VC Sizes Up Google As Consumer Electronics Challenger To Apple Et Al.

Xconomy San Francisco — 

It’s the end of the year, and everyone’s getting out their crystal balls.

At the Silicon Valley venture capital firm NEA, partner Greg Papadopoulos has a prediction about Google. But it’s so positive that he makes a joking disclaimer at the beginning of our conversation.

“I’m not a Google fan boy,” Papadopoulos insists.

A veteran executive at Sun Microsystems and engineer for HP and Honeywell before he became a VC, Papadopoulos (pictured) sees a big opening for search and software giant Google to challenge the likes of Apple, Samsung, and Amazon and become a “consumer electronics powerhouse.”

That’s not just because of the big recent stumble by Samsung, whose Samsung Galaxy Note 7 smartphones were prone to catching fire, or what Papadopoulos sees as a slower pace of significant innovations in Apple’s iPhones. He says Google has the edge because it’s “the leader in artificial intelligence.”

Papadopoulos says that makers of smartphones, cameras, digital assistants, 21st century cars, and other devices need to succeed on three fronts: they need to be connected, they need to be intelligent, and they need to take advantage of the computing power and data storage available from Web-based services (the cloud). Consumers have come to expect devices to detect their environments and anticipate their needs, he says.

“If something isn’t connected, it’s broken,’’ Papadopoulos says, summarizing the consumer’s take. “If my device doesn’t have any intelligence in it, it’s stupid.’’

This is the holiday shopping season that may help prove Papadopoulos’s point. TV ads are trying to enchant consumers with the idea that they can speak their search queries and other commands to the AI “smart assistants” that power connected-home hub Amazon Echo and its new competitor, Google Home.

These units are sort of a cross between a tabletop hi-fi speaker and a talking robot servant. They play your music on command, answer questions in a soothing voice, and relay your spoken orders to your thermostat and other household devices. Google Assistant is the natural language processing AI inside Google Home, and it’s also an element of the company’s smartphone, Pixel, whose price is in the same neighborhood as higher-end iPhone models.

Consumers have been familiar with voice recognition assistants since at least 2011, when Apple introduced Siri in its iPhone 4s. But the connected-home hubs take this verbal relationship with tech into a new hands-free dimension. No need to even pick up a device—-users just talk to the microphones in the tabletop units. Apple is rumored to be working on a similar hub, as is Microsoft, whose voice recognition assistant Cortana is a feature of its Windows software.

“Apple is investing so fiercely in AI right now,” Papadopoulos says. But he still thinks Google Home will “blow past anything Apple or Amazon does.”

(In addition to his Google fan boy disclaimer, Papadopoulous also offered some disclosures: He says neither he nor NEA have invested in Google, though NEA’s portfolio includes consumer electronics companies such as smartwatch maker Olio, and Sentons, which develops touch interfaces for smartphones and tablets. Papadopoulos says his daughter has worked at Google on user experience assignments for less than two years.)

One recent review comparing the two smart home hubs already on the market, Amazon Echo and Google Home, lends some support to Papadopoulos’s view of Google’s superior skills in AI. Tech journalist Swapnil Bhartiya, writing in the publication CIO, found that Google Home could quickly handle conversations in context and answer questions accurately. Bhartiya says Amazon Echo’s voice recognition AI, Alexa, sometimes failed to understand questions, and seemed to steer users toward buying something from Amazon through the device.

Comparisons can be difficult with these products, though, because they’re designed to perform better as they get to know the voices and the life patterns of their users.

The possible effortlessness of the connected-home life, where users speak their commands rather than typing them, will also depend on the size of a hub’s network—-how many other devices and Web services such as streaming video and shopping sites the hub’s smart assistant can control. Conceivably, one command such as “Romantic dinner” could dim the lights, queue up a music playlist, and schedule delivery of a shrimp risotto feast with arugula walnut salad.

Another recent review also pegs Google Home as the most useful product for now, “with a wide range of commands, tasks and integrations with various services,” a reporting team at ITPRO wrote. But the team also pointed to the potential of Amazon’s AI Alexa, which is based on AWS’s cloud infrastructure.

Combined with Alexa’s machine learning algorithms, the ITPRO reviewers say, “the sheer scale of AWS’ compute power means that the potential for Alexa to adapt to users’ habits and increase its skillset means it could be a more promising option in the long run.”

(It should be said here: the reviews don’t touch on the important question of device cybersecurity. Connected consumer devices have become a vulnerable gateway for malicious hackers, and security concerns may become a major factor in product sales.)

Papadopoulos says Google is in the pole position in terms of integration with a vast swath of Web apps and devices, because its Android operating system and its services, such as Search, Maps, and AdWords, are embedded in so many of them.

I asked Papadopoulos whether Google, a unit of parent company Alphabet (NASDAQ: GOOGL), really needs to become a consumer electronics powerhouse as well as a giant in Internet advertising. After all, mobile device makers are under pressure to deliver ever-growing reams of data instantly while accommodating new features such as virtual reality, video streaming, and voice interaction. At the same time, manufacturers such as Samsung have taught consumers they can find these devices at lower prices. Papadopoulos says he does expect that hardware will yield lower profit margins than Google’s AdWords.

Judging by revenues, consumer electronics still occupies a minuscule portion of Google’s business, though its $12 billion research budget funds projects from connected cars to virtual reality.

In 2015, the giant global company reaped $75 billion in revenues, with more than $67 billion of that coming from advertising. While revenue growth was 14 percent higher than in 2014, the growth rate of ad revenues has been declining, in part due to the consumer shift from desktop and tablet computers to mobile phones, where the margins from advertising revenues tend to be lower, the company said in its annual report for the fiscal year ending Dec. 31, 2015. However, Google expects further expansion as more ex-U.S. populations come online.

Google took in $7 billion in non-advertising revenue in 2015, mainly stemming from sales of apps and other content through the Google Play store, though hardware sales of products including video streaming device Chromecast contributed in this category. Sales of mobile-controlled thermostats and cameras from Alphabet subsidiary Nest, which Google acquired in 2014, fall into the emerging category called Other Bets, which scored revenues of $448 million in 2015. The category also includes Internet and TV services.

While Papadopoulos predicts a bright future for Google in consumer electronics, he says he isn’t attempting a detailed analysis of the company’s business plan. But Papadopoulos says Google need not establish itself as a sales volume leader with its Pixel smartphone or other hardware products in order to remain a dominant company in the consumer electronics sphere.

As it continues to develop its software, Google could instead influence the evolution of technology hardware the way Microsoft influenced the design of personal computers, Papadopoulos says.

“A really high-volume play doesn’t make sense for Google as a company,” Papadopoulos says. But by leaving other companies to offer low-margin devices, Google could develop flagship products that help set the pace for new features, he says.

“That’s a powerful place to be,” Papadopoulos says.