Google's Big Marketing Push Pays Off for its Pixel Phone Over Holiday

Company says demand for the phone exceeded expectations. But Google's TV spending more than doubled to get there.

Google products, including the Pixel XL and Pixel, center, during a product launch in San Francisco, on Oct. 4, 2016.

Photographer: Michael Short/Bloomberg

Ads for Google's Pixel phone were everywhere this holiday: Splashed across glossy magazines, the front of the New York Times website and spinning on TV during National Football League games. 

That aggressive marketing push produced a decent debut quarter for the smartphone, the first high-end device Google made itself, according to analysts and industry insiders. The early traction came at a cost though. The online search juggernaut more than doubled its TV ad budget over the holidays to push Pixel and its new Home speaker, according to one research firm. 

Pixel devices accounted for 12.3 percent of phone activations with Verizon Communications Inc., the device's initial wireless carrier in the U.S., according to a survey of fifty Verizon stores by telecommunications research firm Wave7.  There weren't enough devices at several outlets, the survey also found. Verizon declined to comment. 

Investment bank Evercore ISI patched together the Wave7 data to estimate that Google shipped 552,000 Pixel phones in the fourth quarter. Evercore pegged revenue from those sales at $386 million for the quarter. The bank also estimated initial sales of 500,000 units for Google Home, the $129 intelligent speaker meant to rival Amazon.com Inc.'s Echo. 

"The demand for the Pixel phones has exceeded our expectations, which is exciting to see," Google spokeswoman Iska Saric said. She declined to comment on specific sales numbers or estimates. 

Google sold the Pixel outside the U.S. with other carriers, and also offered the phones through its own online store, so total sales in the fourth quarter were likely higher than Evercore's estimate. James Cakmak, an analyst at Monness Crespi Hardt & Co., expects sales of about 1 million units in the period. Expectations were high after the launch: In late November, Morgan Stanley analysts forecast 3 million Pixels would be sold in the quarter, generating $2 billion in revenue.  

Those would be impressive figures for Google, which does not have a successful track record in shipping hardware. Jeff Moore, principal analyst with Wave7, called the Pixel "a major success." The numbers, however, pale in comparison to Apple Inc. and the largest Android handset makers. Apple sold 75 million iPhones in the 2015 holiday quarter. Samsung Electronics Co. shipped 9 million units in the initial month of the S7, a phone at a similar price and size to the Pixel. 

Demand for Pixels likely got a boost from Samsung's disastrous Note 7 recall, which came just as Google introduced its phone. 

Ads may have helped, too. In 2015, Google spent roughly $45.9 million on two national TV ads during the holiday quarter, according to iSpot.tv, a firm that tracks marketing spending. This past quarter, iSpot.tv estimated that Google spent more than twice that ($109.8 million) for twelve ads in rotation around the Pixel. Then Verizon pitched in, spending $57.1 million on three ads exclusively for the Pixel, according to iSpot.tv. 

Google's heavy spending may continue. Several people close to the company's hardware unit said it plans to expand the Pixel line in coming years. First unveiled with a suite of other hardware products in October, the $649 to $869 smartphone is a key part of Google's strategy to jump-start use of its digital assistant. With the Pixel, Google is also trying to replicate the tight control that Apple has over hardware and software.  

When the Pixel first arrived, several analysts expressed concern that revenue gains from hardware sales might come with margin pressure from increased advertising. UBS analysts expect fourth-quarter marketing spending to climb by $491 million, compared with the third quarter. A year earlier, the increase was $466 million, they noted. 

Google has braced investors for the spending uptick, and investors assume Google won't let it balloon like Apple and Samsung, according to Cakmak. "The question is how much tolerance Google has in branding campaigns without corresponding returns. And it's likely not much," he said. 

Alphabet is scheduled to report fourth-quarter earnings Jan. 26. The lion's share of its sales, which analysts expect will be $20.56 billion, comes from advertising. Google discloses hardware sales in an "Other" revenue line time with sales from its mobile app store and growing cloud computing business. That line item during the fourth quarter in 2015 reported $2.1 billion in revenue, about 10 percent of total sales.  

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