HTC

  1. poofypuppy says:

    Thanks, Savo. Saw some recent articles regarding Verizon, it seems they are conflicted over whether to adopt or resist Google’s platform. There’s obviously a lot at stake but this is new territory for everybody, so it should be interesting to see what happens. I’m wondering if Google will be doing to the major wireless carriers what Bill Gates (early Microsoft) did to IBM… co-opt the platform from the established giants.

  2. savolainen says:

    Greeting poofy,

    Hope you had an enjoyable Thanksgiving and your Xmas shopping (if you celebrate) is going well.

    To my mind the big loser in all the Google mobile goings on will be MSFT.

    MSFT did Netscape in in the browser wars by giving away Explorer. Google looks to be set up to pull the same trick on MSFT’s mobile aspirations with Android. It will be hard for MSFT to compete with for-free.

    Then to add insult to injury, if Android takes off, suspect there will be a Linux halo effect extending to PCs. Just like AAPL has seen increased sales due its iPod successes suspect Google will help Linux make inroads on PCs.

    One item I didn’t mention in the Android & HTC post was the remarkable parallel between the Mobile Operators listed in Google’s Open Handset Alliance and the Mobile operators who have been linked to MegaSIM.

    I don’t read much into this, other than Android handsets optimized for these Mobile Operators will likely be designed to handle high capacity SIMS. Worse things have happened.

    It seems the Street expectations for MegaSIM are zero. Am cautiously optimistic. If news is lurking figure we should hear something at 3GSM in February 2008.

    BTW have been busy and distracted and will try to get to other comments as time allows.

    Best,
    Savo

  3. bob77977 says:

    hi savo,
    few months ago I asked you about megaSIM. you thought then that the delay was caused by IP matters – MMC/USB.
    it looked like megaSIM missed the train as 6 and 8 GB of memory are available on microSD cards not bigger than a SIM card.
    now it looks like megaSIM was waiting for google to get ready.
    megaSIM is probably is a basic component in google’s plan.
    it’s not so much for the storage capabilities but rather for the encryption ones.
    google has one hell of a plan – transferring the phone into a paying device is probably a good part of it.

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