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Alphabet Roundup: Hardware, Privacy, App Store Tax, Health, China

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Of the ton of Alphabet (GOOGL - Free Report) news in the last few weeks, the following appear to be the most significant-

Hardware News

Alphabet has toyed with the idea of making hardware for quite a while now although it hasn’t really made a play for market share or made a big deal about share it picked up. But the fact remains that the company acquired Motorola Mobility only to swallow most of its patents and discard the rest of the company. Then earlier this year, it picked up HTC’s mobile business, again spurring rumors that it may be venturing into hardware, but we don’t really know.

What we do know, however, is that its flagship Pixel line of hardware, including the Pixelbook (high-end Chromebook), Pixel smartphones and Pixel Watch, as well as Google Home smart home speakers are picking up mindshare.

Google doesn’t yet need a hardware line of its own (licensing its technology to other hardware makers is a far more profitable proposition and regulatory pressure hasn’t materially harmed it). But it continues to pick up all the pieces it needs to create leading edge devices and continues to improve upon device quality. Hardware makers can use the devices as prototypes.

But the market is changing quickly with the advent of IoT devices where connectivity is more closely tied to the hardware itself, with the services the devices enable being the biggest selling point. In such an environment, involving more players in the device making itself can increase chances of regulatory scrutiny while making it more difficult to generate profits.

The Google Home device for example, allows the user to shop, listen to music, catch up on news, make calls, connect with other devices to facilitate household operations and so forth. Google or market leader Amazon (AMZN - Free Report) gets to collect user data about habits, preferences, etc. to advertise and sell more effectively. So now, capturing the hardware share that can sell the services is more important. Which is why the smart speaker numbers from Strategy Analytics are so significant.

Amazon’s market share dropped from 76% in 2Q17 to 41% in 2Q18 despite growing units from 2.9 million to 4.8 million as the market grew 200% from 3.9 million units to 11.7 million units. Alphabet was the biggest gainer, growing from 16% to 28% (3.2 million units) followed by Alibaba (BABA - Free Report) and Apple (AAPL - Free Report) , which went from 0 to a respective 7% and 6%. Even JD.com (JD - Free Report) took a 2% share.

Standalone Retail Store

The Chicago Tribune reports that Google is planning a two-level store in Chicago’s Fulton Market district, close to its Midwest headquarters. While company spokespersons maintain that they don’t comment on rumors and speculation, it’s an interesting development that seems to point at its hardware ambitions.

Privacy Pains

San Diego resident Napoleon Patacsil has sued Google for collecting user location data even when they have location history turned off and is seeking unspecified damages. In his words, Google's "principal goal was to surreptitiously monitor [the claimant] and to allow third-parties to do the same."

The legal challenge was issued under California's Consumer Privacy Act, which was framed in line with the stringent GDPR that Europe adopted in May this year and is seeking class action status. If granted, millions of Android and iPhone users may join the case.

The complaints have been ongoing for quite some time now although this suit is the most formal approach. Even last week, privacy-focused Big Brother Watch accused Google of harvesting data "secretly, against people’s will."

Google’s wrongdoing appears clear from its actions-

Earlier its support policy read: "With Location History off, the places you go are no longer stored."

A Google spokesperson also clarified earlier: "There are a number of different ways that Google may use location to improve people's experience, including: Location, History, Web and App Activity, and through device-level Location Services…We provide clear descriptions of these tools, and robust controls so people can turn them on or off, and delete their histories at any time.”

But on Friday, the support policy was changed to: "This setting does not affect other location services on your device... some location data may be saved as part of your activity on other services, like Search and Maps.” Moreover, the company now says that "We have been updating the explanatory language about Location History to make it more consistent and clear across our platforms and help centers."

On that very day, privacy group Electronic Privacy Information Center complained to the FTC that the company’s recording of time-stamped location data even after users have turned off Location History was in clear violation of its 2011 settlement.

ACLU legislative counsel Neema Singh Guliani also told Bloomberg that this kind of data collection is a concern, particularly if there’s deception involved, she strongly advocated a GDPR-like legislation for the U.S. and also said that Congress was debating the issue.

Separately, Professor Douglas Schmidt of Vanderbilt University (Nashville, Tennessee) found in a study that people browsing with Chrome in Incognito mode could have their activity linked retrospectively to account information in Google-owned services like Gmail and YouTube. Also, "While such data is collected with user-anonymous identifiers, Google has the ability to connect this collected information with a user's personal credentials stored in their Google Account."

Incognito mode is worded carefully. It reads: "Now you can browse privately, and other people who use this device won't see your activity."

Google’s response: "This report is commissioned by a professional DC lobbyist group, and written by a witness for Oracle (ORCL - Free Report) in their ongoing copyright litigation with Google... So, it's no surprise that it contains wildly misleading information."

