Another Death in the Bloodbath: Google Buys Motorola Mobility

Well, I did say we can expect fireworks and that there are too many competitors in the smarpthones space. Today Google bought Motorola Mobility for 12.5 Billion dollars. Part of why the timing, is no doubt the 'sale' that is going on at Wall Street right now, because of the big share price declines, major corporations are on discount if you ever wanted to buy a rival.

WHAT'S IN IT FOR GOOGLE

First, this is a big move obviously. I think this is a good move by Google but one that gives it a conundrum. Lets first see what they get. Motorola had a deep patent portfolio in the mobile space. As Google has said tis future is completely tied to mobile, and as the rivals like Apple and Microsoft have been suing Google and its Android partners about patents issues, the patent portfolio is one major asset and reason to do the acquisition.

Secondly, they get a major handset maker. Motorola is a top 10 smarpthone maker and a top 10 overall 'dumbphone' maker. Motorola's current production level is of the capacity of about 8-9 million handsets made per quarter (30-45 million per year) of which currently two thirds are smartphones. Motorola has very aggressively been shifting its total production from dumbphones to smartphones and Motorola was the first major brand to go solely Android (leaving Nokia's Symbian alliance and Microsoft's Windows based operating systems). But just recently Microsoft has spoken in public that they 'might' want to join Microsoft Phone 7. I think now its obvious to see, that was a bargaining ploy, to force Google to boost its price and make its move, before Motorola signed any deals with Microsoft..  So remember, this puts Google now in the 'big leagues' with such rivals as Nokia, Samsung, LG, HTC, RIM and SonyEricsson - and gives Google more control of its handset division than Apple (who outsource their handset production to Hon Hai ie Foxconn).

Thirdly, