Google buys Motorola Mobility for $12.5B

This week Google came out of nowhere and shocked the tech community by announcing that it was going to buy Motorola Mobility for $12.5B. $12.5B is a lot of money to spend, even for Google. Google’s cash at the end of 2010 was only $13.6B. So why would Google spend so much for Motorola? What is it getting for its money?

1) Patents

According to comScore, Android now represents 38% of the smartphones in use in the US, but from recent headlines you’d think that it was 4%. “Are Motorola’s Patents Enough to Protect Android?” and “Is Google’s Motorola buy the only way to save Android?” sure make it sound like Android is on the ropes.

Google has been in a war of lawsuits with its competitors for a while now. Apple, Microsoft, Oracle, and others are suing Android device makers over patent infringements left and right. Microsoft makes more money on patent licensing from Android manufacturers than it does from Windows Phone. Apple is suing HTC and Samsung. Motorola possesses about 24,500 patents which should help Google fend off enemy lawyers.

2) Close ties to hardware

Besides having a business of selling phones, having the hardware expertise in house can help improve Android. Apple attributes iPhone’s success to the fact that Apple controls both the hardware and software. Google now has that same opportunity to make the hardware and software work better together.

Google now also has the opportunity to help Google Wallet by putting NFC into all Motorola phones. One of the conditions for NFC to work is availability of NFC devices.

Something else Motorola brings to the table is a customer support organization. Google’s customer support is famously poor and was a big problem when they tried selling the Nexus One smartphone. Customers need to be able to talk to someone about problems and Motorola should be able to supply that organization.

This is all good for Google, but it also puts them into a position where they are competing with their customers (e.g. Samsung, HTC, LG, and Sony). Google says that it will keep Motorola as a separate company and nothing will change in the relationships with its Android partners but we’ll have to wait and see if that’s really true or not. Historically it doesn’t work out very well for companies that compete with their clients. It didn’t work for Palm or Apple when they tried it.

Google has to be careful here not to scare other manufacturers off of Android. The whole value of Android to Google is to get as many people to do mobile searches as possible and that requires shipping as many handsets as possible. Reducing the marketshare by pushing other OEMs to other operating systems reduces Android’s value and Google’s $12.5B investment will seem less wise.

3) Set top boxes

Motorola Mobility also creates set top boxes used by cable systems. (Because set top boxes are mobile, right?) This is a big opportunity for Google TV. Google TV has not been very successful as a consumer product. One reason is that because it required an additional box be added to existing home entertainment systems. If Google could get their software built into the set top boxes, that would put Google TV in the hands of many users who won’t have a choice about it. As all Google products, the purpose of Google TV is about getting users to do searches (in this case for TV shows) and displaying ads. If all the set top boxes started doing Google searches with ads, that could turn into a significant revenue stream.

My Take

If nothing else, this purchase shows Google’s strong belief that Android is a core strategic platform for them and they are very committed to it. Google was obviously very worried about the patent litigations and may have quieted them all in one big strike. Removing this distraction is certainly good for the company and the platform.

Clearly this is a long term solution for Google. $12.5 is 50% more than Google’s total income in 2010 ($8.5B) so it will take a long time to recur that cost. Also, Motorola isn’t profitable so that is more money they will bleeding and will need to recoup.

The close relationship with the hardware engineers can only improve Android and that is good for consumers and the industry. Google does have to be careful about how it treats the other Android manufacturers which it is now competing against. Market share is key for revenue and they cannot afford to alienate their partners. Things can change very fast in this industry. It wasn’t that long ago that RIM was leader by far. Android can fall too if Samsung, HTC, and LG abandon Android.

 

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About Lee J.

Mobile Guy!
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