Google Pop Up Store Opens In New York
A new Google Pixel XL phone is displayed at the new Google pop-up shop in the SoHo neighborhood on October 20, 2016 in New York City.  Spencer Platt—Getty Images

Why the New Pixel Smartphone Has Been a Modest Hit for Google

Nov 28, 2016

Google may have a modest hit with its new line of Pixel smartphones, but the search giant won't sell enough devices to threaten market leaders Apple and Samsung.

Thanks to only a limited number of partnerships with wireless carriers, Google is likely to sell about 3 million phones in the fourth quarter followed by another 5 million to 6 million next year, analysts at Morgan Stanley (ms) estimated in a report on Monday. Much higher sales would require more extensive partnerships, the analysts said.

While that won't approach the more than 200 million phones Apple and Samsung sell every year, it will provide a solid chunk of additional revenue for Google of about $2.1 billion this year and $3.8 billion in 2017, the analysts noted. Google's parent, Alphabet, is forecast to bring in over $106 billion in revenue next year, according to the analysts.

Google (googl) introduced the 5-inch Pixel and 5.5-inch Pixel XL in October. Google fans have been attracted to the two Pixel phones since they are the only ones to include the company's new voice-driven digital assistant and are among the first to run on the Snapdragon 821 chip, the fastest processor offered by Qualcomm (qcom). The phones also include a highly-rated camera that some reviewers said rivals the camera in iPhone 7 Plus.

Competition in the smartphone market has mostly focused on the low end of the market, as consumers in the fastest growing areas such as India and Vietnam can't afford to pay $600 and up. But Google chose to target the high-end of the market. The Pixel starts at $650, the same as the new Apple (aapl) iPhone 7 and Samsung Galaxy S7.

It also partnered exclusively with Verizon, meaning customers of AT&T (t), Sprint (s), and T-Mobile (tmus) couldn't buy directly from their carriers and had to acquire the phone from Google or Best Buy. Verizon (vz) then included the Pixel in its free-with-trade-in offer on Black Friday, along side the iPhone 7.

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The Pixel phone has about half the profit margin of the iPhone 7, at 24% versus over 40% for the Apple device, the analysts wrote. In the long term, sales of Pixel phones should also boost Google's Android and mobile search revenues.

"We see Pixel's unique artificial intelligence capabilities, deeper app integration, improved computing power and platform, and new hardware capabilities leading to higher Android user monetization (increased spend on smartphones) and higher mobile search monetization (as advertisers will spend more as users monetize higher)," the analysts wrote.

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