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I'll be honest here. We don't know what's exactly happening with the Android N Dev Preview 2's Downloads and Files situation. There are lots of nitty gritty changes happening and we obviously can't tell if these are forgotten missteps in this release or if this is the way things will be from now on. I've been going back and forth between each screenshot of Android N Dev Preview 1 and its equivalent on Dev Preview 2 trying to understand the rationale behind some of these changes, but I haven't made sense of it all.
Here is what we know though and I guarantee that it's confusing, so I'll try to make it as clear as possible and hope you can follow along.
Downloads and Files are the same app
In Android N Dev Preview 1 (which I'll refer to as N1 from now on, to abbreviate), the Downloads app has the package name com.android.providers.downloads.ui, whereas the Files app (ie the file explorer that shows up when you go to Settings > Storage > Explore) has the package name com.android.documentsui.
In Android N Dev Preview 2 (referred to as N2 from now on), both apps have the same com.android.documentsui package name.
This means that they're essentially the same app and this will become apparent as we go through all of the changes that this merge has caused.
Downloads app on N1 (left) vs N2 (right). Notice the sorting option and hamburger icon.
As a happy side effect of this merge, the Downloads app on N2 is no longer a semi-capable file browser. It has many of the same features of the Files app that were introduced in N1 like multiple windows to run several instances simultaneously and a side menu that lets you browse across other directories.
Downloads N1 (left) vs N2's multiple windows (middle) and side menu (right)
Files can now install APKs
If you ask me, the best feature to come out of this merge is that you can finally install APKs while browsing your device's storage. You might have thought that this was always possible, except that no, it wasn't.
In N1, when we wrote about the Files' app overhaul, a couple of readers helped us realize that it still didn't know how to handle APKs, throwing a "Can't open file" whenever you tapped on installation files. In N2, since the Files app has to also act as the Downloads app, and the latter has always been able to install APKs, it seems to have carried that feature over to Files. The result is that if you browse your device's storage and tap on an APK, it will launch the installer right away, just like it does in Downloads.
Other changes and bugs in Files
There are a few other differences between Files on N2 and N1, some might be new features, others are possibly bugs.
First, the sorting icon is no longer hidden under the overflow menu like it was in N1. It shows in the title bar next to search and view.
Files on N1 (left) vs N2 (right). Notice the sorting icon.
Second, the side menu sees a couple of changes: a) it's oddly titled Downloads now instead of Files, b) the device's name shows up instead of the more generic Internal storage, and c) Documents has disappeared from the possible options.
Files sidemenu on N1 (left) vs euh... Downloads?! on N2 (right).
Downloads can't rename or copy/move everywhere
We've been mostly looking at the positives of this merge. Now it's time we checked all the weird issues that it has created, starting with the fact that the Downloads app on N2 can't seem to be able to rename files anymore. The option shows up but is greyed out.
Downloads app can rename files on N1 (left) but not on N2 (right)
The other change on N2, and this is a much more annoying one, is that beside your Google Drive, you can only copy/move files to your Recent folders, which are... limited to just the Downloads folder, ie the same directory you're starting from, ie useless.
Downloads can copy/move to all Documents on N1 (left) but only to Recents on N2 (right)
Files can only copy/move to Recents
Same issue as the Downloads app, but here it's a doozy. When you tap to copy or move a file in the Files app on N2, you get only the Recents and sometimes the Downloads options in the side menu, but not Documents. (Thanks Fedor von Bock!) And Recents definitely does not list the recent folders you've browsed through, so there's no loophole to exploit here by browsing your target folder first and then going to the original folder to start the copy/move operation.
The end result is that you can't really copy/move anywhere except the Downloads folder. That must be a bug because you will need another file explorer app if you just want to move some files around.
Files app copying on N1 (left) and N2 (right)
It's worth noting that on N1, there was a Show internal storage option in the overflow menu when copying/moving files that isn't there on N2. When tapped, it revealed the device's storage in the copy/move's side menu, thus letting you select any directory as a target.
Android N1 can show/hide internal storage when copying (left), but N2 can't (right)
Copy menu on N1 with internal storage enabled
Attaching files from any directory requires more taps
We're done with the Downloads and Files apps, but there's one last element of the Files app that gets called upon: the file picker when you attach files from other apps like Gmail. On N2, you don't immediately see the option to open from any folder on your device. You will have to hit the overflow menu and enable Show internal storage to be able to browse through all of your directories.
Android N1 file picker (left) vs N2 (middle) with its hidden internal storage option (right)
These are all the changes and consequences of this merge that we could find between Android N's Dev Preview 1 and 2. I am personally very happy about the APK installation improvement but I find all of the other changes either pointless or annoying.
I hope that the copying/moving thing is a bug because the function is utterly useless now. All you need is for the Documents folder to show up in the copy/move/attach's side menu and you'd have half the problem solved. Then you need the Show internal storage option to come back when copying/moving inside the Downloads and Files apps. And that would fix the issue altogether. Let's cross our fingers while we wait for Preview 3 and hope it solves this mess.