What’s the deal with Google and HTC?

Rumors out of Taiwan suggest that Google is preparing to purchase some or all of HTC's smartphone division. If true, it would mark a sad end for the company that built the first Android phone. What's not clear, however, is why Google wants to buy HTC, and what it's looking to get out of the deal.

What's going on?

Yesterday, reputable Taiwanese website Commercial Times reported that Google is looking to buy HTC. The piece cites the search giant's burgeoning hardware business and its struggles to mass produce its own hardware. Later on, there's mention of Google's desire to integrate its software with hardware in a way similar to how Apple "owns" all parts of its business.

The language is ambiguous, but what's plausible is that Google wants HTC's mobile division without the added baggage of Vive. That's good because Vive was spun out of its parent company last year and exists as a standalone subsidiary (that may also be sold). So perhaps we can expect the deal to mirror that of Microsoft and Nokia, whereby the holding company and Vive are untouched but Google takes everything else.

One note of cynicism: Google doesn't really need to buy HTC to make its stated aims work. HTC is already the contract manufacturer for the Pixel, and there have clearly been issues producing that device in the quantities Google needed. Buying the Taiwanese company to simply own its own factories seems counter to the logic of almost every other big technology business -- which use contract manufacturers in China like Foxconn and Pegatron.

Why HTC?

Rumors of HTC's demise have been raging for some years, and the business is now in serious trouble. In 2015, HTC's share price fell below that of its valuation, which is investor-speak for saying that business-types considered it worthless. HTC posts monthly revenue data, too, and watching its handset sales gently dwindle makes for grim reading.

In the past eight months, the company's sales have fallen as far as 54 percent below what they were just a year ago. There is the occasional spike in sales, sure, such as when it launches a device, but that's all that's stopping the graphs from looking like a ski slope. As a consequence, HTC stands on pretty shaky ground and is ripe for an acquisition.

Why is HTC in trouble?

Back in 2015, we asked if HTC was at risk of becoming the first big Android business to go to the wall. The company is weak on several fronts and has been undercut on the lower-end by low-margin Chinese businesses that can compete on quality. At the higher end, HTC doesn't have the advertising clout to go toe-to-toe with Samsung or LG. Here's an easy way of understanding things: Would you rather buy HTC's U11 or a Galaxy S8, V30 or OnePlus 5?

HTC's business has also been at the risk of simply not having the cash to cover its losses like it would if it were a conglomerate. When outfits like Sony and LG lose millions on phones, they simply shift cash from profitable divisions like PlayStation and TVs to cover the gap. HTC has no such insurance plan because its core business is the manufacture and sale of smartphones. As the Android world has seen profits evaporate for all but a few, HTC's dominance and prestige have withered.

Why is HTC a good prospect for Google?

Because, fundamentally, HTC's actually a very good company that simply can't compete with its wealthier rivals. Its devices, like the U11, earn plenty of critical praise, and HTC has a small but dedicated following. There are few people who want to see HTC reach such an ignominious end. Not to mention that Google picked it to manufacture the Pixel for a reason -- the company is pretty choosy who it selects for a partner.

On the flipside, it's likely that HTC is available for little more than a couple of bags of potato chips and a crate of beer. A cursory look at the company's financial reports demonstrates just how deep its losses run. There's around $838 million cash in the bank, and HTC's total assets run to around $2 billion, not to mention its cratering stock price. We're not financial journalists, and it would be reckless to guess at a purchase price, but it's gonna be low.

Not to mention all of the various creative accounting Google's accountants will inevitably invoke. HTC's going to look like even more of a bargain compared to the $12.5 billion Google spent to buy Motorola back in 2011. There's also the fact that Google, like so many big tech companies, can use some of its overseas profits to fund the purchase. Because it would cost more than Google's leadership is prepared to pay in tax to repatriate, it makes sense to spend it on something nice.

Oh, Motorola! That's why I was getting déjà vu!

Yup, this isn't Google's first rodeo when it comes to buying a handset manufacturer that's fallen on hard times.

Why did Google buy Motorola?

Settle in for a potted history of the deep, dark times back in 2011, when the tech industry was locked in a war over patents. This was back in the days of Steve Jobs declaring "thermonuclear war" on anyone he thought was copying Apple's iPhone. It was a great time for lawyers, court reporters and ... pretty much nobody else.

In 2009, Canadian telecom giant Nortel went bankrupt, and one of its biggest assets was its vast patent library. There were around 6,000 mobile-related patents in the library, which was a huge cache of weapons in the smartphone wars that played out in the courtroom. The portfolio was purchased by the Rockstar Consortium, a supergroup of tech companies, including Apple, BlackBerry, Microsoft and Sony, which spent $4.5 billion to own the lot.

The conspicuous name missing from that list was Google, and the expectation was that Rockstar would sue the search engine into oblivion. As a consequence, Google opened its checkbook to buy Motorola, which had reportedly had 17,000 patents and 7,500 applications. If Google felt as if it had initially brought a knife to a gun fight, it quickly reminded everyone that it had enough cash to run to the bazooka store.

An additional reason Google bought Motorola, espoused by Forbes, was that Google used Motorola as leverage over Samsung. The search engine was annoyed that its Korean frenemy was becoming too popular and was hiding Android behind its own TouchWiz skin. Coupled with Samsung's development of Tizen as an alternative operating system, Google needed to bring its troops in line.

Google would sign a deal with Samsung, offering it the protection afforded by Motorola's patents, if it left Android alone. The minor existential threat dealt with, and Google was able to sell off Motorola, knowing that the Korean giant was no longer able to become a full-blown rival.

The economics of the deal

The patent wars came to an end, and there was a belief that Google really did overspend for what it got. But according to both The New York Times and Google's M&A chief, Don Harrison, Motorola was secretly a bargain.

That's because of the $12.5 billion purchase price. The company had around $3 billion in cash and $1 billion in extra tax credits. Then, Google sold off Motorola's home and TV business for $2.5 billion, then sold the phone division for a further $3 billion. So those patents and all of the various leverages that the deal gave Google wound up costing just $3 billion.

Will Google do the same with HTC?

That's doubtful, both because the days of blockbuster patent maneuvering is long gone, and HTC's patents don't appear to be anything to write home about. What HTC has, aside from a slightly tarnished brand, is know-how in contract manufacturing. Not to mention the research and development teams that have earned plenty of praise with their smartphones. As before, the only really plausible reason that Google would want HTC is to turn it into Google's own internal hardware division.

Lightning round:

• Would Google do this as a way of saving HTC, its first partner?
  No. Billion-dollar companies don't make a habit of bailing out their friends out of a sense of generosity. Especially not at the newly prudent Alphabet.

• Would Google buy HTC as a way of reassuring the Android ecosystem?
  Phone calls are reassuring; billion-dollar buyouts are something else.

So what happens now?

Right now, nothing. This is just a rumor, and the only people who know the truth are holed up in Google's HQ. But whatever happens, it's going to be fun to see if Google can reinvigorate HTC as a part of its own hardware business. Or not.