The Google-Motorola Deal: Winners and Losers

Email

Every tech company with a stake in mobile computing will feel the ramifications of Google Inc.'s (Nasdaq: GOOG) plan to buy Motorola Mobility Holdings Inc. (NYSE: MMI) for $12.5 billion.

Google partners could well become rivals, while the other major players in the mobile computing arena, such as Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT) and Research in Motion (Nasdaq: RIMM) all will be affected – some negatively, but some positively.

The new partnership also could inspire other merger and acquisition activity in the sector, between large, cash-rich companies and small, struggling ones.

Let's take a look at how the Google-Motorola deal, which was announced on Monday, will alter the mobile computing landscape, company by company:

Google: A Mixed Bag

Primarily, Google bought Motorola to acquire its vast patent portfolio to better defend its mobile operating system, Android, from a rising number of patent lawsuits.

"Motorola has a strong patent portfolio which will help protect Android from anti-competitive threats from Microsoft, Apple and other companies," Google CEO Larry Page said in Monday's conference call.

Although most of the lawsuits have been aimed at handset makers such as HTC Corp. (OTC: HTCXF), Samsung Electronics LTD (PINK: SSNLF), and Motorola, the common thread was Android. Microsoft focused on collecting licensing fees for each handset, while Apple's strategy was to halt the sale of devices competing with its own iPhone and iPad products.

The typical defense to patent lawsuits is another patent lawsuit, but you need to possess a broad portfolio to do that. Google, which had a mere 700 patents before, will add Motorola's 24,000 patents to its arsenal.

"Motorola has some pretty good patents in there. This is a pretty important thing for Google to have to level the playing field," Michael Barclay, a fellow at theElectronic Frontier Foundation, told USA Today.

Although some speculated that the Google-Motorola deal was an attempt by the Mountain View, CA-based company to mimic Apple's strategy of vertically integrating its hardware and software, that approach has a downside.

For one thing, Google's expertise is in software, not hardware. It has no experience integrating the two (as opposed to Apple, which has been doing it for 35 years).

But the bigger sticking point is that by building its own phones, Google would risk alienating those handset makers that have adopted Android and made it the fastest-growing smartphone operating system. ComScore reported that in 2011's second quarter, Android held 40.1% of the smartphone market, compared to Apple's 26.6% and Research in Motion's 23.4%.

The problem is that unhappy partners might abandon Android either for Microsoft's Windows Phone operating system or for their own OS. And that would reverse the growth of the Android platform, exactly the thing Google is trying to avoid by spending billions to purchase Motorola.

Beyond that, Motorola may have hardware expertise but its profit margins are nowhere near Google's – about 25% compared to 65%.

So Google must tread carefully as it ventures into the realm of hardware-software integration.

One more issue for Google is whether it can successfully swallow a company like Motorola, which has a distinctly different culture but is two-thirds the size of Google in terms of personnel (29,000 versus 19,000). Integrating two such vastly different companies isn't impossible, but it won't be easy.

Motorola Mobility: Winner

Motorola is clearly the biggest winner in the deal — particularly its shareholders. The stock got a robust 56% pop on Monday, after languishing for months.

Although the company had made a strong effort to reinvigorate its business, those efforts had not yet paid off. Although part of Google, the venerable Motorola brand should not disappear, as Google promised to run the company as a separate entity.

As such, and with Google's deep pockets behind it, Motorola could complete the turnaround it has been working on since splitting apart from the government-equipment side of its business in January.

Microsoft Corp.: Winner

One of the surprise winners in the Google-Motorola deal is Microsoft. The company is hoping to exploit any rift that develops between Google and its hardware partners so it can lure them back to Windows Phone. Many of those handset makers once used Windows, but turned away from Microsoft's product in favor of Android.

Microsoft's share of the smartphone market has plummeted to 5.8% according to ComScore.

Even if some makers don't abandon Android altogether, they very well may hedge their bets by offering at least some models that run Windows Phone.

"The deal will make most Android players realize how dependent they are on Google and how quickly Google's plans can change their business," Francisco Jeronimo, an analyst with IDC, told MarketWatch. "This acquisition may be the catalyst for companies to reduce their dependence on Google's platform to face future market challenges."

