The big question is why is Google doing this? Media reports and analysis of the potential deal has been all over the map. Much speculation has centered on the real value being in the large Motorola patent portfolio, to help defend Android against lawsuits. There has been other commentary which points to the possibility of using the Motorola set top box business as an entrée for GoogleTV to finally penetrate the market. One pundit has even suggested that Google will eventually be giving away Motorola/Android handsets, in an effort to disrupt the marketplace and further drive mobile advertising revenue.
The only folks that really know are those inside Google, and they aren’t saying.
I’ve seen this called a “Bold” move–but it is Bold or a really bad idea? Let’s look the deal from several angles:
The price, $12.5B seems very rich to me for an also-ran commodity hardware maker, but I’ve of course not modeled it and done rigorous “what if” analysis like the quants at Google surely have. As mentioned above, a lot of the analysis of this deal has centered on Motorola’s 17,000 held and 7500 pending patents, supposedly to help defend Android against a recent spate of lawsuits. That’s a lot of patents, not doubt. But how many of them are actually relevant? A Motorola shareholder has recently filed suit on the basis of the deal being below fair value, so maybe my opinion on the deal price being rich is off base. Of course, anyone can file suit for anything.
Hardware vs. Software, Margins & Commoditization
This is the biggest issue to me. Google has a beautiful, high margin software business. In most cases, I am baffled when a successful software company wants to buy into or otherwise enter the hardware business, as I have written previously about Oracle. In addition to higher margins, software tends to commoditize much less quickly as well, as you can constantly tweak and go vertical with your applications to stay ahead of competitors. Motorola Mobility is in a high volume, hit-driven business which tends toward low margins pretty quickly. You can make money in this segment, but results tend to change quickly, and it really helps to be one of the big two or three market gorillas.
Of all the negatives, this one baffles me the most. Google is positioning itself to compete with its customers–the Android licensees. I realize this is the age of “coopetiton” and all that. But from a strategic perspective, it’s far better NOT to compete with your customers and partners if you don’t have to. This strikes me as one of those times that it’s not really necessary. The Google pundits are spinning the story that Google can use all of those patents to defend the Android licensees against business-damaging lawsuits, so they’ve really done this FOR the licensees. Maybe this is true, but it sure smells like spin to me. I think that handset manufacturers will be much more careful about investing in Android-based systems going forward.
Apple vs. Microsoft
Google Android has been positioned as hardware-agnostic system software, which has allowed it to grow extremely fast and shoot past the Apple iPhone in volume. Think Microsoft Windows in PCs in the old days vs. the MacIntosh. Apple is the world’s darling now and Microsoft isn’t held in high regard like it used to be. Apple has always used a strategy of tightly coupling their software with only their own hardware. But Microsoft built a hugely profitable software business with 90% market share by following a software-only business model, centered on partnering with hardware vendors–and swamped Apple in the PC business. Of course, Apple has won big in some major categories recently with their favored approach. The final verdict for each of these two very divergent strategies isn’t yet clear in the smartphone segment. How important is having the software and hardware under one umbrella in this particular market, versus the ability to propagate your technology more broadly with 3rd party hardware partners? We shall see.
A software-only business is far simpler since you don’t have to deal with the complexities of hardware supply chains, obsolete equipment, and inventory forecasting. Because of this, it’s much easier to focus your resources on fewer key business drivers, and much easier to “turn the ship” when necessary. Google is getting to be a very large, complex business as it is. Adding hardware to the mix will only make it more complex, and harder to manage as a result.
What Does Google Really Do with Motorola Mobility?
I have seen a lot of speculation in this area, some of it ridiculous. As I stated earlier, One VC speculated that he expects Google to eventually give away free handsets to somehow drive advertising revenue. Although on the surface this seems to fit with the Google business model, it’s one of the silliest things I’ve heard, and a great way to lose money. Google announced that they will run the acquisition as a separate subsidiary, implying somewhat of an arms length relationship. Like we bought it, but we’re really not going to pay that much attention to what they’re doing, let alone influence how the company is run. Right — I’ve got some really attractive swampland you might want to buy if you believe that one. They just paid $12.5B–fair price or not–it’s not exactly chump-change. I think they have some plans and will be actively involved. But what are those plans? That’s being held close to the vest–it will be interesting to see what unfolds.
There are a lot of different ways to look at this deal. So many angles to view it, and a lot of information about Google’s true intentions aren’t available to us. But remember, most acquisitions fail. My own feeling is that if the Motorola patents aren’t worth $12.5B, Google will regret this deal. And unintended market fallout could make them regret it even if the patents are that valuable. It would not surprise me to see Google jettison the hardware business in a couple of years. I want to hear how you analyze this move, so post a comment to share your views on this deal and continue the discussion.