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Wall Street Weighs In on Google’s Upcoming Pixel Phone

Google plans to update its line of smartphones with the Pixel 2 and other devices on Wednesday, in a move that analysts say will help it compete against Apple and prepare for the rise of augmented and virtual reality.

Google is expected to increasingly focus on Pixel following its $1.1 billion deal last month to acquire 2,000 smartphone employees and license some related intellectual property from HTC, which manufactured last year’s Pixel phones.

The new phones are expected in two models: a Pixel 2 with a 5-inch screen at $650 and a larger Pixel 2 XL with a 6-inch screen costing $850. Both will have faster processors than last year’s models and run Google’s newest version of Android, called Oreo.

Google is also rumored to be debuting a new version of its Google Home connected speaker and its Pixel Chromebook laptop.

Google only sold a few million, or less, of the original Pixel phones introduced last year. That’s in part due to the fact that only Verizon sold the phones directly, while other carriers opted not to stock Pixels themselves.

The same distribution plan is expected this year, which will likely prevent much growth in sales, Andy Hargreaves at Keybanc Capital Markets notes. Revenue from the phones won’t be meaningful this year, he added, but he is looking for “clues” in Wednesday’s keynote presentation at Google’s media event in San Francisco that could “indicate the potential for a much broader distribution strategy in future years” that could raise optimism about greater revenue and gross profits from hardware sales.

Argus Research analyst Joseph Bonner said that the HTC deal, far more modest than the outright acquisition that had been rumored, should still help lift Google’s hardware product efforts, which have been “halting and fraught at best.”

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“The HTC employees who will move to Google have likely been working on Google-related hardware for some time, and bringing them in-house should allow for the tighter integration of the Android OS in new hardware designs” including the Pixel smartphone line and perhaps in the connected speakers and other smart, connected devices, Bonner wrote. “The elegant integration of hardware and software has certainly been a key factor in the success of Apple’s iPhone and other products.”

The deal could also help expand distribution of Pixel phones using HTC’s existing relationships with retailers and carriers, Youssef Squali at SunTrust Robinson Humphrey says. And Google (GOOGL) will be better able to keep up with Apple (AAPL) by bringing more design talent in house so it can make its mobile software and hardware work better together.

“Given mobile’s importance, we believe that Google is likely looking to offer a better end-user experience through tighter integration between proprietary designed hardware and the Android operating system, similar to what Apple has done,” Squali wrote.

Analyst Scott Devitt at Stifel Nicholas agrees. “With this level of control, Google can finally build a multi-year product roadmap similar to Apple’s (for example, some functionality for the iPhone X was reportedly in development for several years), which we think is critical to creating leaps and bounds in device quality/functionality,” he writes.

Google’s great successes until now have come from products like search and YouTube that largely run on servers in Google’s cloud data centers. But with the coming growth of artificial intelligence and augmented and virtual reality, more of the computing power needed by applications will have to be on consumers’ own Pixel devices, Sameet Sinha at B. Riley points out. “Deeper integration of hardware and software resources was a necessary move and in line with management’s underlying bet to integrate AI into everything Google does,” Sinha writes.