Google’s Monstrous Move for Motorola Mobility

by Chris on August 15, 2011

I returned to Canada late on Saturday, after 10 amazing weeks in France. It took me all of Sunday and most of today to get over the jet lag, and re-familiarize myself with Toronto life.

Hoping for a quiet Monday, instead I woke up to hear about the big acquisition Google’s making of Motorola Mobility. So, I apologize for taking until now to get this post published.

To recap the facts, quickly:
Google is paying a 63% premium to purchase MMI at $12.5 billion, and there is a mighty $2.5B break fee. This is a friendly deal between the companies.

I spent a good part of today thinking about this transaction, and as of right now here are my thoughts on the whole matter.

Patents

Everyone is talking about patents and sure, it makes sense that Google wants more patents. Patents are like bodyguards. When you’re surrounded by huge muscle-bound dudes, people don’t tend to pick on you so much.

Apple’s got some great IP related to touch screens and the multitouch user interface. I’m sure their patent count is lower, but it isn’t just a numbers game. It’s about having useful patents.

Microsoft has been in the OS game forever, so they’re in pretty solid shape.

RIM pretty much invented the smartphone segment. They have oodles of patents around mobile data systems and they’ve been investing billions of dollars in beefing up their patent portfolio over the last few years. Remember how much criticism Wall Street gave them for it at the time? Maybe it was a smart move after all.

And then there’s Google. New to mobile, but kicking major ass and giving their product away for free. Competitors are pissed off. How do you fight back? Hey, they’ve got no big bodyguards – let’s beat them up! And let’s get more bodyguards ourselves, too (hello, Nortel patent auction).

But Google is a rich company. So they make a deal with Motorola, who has lots of fundamental wireless patents. I’m not a patent expert, and most people analyzing this stuff aren’t either … but I think we’re all just going to assume that Motorola’s patents offer some decent protection to Google.

Hardware: Conflict of interest?

Everyone is pointing out that Google now competes directly with its Android partners. Yeah, we’ve all seen the quotes from HTC, Samsung and Sony Ericsson saying that they support the deal. But quotes like that mean nothing to me. I just ask myself if an executive would ever say the opposite in public. If the answer is “no”, then the comment is meaningless.

I’m sure Samsung and HTC are upset. But what are their options? HTC could move back to a dual-OS strategy and support Windows Phone. Samsung is rumoured to be talking to HP about licensing WebOS. But it’s obvious that Android momentum is huge, and neither company will abandon it. So they’ll look at hedging their bets slightly, but they’ll just have to shake off the gut-punch and continue.

Can Google possibly be fair to these partners? Even though other Android partners see risk in Google’s Motorola acquisition, that doesn’t necessarily mean they’ll get the short end of the stick. In the optical communications industry circa 2000 it was extremely common for telecom infrastructure companies to also build their own optical components. They had separate component divisions that were run like independent companies.

Nortel and Lucent both did this, for example. Nortel’s first OC-192 systems relied on Lucent-supplied lithium niobate modulators. Lucent Microelectronics was the sole supplier of this part to Nortel. That was just the way business was done.

I do think it’s possible for Google to run Motorola as a separate company, and one that doesn’t get any more rights to Android than HTC and Samsung. That doesn’t mean it will actually happen, but it’s certainly possible and it wouldn’t be the first time such a model succeeded. More on this later, because operating Motorola independently flies in the face of the whole “integrated platform” argument.

Controlling the whole platform

Most industry pundits have pointed out that Android was becoming fragmented, and this is a problem for developers. So does owning Motorola help solve this problem? I’m not convinced yet.

I found this well-written article talking about how Android is no more open than iOS, and it seems than Google has a process in place to approve every Android device on the market if that device vendor wants to include Google apps such as Gmail, Maps, Android Market and YouTube.

In case you don’t want to read the story I linked to above, the gist of it is that Google won’t approve Android devices for a license unless they pass “compatibility testing”, and the results of this test may entirely depend on what Google wants. If they don’t like something about your device, they shut you down.

So Android is an open OS, but the important layer on top of Android is Google’s own apps. This means Google maintains as tight of control as they want to over Android. And perhaps this control has been getting tighter specifically because of the fragmentation problem.