App Store Tax

Google and Apple have for long helped developers reach their audiences on devices running Android or iOS. They’ve done this by weeding out clones, malware, malicious attacks, thus reducing security risk while also helping with payments, to make the whole process secure and smooth for users. But the 30% cut they take from every purchase (including in-app purchases) has created tension with some developers, especially the bigger ones, who have at times negotiated sweeter deals.

But now, some have decided they no longer need to pay the “app store tax.” Recently, Netflix (NFLX - Free Report) , which has been the most popular app on iOS with most money spent and the greatest number of downloads on Android, according to App Annie, decided it didn’t need the stores any longer. The company is now making the service available directly at its own website.

The hit to Apple and Google revenues isn’t known and probably won’t be significant with respect to their total revenues, but it will be a blow to app store revenue that has been climbing steadily for both. This is the second defection in a short time for Google, which earlier lost $50 million a year when Fortnite Battle Royale was moved by its creator Epic Games. It’s a disturbing trend but not one that most developers can afford given that the app stores offer access to billions of users.

Health

Psychologists have started pointing to the impact of constant exposure to mostly negative news, which could be mild to major depression in people. Others that haven’t developed the condition yet could question whether it’s really all so bad out there. To help solve the problem, or at least to take a break from it all, Google is testing a new feature for all Assistant-enabled devices.

So when you say, "OK Google, tell me something good," Assistant will surface some heartening, feel-good things happening around the world that reinstates your faith in humanity. The news is selected with help from nonprofit Solutions Journalism Network that links you to stories from a range of credible media like The New York Times, BBC and NPR. But let’s face it, negative news and sensationalism sell better, so some of the stories surfaced could be a few years old.

Alphabet-backed One Medical, which is a primary care group accepting both insurance and out-of-pocket payments, is raising $200 million from private equity firm Carlyle Group, which will also buy $100 million worth of shares from existing investors. Meanwhile, Alphabet plans to invest $375 million in health insurance startup Oscar Health, giving it a 10% share. The money is expected to help its expansion into more markets and business segments, including Medicare Advantage for seniors in 2020.

Another heath initiative from Alphabet and its partners, London’s Moorfields Eye Hospital and the University College London Institute of Ophthalmology, is the use of artificial intelligence from DeepMind to help doctors to detect 50+ sight-threatening conditions from a simple eye scan. Clinical trials are expected to start next year for the system that has performed better than humans in internal trials.

If it gains regulatory approval, the first products will be rolled out by Moorfields Eye Hospital across the UK. The NHS has said that Moorfields owns the data used to develop the software, and can use it freely in other research.

Project Wooden, which is developing Google’s soon-to-go-live unimaginatively named fitness coach called “Google Coach” may help Google catch up with similar services from Apple and Fitbit (FIT - Free Report) , the leaders in the smart watch category. Google Coach will draw on location, calendar and other user information to suggest AI-based actionable health recommendations, including suitable workout routines and dietary adjustments to improve nutrition.

The rumor comes from Android Police although Google’s limited presence in the category almost makes this development inconsequential. On the other hand, its expansion to other devices like smartphones, where Android has a bigger presence, may not be as useful since nobody ties a smartphone to their wrist or wears it to bed, etc.

China Plans Exploratory

Google responded to the employee protest of its possible return to China, particularly its censored search engine internally called Dragonfly that was reported in The Intercept in early August.

CEO Pichai told employees that the attempt was exploratory, that discussions were in the early stages and that they didn’t include controversial topics. He said that Google remains "very open about our desire to do more in China," and that the team "has been in an exploration stage for quite a while now," "exploring many options."

Despite the protests, this isn’t something that a technology company has done for the first time; the popular Mozilla search engine has continued to operate on China’s own terms for quite a while. But given Baidu’s dominance, its nationalistic brand positioning and government support, foreign search engines have had the going rough.

Google, if it launches in China, will likely have other focus areas, where it can more easily find partners like Tencent (on whose platforms it can sell apps) and JD, which it can support with retail technology and strategy as it takes on market leader Alibaba. Then there’s Waymo, which furthers the Chinese goal of getting more electric cars on the road.

In this context, the purpose of incorporation of Google’s Chinese subsidiary called Huimo Business Consulting (Shanghai) Co. on May 22 in Shanghai's free trade zone makes perfect sense: business and logistics consultancy, as well as services related to the design and testing of self-driving car parts.

Protestors probably need to take a more pragmatic approach to China, especially given that it isn’t alone in limiting searchable information; Germany and other parts of Europe are doing likewise. Moreover, Google’s goal in China doesn’t appear to be the simple operation of a search engine, but rather its synergistic application to support other business opportunities.

Recommendation

Alphabet shares carry a zacks Rank #3 (Hold). See the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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