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ACG Research
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Tuesday, July 10, 2012

Google Acquiring Motorola: Mash-up or Crash-up?

(Note: This post was originally posted in August 2011.) The big news rocking the wireless, handset, tablet market is Google’s bold bid for Motorola Mobility Inc. This is excellent news for Motorola Mobility’s (MMI) investors and MMI’s shareholders who were faced with the prospects of a long slog of an unprofitable business in an unrelenting competitive environment. However, the long-term prospects for Motorola as a Google company look pretty dim.

It’s about patents
The primary driver of this acquisition is the patent portfolio. It seems that much of the fight over mobile is going to be over patents, and Google needs to shore up this weakness. Google is moving to a vertically integrated business model, which would enable it to increase margins and revenues in the mobile business. Google can now make money on the hardware, the Android ecosystem. Additionally, in-house hardware expertise should result in faster development and more robust software. If it succeeds in taking Apple’s basic business and adding a degree of openness, Google could become the master of the mobile universe, which would enable it to charge premium pricing.

The acquisition will succeed in giving Google a solid patent portfolio for waging both offensive and defensive IP legal battles. However, given the amount of money paid, Google needs to get more than just a patent portfolio. Google also acquired a mobile device manufacturer and a cable TV equipment company (the Home division sells set-top boxes, cable modems, CMTS, optics, QAM and other network gear).

Clipping Android’s wings
As a mobility play, this acquisition makes as much sense as Microsoft buying Dell. There is a very high risk of alienating the other vendors, because the temptation to play favorites will be too great. Even if there is no actual favoritism, the appearance of preferential treatment will be enough to create issues. Google just gave all the Android ecosystem partners a compelling reason to execute plan B and start evaluating overtures from Microsoft. Do not expect to see any company shift strategies in the short term, but the long-term growth trajectory of Android just got clipped.

The mobile handset market is a low-margin business with tremendous risk, especially if a product does not sell as expected and heavy discounting is required to move inventory. MMI’s gross margin in Q2 was less than 26 percent and that includes the approximately one-third of its business from the Home division, which has much higher margin products and for which they pay nothing for Android licensing.

Google also has not been very successful in consumer hardware: the Google Nexus One failed, the Nexus S seems to be lost in a crowded field and Google TV is on the ropes (currently returns are exceeding sales of the Logitech Revue, see WSJ article). With this track record, it will be interesting to see how well Google competes in this market.

Clash, bottlenecks, delays
From a culture and operations perspective we would expect major assimilation issues and major delays in key decision-making. Cultures and bureaucracies will certainly clash, which will contribute to bottlenecks and delays in product development and delivery. It will be interesting to see new hardware designs from the combined companies, as designers try to please two masters.

This acquisition puts more pressure on MMI’s Home division; it is a great opportunity for competitors to take more business from Moto and accelerate its share decline. The Home business seems to get less attention from Moto management than its sexier sibling, and the uncertainty and distraction from the acquisition will exacerbate this situation. The Google name may be great with consumers, but not with service providers. Service providers already distrust Google because of its stance on net neutrality and its 1G FttH project. Furthermore, Google is trying to muscle in on their main source of revenue with OTT (and have a direct relationship with the customer, excluding the SP). If Google can get over these hurdles, it has to sell its vision and fight the perception of putting out half-baked software and putting little effort into customer support.

Regarding business models, there are dangers in trying to chase Apple at a game that it has spent decades perfecting. While imitation is a sincere form of flattery, it is a bad business strategy for most companies. Bottom line, other than getting a decent patent portfolio, this deal is not going to be worthwhile for Google.

David Dines

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