So I’m left asking myself why Google needs to own a hardware company if they already have a stick they can use to beat hardware vendors into submission?

I guess what I’m also trying to say is that if Motorola is to be run as a separate company, then Google doesn’t own an integrated mobile platform. They own an OS, a bunch of apps, and an independent hardware company.

Or maybe it’s about the living room

That brings me to the final piece of the puzzle (at least for this post). Motorola has a strong position in the set top box market. Google TV hasn’t gained a lot of momentum yet. Maybe owning Motorola’s set top box business would accelerate things. Maybe it would be nice to have Android playing nicely with every single Motorola set top box on the market? Maybe Motorola can start building Google-branded products that are sold directly to consumers, and not through cable companies?

What do you think? I want your opinion on this.

Chris August 15, 2011 at 11:15 pm

Oh, and am I ever glad I never got around to shorting MMI stock !! I closed my NOK short and was sitting there ready to pounce on MMI, feeling that they were going to be clobbered by Samsung and HTC in a commodity war. What a costly mistake that would have been.

BRZ August 16, 2011 at 10:10 am

Big winner – MMI shareholders.

I see it as neutral to negative for other Android manufacturers.

How many quarters will it take Google to generate margins similar to Apple and RIM for their integrated smartphone business?

RIM reports 15-Sep. Moving forward or still stuck in the transition period muck?

Noel August 16, 2011 at 10:56 am

First, welcome back to Canada. Those 10 weeks sure went fast!

Google acquired Motorola with a variety of objectives in mind, not all of which will pan out. This is in keeping with their consistent strategy of throwing things at the wall and seeing what sticks. The three biggest opportunities I see for Google in this deal are:

1. Patents – Google finally has been able to bolster it’s patent portfolio in the mobile space to protect and enhance it’s technology by both in the offense and defense.

2. Android – This will help solidify this platform and result in a higher degree of software/hardware integration to better compete with Apple. I see very little downside with respect to their Android handset partners as those partners have very little choice but to stick with the platform. No doubt, though, that Google’s Motorola handsets will likely gain an advantage over their Android competitors. Just like in investment banking firms, that oft-claimed Chinese wall will not really exist.

3. Set-Top Box – Motorola’s set-top box business allows Google a firm and instant entry into this area. Although described now only as a ‘hobby’ for Apple by Jobs, there is no doubt that Apple wants to eventually own this space too and Google knows this. Google’s acquisition of SageTV (probably the best PVR software company out there and a product I’ve enjoyed for years) a few months ago verified their strong interest in this area. The set top box is ripe for innovation and one of the last massive technology gadget opportunities left that would interest and perfectly suit a company with the size and DNA of Apple and so Google needs to be a part of it too. This is especially true with the proliferation of TV programs being officially available over the internet rather than cable. Like many I am tired of the closed system that is my Rogers PVR box. Why shouldn’t I be able to record an HDTV program and watch it on whatever device anywhere anytime I want to and also store a backup of it? I should add that one shouldn’t underestimate the challenge overhauling this space given the control the cable companies have (as Steve Jobs has also noted many times).

I only see downside for RIM. This leaves the four major players of Apple, Googlrola, Microsoft/Nokia and RIM with the latter not being one of the ‘Big 3′. With 3 formidable competitors, market myopia, very little cash relative to their market size, a history of poor execution, a long timeline until they introduce a major overhaul of their OS (and it remains to be seen whether the market will even receive that well), falling market share and only having the slowly-eroding selling points of security, a physical keyboard and being the low cost option in many volalite foreign markets it doesn’t look good for RIM. They will be relegated to being a smaller niche market player who blew it in a market they once controlled and that was theirs to lose.

Chris August 16, 2011 at 11:49 am

Hi Noel – I definitely see your point on this being a potential negative for RIM. Hard to say until we know more about the truth behind Google’s motivations.

One thing that does bug me is RIM’s relative size versus Microsoft/Nokia, Google/Mot and Apple. I was speaking to a good friend yesterday who believes RIM needs to be sold. His logic related to the size differences as you also pointed out. Absolutely a fair comment.

