Maybe Alphabet Inc. (Nasdaq: GOOGL) should have named its new smartphone the "Trojan Horse."
See, there's a lot more going on here than the introduction of a new piece of hardware.
Now, don't get me wrong. The Pixel 2 is an impressive device.
And on the surface, it seems designed to compete head-on with the iPhone from Apple Inc. (Nasdaq: AAPL). After all, it sports a state-of-the-art organic light-emitting diode (OLED) and comes in standard and plus sizes.
The Pixel 2 debuted two weeks ago along with several other pieces of hardware, including an updated laptop and an artificial intelligence-powered wearable camera. And the global leader in online search got generally great reviews for its new products.
However, I have to say the real star of the show received almost no attention.
It's the hidden ingredient that is the true driving force behind these moves.
Will it help Alphabet's stock over the long run?
Here's what I think…
Despite Some Hardware Plays, It's All About the Software
I recently appeared as a guest on CNBC World to discuss Alphabet's moves. At the time, I said the new phone wouldn't "move the needle" all that much for the stock.
Fact is, it's a software play by Alphabet that makes all of this so intriguing. And that software – which I'll tell you about momentarily – is what's going to help the company's growth and profit margins in the months ahead.
Yes, I recognize that the firm unveiled the Pixel on the heels of its recent investment of $1.1 billion in Taiwanese smartphone manufacturer HTC Corp.
Under terms of the HTC deal, Alphabet is going to transfer 2,000 workers to its own R&D unit. That tells me the firm has hardware ambitions beyond the phone.
But here's why I say the Pixel is Alphabet's "Trojan Horse." The company is taking a page out of Apple's playbook and making the Pixel the central piece in its hub-and-spoke software strategy.
It's a great new sales hook…
Taking a Page from Apple's Book
When it comes to quality and profit margins, Apple dominates with its iPhone. But the iPhone commands that level of respect in no small measure because it's central to Apple's far-flung hardware empire – and its app, music, and movie sales.
What Apple has built is nothing short of the best consumer-centric tech ecosystem in the world today. And it all starts with the iPhone, which accounts for more than two-thirds of Apple's sales.
With the iPhone, users can "talk" to all their devices basically at the same time. For instance, if you update your calendar on your phone, that update automatically shows up on your MacBook and iPad.
If my iPhone rings, so does my iPad and Apple Watch. And it all works backward as well. When I update my MacBook, I'm updating my phone right along with it.
To get to that level of seamless integration, Alphabet must have its own branded handset.
So, investing heavily in the development team at HTC and the Pixel allows Alphabet to come up with an enhanced version of its Android operating system, the most widely used in the world.
Doing so also allows Alphabet to market its own phone in a way that won't anger its partners who rely on Android. I'm talking here, of course, about Samsung Electronics Co. Ltd. (OTCMKTS: SSNLF), the world leader in Android smartphones.
Those software upgrades will allow the Pixel to play a more vital role than the sales figure would indicate. ComScore says only an average 0.7% of U.S. smartphone subscribers used the Pixel in the three-month period ending in August, the last month for full data.
To put that into perspective, 45% of subscribers used Apple's iPhone, and 29.5% used a Samsung.
However, if you look at it another way, well over half of American smartphone users carry an Android (Alphabet) phone.
In other words, the Pixel 2 has some built-in advantages that can add to Alphabet's bottom line.
And to Alphabet investors' bottom line…
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.