The Telegraph dropped a bomb suggesting a Google-branded phone will come to market in 2016.
As exciting as it sounds, I believe its impact on Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) bottom line will be negligible and Apple (NASDAQ:AAPL) has nothing to fear (for now). Google's modular phone project is supposed to ship a first version out to developers at the end of 2016 but this is apparently not about that phone as it is Google branded, not Ara branded.
Source: Wikipedia / Google ARA phone coming 2017
Why this is weird
Google already has the Nexus phones on the market. These are high-end phones that serve to showcase the capability of Android. By bringing a competitor to market they would be putting pressure on their Nexus phone partners. The Nexus phone isn't a wild success to begin with the latest Nexus 6 iteration is no exception.
The release of the ARA phone isn't all that far off either. Developers should get it before the end of 2016 and the target is to get it in customer hands in 2017. It's strange the company would be betting on two horses - modular and non-modular. This seems very wasteful from an investment standpoint, especially considering it's not a core business. How likely is that when the company just brought in CFO Ruth Porat to reel in wasteful investment spending?
Why it could be true
Google's Chromebooks are doing well and taking away market share from Microsoft's (NASDAQ:MSFT) Windows PC and outselling Macs. This may have encouraged Google that it can do well in the hardware business and ensure it has a larger fleet of devices out there which it completely controls.
EU commissioner Vestager also is after Google as the company allegedly:
abused its dominant position by imposing restrictions on Android device manufacturers and mobile network operators.
Google may have aggressively moved into mass market device manufacturing as a defensive strategy. In case the company is no longer allowed to impose restrictions on Android device manufacturers it may have to bring its own device to market to defend its market share in mobile search and Android Play.
What does it mean?
In case you are an Apple shareholder I don't think you have anything to fear for now. With the high-end Nexus line out there, which is a niche market product, I don't believe this new phone will be a premium phone set to compete with the iPhone. It is much more likely it will be a mid-market phone that is designed to defend Google's mobile market share with search and apps. Android phone manufacturers should be much more worried as EU commissioner Vestager may be forcing Google into a strategy change rendering their services obsolete.
Most importantly if you are a Google shareholder I believe you should not count on this contributing to profits at all. It is most likely purely a defensive move and Google could even bring smartphones to market at very low prices and zero margin, taking a page out of Amazon's (NASDAQ:AMZN) book, in order to ensure the dominance of its search and app platforms.
If this phone is indeed released before the end of 2016 it does worry me that it shows Google is concerned about the activity of the EU commissioner. If Google really ramped up investments in a regular mid-market phone to defend Android that shows they are feeling the heat. I'm inclined to factor in more serious consequences. For example we could see pressure on Google's market share in mobile search, something that would in fact be impactful to the bottom line. It seems early to draw this conclusion and I continue to hold Google as a large core holding but couldn't blame anyone for taking a cheese shaver to their position. As far as I'm concerned there's very little good a phone release can do for Google but it could be a sign of weakness in its mobile search dominance.
Disclosure: I am/we are long GOOG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.