So I’m interested in knowing how RIM will fight back and fight hard with a much smaller size, and like we all agree … recent execution issues.

That said, here’s an interesting set of numbers to chew on. Curious what you and others think.

Apple spent $628 million on R&D last quarter. I’m not sure how much was on iOS and iOS hardware but clearly not all. They still have to run iPod and all of the Mac stuff.

RIM spent $423 million in R&D last quarter. 100% of this is focused on the mobile industry. Very clearly there is an efficiency difference between Apple and RIM when it comes to R&D dollars, but I think that when you back out Apple’s mac and iPod R&D RIM is actually spending more.

To me this says you don’t have to be massive to win …

That said, I’ll also shoot down my own argument for a moment and point out that AAPL hit the #1 spot for global market cap recently (even if intraday), so while their R&D is not big, their value is huge and they can buy whatever the heck they want through their massive cash pile and their stock valuation. RIM can’t.

Oh, and for good measure, GOOG spent $1.2 billion last quarter on R&D, yet clearly the majority of this is not related to Android. So again I think it proves that you don’t need massive *physical size* to win. Market cap maybe yes …

Noel August 16, 2011 at 1:15 pm

No, you don’t have to be a massive size to win. Look at where Apple has come from. 14 years ago they begged Microsoft to invest $150M in Apple, which Microsoft did in return for some favourable positioning of their products in Apple’s ecosystem. This capital allowed Apple to go forward instead of declare bankruptcy. There also has to be a window of opportunity, one has to see that there is one and then one has to exploit it successfully. RIM has really only done this once, which was in the very beginning when they came out with the RIM pager and then the Blackberry. They have let every other opportunity slip buy and have become a copycat company and a poor one at that. RIM needs to spend the money wisely, in the right direction and manage the process so that execution happens, which is not what they have been doing. This is why I asked the question a while back on this blog whether others thought it was wise for RIM to spend money to buy back stock instead of investing it in their business and/or keeping it as a war chest.

I still see RIM making some gains in foreign developing markets but all they are doing there is competing on price and the fact they have BBM. With iOS messenger (and Android equivalents) coming on like a freight train soon, all that will be left is for RIM to compete on price in those markets and that usually is a losing long-term strategy. Yes, they will still own the corporate market in developed countries and to an extent in developing countries because of their physical keyboard, security and IT department integration, but that is hardly going to be enough to allow their company to grow revenues and profits.

ljp August 16, 2011 at 9:21 pm

Under Jobs, Apple’s R&D has always been “small” in comparison to the other technology companies. This could be Jobs’ true value to Apple if it’s a result of him directing the research and not allowing the development miss production targets. Then again, Apple has a history of technical shortcomings that have always been overlooked by their user experience, devoted fanbase and Jobs’ ability to push the blame onto other entities. So that small R&D department might hurt them in the future.

I don’t see how RIM’s size would be a hindrance to the company. They’ve always been overshadowed by larger companies. Being big has never produced the best results in technology. Time Warner bought AOL to create the worst merger in history, NORTEL’s buying spree ended in bankruptcy, Microsoft has spent billions acquiring companies that have ended in write-downs and Rupert Murdoch buying MySpace is also a great example.

When MySpace was bought, there were several articles that said the biggest loser would be Mark Zuckerberg and Facebook. “He should have accepted the $500 million buyout offers!” Was the common refrain as pundits said there was no way Facebook could compete against the size of Rupert Murdoch. And we all know how that worked out.

RIM has always shown that they have the ability to work with the larger players. They also make small acquisitions that benefit the company. They don’t need to compete with Apple in buying companies as Apple has never been the acquiring type. I believe Apple has averaged one acquisition per year over the last 25 years. They prefer to grow internally.

Noel August 16, 2011 at 11:18 pm

Amusing that ljp can make any comment into a positive about RIM. (Sorry I couldn’t resist but I think I am entitled given you keep having that chip on your shoulder about me and the stock has slid to less than 1/2 of what it was all the while you keep parroting how wonderful the company’s prospects are)

ljp August 17, 2011 at 9:35 am

It’s their history Noel. The work with over 600 carriers, thousands of enterprise customers and governments around the world. The Nortel patent deal again shows how they find ways to work with large corporations who should be their competitors.

