It’s Time for Google to Make the Hardware Call
Last week, news broke that Google was reorganizing its devices division. Along with laying off hundreds of employees, Google appears to have admitted defeat with Fitbit as its co-founders are leaving the company after three years. The remaining team is being combined with other HW assets. While the preceding items may surprise some, they all are predictable. In late 2022, we talked about how Google’s HW bet was struggling. We are now at the point when Google should make the call and end its hardware involvement.
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A Gadget Recession
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Talk of there being a “tech recession” has picked up in recent months. Weakness in advertising, slowing revenue growth in cloud services, and even declining digital goods commerce has fueled the tech recession talk. Amidst all the chatter, one development that has flown under the radar is just how tough it’s become in the consumer gadget space.
The stage needs to be set before going any further. The consumer gadget space has had a very rocky decade with the highest of highs and some big valleys. The smartphone revolution led to generational-level changes across the industry. We saw a flood of new players enter the game with ambitions that didn’t stop at smartphones. The dramatic rise in smartphone and tablet (iPad) adoption opened doors for new gadget chapters. There’s the wearables revolution with Apple Watch leading the charge out of the gate, soon accompanied by AirPods and wireless headphones. At roughly the same time, we had the smart speaker mirage take shape. That movement quickly splintered into stationary screens and other smart home devices, both of which have been lackluster except for home security cameras. There have been other hardware/industry developments as well such as companies trying their hardest to copy Apple with vertical integration. Apple’s Silicon Mac transition is still in its infancy from the perspective of laptop/desktop market dynamics.
Macro headwinds, decades-high inflation, and a lopsided competitive landscape with the Apple ecosystem gaining momentum has brought about a gadget recession. This doesn’t necessarily mean that the total number of consumer electronic gadgets shipped will decline over a certain time period. Such metrics will be hard to verify. Instead, a gadget recession refers to a difficult stretch for playing in the space. Not all companies will come out losers from this development. But it's tough seeing anyone, even Apple, escape unscathed.
Apple. The latest earnings point to device upgrading slowing. Due to budgetary concerns, instead of moving down market to cheaper alternatives, consumers are much more likely to hold on to their current (Apple) devices for longer before upgrading. My estimate calls for the number of devices that Apple will ship in FY2023 declining 3% from FY2022.
Amazon. The Alexa HW portfolio looks and feels tired. Years of Amazon moving way too quickly and embracing ideas that should not have been released publicly has led to a bloated lineup of devices with long upgrade replacement cycles.
Microsoft. Surface is in trouble. Management has been talking about consumer weakness for some time now and signs suggest weakness moving into enterprise as well. New product launches are not capturing buzz or mindshare.
Meta. There isn’t a whole lot to point to in terms of Meta successfully giving consumers what they want from a gadget perspective. The company’s VR efforts have been lackluster.
Google. In what may be the most difficult hardware portfolio to assess, Google’s mixed signals towards hardware have shifted to focus on Pixel smartphones.
Chinese-based companies (Xiaomi, Oppo, Vivo, etc.). Global ambitions have been dialed back and the focus put on trying to stand out in an intensely competitive smartphone market with declining unit sales.
Other (Sonos, Samsung, Peloton). While some of the individual stories are better than others, no one is ringing the all-clear bells.
While economic and competitive pressures are genuine, there is another factor unfolding in the gadget space that can’t be ignored. Beginning at the tail end of the pandemic, various tech YouTubers began to speak up about a marked slowdown in views and engagement. Things felt off in the tech vertical, and the pandemic didn’t seem to fully explain the situation. In retrospect, the changes may be the byproduct of something akin to a settling out process in the gadget space. We aren’t quite ready to jump into the face wearables era. Apple is expected to unveil their move into the space in a few months with a launch later in the year. Meanwhile, the smartphone and tablet space has been unfolding along ecosystem grounds. The iPhone business has been a replacement business for years with the majority of sales going to existing iPhone users upgrading their device.
Taking a step back to look at broader industry trends, a gadget recession likely won’t be met with a wave of M&A. Instead, it is far more likely management teams will reassess their commitment to hardware in the first place. News of Microsoft and Google getting out of hardware altogether would not surprise me. There comes a point when years of investment dollars and managerial/talent resources just become too hard to justify when there is little to nothing to show for such efforts. The rationale that these companies gave for being in hardware in the first place has never been strong either. Amazon and Meta have publicly demonstrated more of a long-term commitment to their gadget businesses relative to Microsoft and Google. However, both are facing revenue growth pressures that require their respective hardware bars to be raised in order to receive ongoing investment dollars.
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