Nokia Corp.: Winner

Finnish phone-maker Nokia Corp. (NYSE ADR:NOK), having misjudged the impact of Apple's iPhone and the shift toward smartphones, has seen its market share slide to 2%.

As a result, Nokia made a deal back in February to drop its own Symbian OS in favor of Microsoft's Windows on its phones by the end of 2011. That deal now looks prescient.

So not only does Nokia not have to worry about any competition that may arise from the Google-Motorola deal, it has a potential M&A partner in Microsoft, which may now decide that it wants to add to its own patent portfolio.

If Microsoft does go shopping for phone patents, Nokia is its best bet, particularly if Nokia's weakening market position makes it a takeover target. If any other company decides to make a move – Samsung is rumored to be interested – expect Microsoft to swoop in.

Apple Inc.: Loser

Although Apple has little to fear from any new hardware that the Google-Motorola deal might produce, the change in the balance of power regarding patent portfolios seriously undermines its strategy of attacking Android in the courtroom.

Motorola's patent trove is six times that of Apple's, which will give Google plenty of ammo to file countersuits.

That may not stop Apple from filing future patent lawsuits, but having to deal with countersuits will make the strategy less effective.

Research in Motion: Loser

Another victim of the iPhone-Android surge in the smartphone market over the past several years, Research in Motion's share has slipped to 7.9%. RIM's share was 42% as recently as 18 months ago.

As the iPhone and Android have become more mainstream, business users – RIM's main customer base – have chosen them over once de rigueur BlackBerrys.

RIM's problem is that it's much smaller than most of the other players in the sector. The Google-Motorola deal, as well as the Microsoft-Nokia deal, is pushing it into a shrinking corner.

"They are in no man's land at this point," Chetan Sharma, an independent wireless analyst, told Bloomberg News.

Worse still, RIM isn't a particularly attractive takeover target.

"RIM's management needs to come to the conclusion that they need a partner and I'm not sure that's happened yet," Tavis McCourt, an analyst with Morgan Keegan, told Bloomberg News. "Long term, everybody is looking for a dance partner and RIM had better find one. This is getting to be a business where you need to be really big to compete."

Samsung, HTC, et al: Mixed Bag

The 30-odd handset makers that adopted Android and have made it a big success now have to decide whether Google is friend or foe.

True, Google promised to keep licensing Android as it has been, but you can't blame companies like Samsung and HTC for being a little nervous.

"It's very tough to compete with your own licensees," Avi Greengart, an analyst with research firm Current Analysis, told Investors Business Daily. "Google owning a handset vendor makes life very uncomfortable for other handset vendors."

They can choose to use Windows Phone, of course – Microsoft would love to have them back-or could opt for their own operating system. Samsung, for example, uses an OS called Bada on phones that it sells in Asia.

For now, however, most handset makers simply seem to be relieved that Google will have Motorola's patents to defend the Android platform – at least publicly:

"We welcome today's news, which demonstrates Google's deep commitment to defending Android, its partners, and the ecosystem," JK Shin, president of Samsung's Mobile Communications Division, said in one of several very similar statements from Google's partners.

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. sudarshana | August 17, 2011

    interesting

  2. William L. | August 18, 2011

    Google has been too hasty and early to acquire a hardware vendor, in this case a handset vendor.

    Its expertise is in the WEB, not so strong in the software, although it has some software capabilities supporting its WEB business.

    Even its Android system is still too premature to be able to tackle Apple.

    So if its trying to mimic Apple, its just too early for them.

    They should waited for its Android and its Chrome OS system to be stronger and more widely accepted by consumers and also all the hardware vendors.

    I think the other handset vendors will most likely switch to either WebOS or Microsoft eventually.

    Its usually very difficult for a software company to merge well with a hardware company due to company culture and its way of business and environment.

    Apple is a unique case because it has its foundations built since Apple II days where it owns the software and the hardware.

    However in the case of a smaller hardware like handsets or gaming machines, it maybe easier for hardware and software to converge into one.

    But this will come with a price, that is, Google will lose some or most of its handset partners to competitors or they will built their own OS.

Leave a Reply

Your email address will not be published. Required fields are marked *


× 9 = eighteen

Some HTML is OK

© 2014 Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201, Email: customerservice@MoneyMorning.com