They have BlackBerry support as part of Microsoft’s new Office365, and IBM continues to offer BlackBerry support and management to their customers. These aren’t rah-rah fabricated stories Noel. But real world examples of how they navigate the market.

Nowhere did I say how wonderful the companies prospects are, I just provided the history of how RIM has worked and continues to work in a sector that contains companies much larger than them. Don’t forget that you are the one that made an article about Google and Motorola into an article about RIM.

ljp August 16, 2011 at 12:55 pm

Amusing that Noel can make any comment into a negative about RIM.

Google paid too much for Motorola, but that fits in with the way they’ve handled ever acquisiition. It’s also funny the way some now assume that acquiring these patents ends the problems faced by Android manufacturers. Apple and Microsoft were going after Motorola before the takeover, so it’s not like those cases will be stopped.

Patents are mostly used for cross-licensing deals between companies to settle the court cases and Motorola has already entered into many agreements with their patent line-up. All Google has done is protect the other Android manufacturers from Motorola as they had started to threaten lawsuits against the other Android partners in the week preceding this deal. Perhaps Sanjay Jha was pressuring Google to raise the price?

That’s also assuming Google is going to give HTC, Samsung, et al access to the patents. They could be using it as an additional club to keep the Android manufacturers using Google search and the other services(Nice to see you discovered Google’s “free” Android claims aren’t exactly true).

Motorola is getting beaten not only by Apple,RIM and even Nokia but they are also falling far behind HTC and Samsung. Google is great at their core business but every attempt to step out of that hasn’t exactly met with success. Bankrolling a company that has had problems making compelling smartphones doesn’t seem much different than HP’s purchase of Palm. Assuming that the success of the parent company is going to rub off on the failing acquisition is a mistake that has been made too many times in the past.

BRZ August 16, 2011 at 7:42 pm

Awesome post ljp.

Brings to mind more questions. So Google takes out Motorola, but does this cease the patent litigation between HTC, Samsung and others?

I don’t spend a lot of time studying the financial metrics and operations of the whole space but how far back in time do we have to go to compare Motorola to RIM in terms of margins and profitability?

Right now I view the deal as neutral to slightly positive for RIM since it muddies the Android waters.

I don’t think RIM has to sell to anyone. I am highly critical of things they are doing wrong but they are doing a lot of things right. OS 7.0 devices are out the door or heading out the door. Who says RIM is too small if EPS growth is restored as the company moves out of this period of transition? Can you say significant multiple expansion if and when RIM’s financial statements show it ramping out of the transition period!!!

Let’s hope they have some significant developments for H2 of calendar 2011.

Michael Li August 16, 2011 at 1:52 pm

There’s a rumour that Google bought Motorola because Microsoft was in talks to buy Motorola’s patents. If Microsoft succeeded, they would be able to sue Android even more. This explains the $2.5 billion breakup fee that Google was willing to pay. http://www.electronista.com/articles/11/08/15/google.may.have.had.hand.forced.on.motorola/

Jeffrey August 16, 2011 at 2:20 pm

My $0.02 is that in addition to the patent argument, this will allow Google to pursue ideas that require innovative hardware at their own pace, without co-ordination. Linux-based OSes are always more capable than the platforms they run on, this move eliminates the dependency on partners if Google wants to push something smart out. I’ve read the post-mortems on the Nexus One project as being a bit of a mess for Google (hardware/software support issues, for one). There is no reason for these problems to plague their ideas going forward.

I anticipate great products, but Google does have some history of launching services that seem to fizzle out, so it could go either way.

hanke August 16, 2011 at 6:42 pm

Google’s purchase of Motorola M. is interesting, but isn’t any huge game changer. I suspect the acquisition was made for all the reasons people have speculated: further hardware/software integration, patents, set top box potential. The real game changer will come when Steve decides to spend his cash hoard. He doesn’t continue to build it for no reason.

ljp August 16, 2011 at 8:24 pm

Maybe he’s planning on taking Apple private.

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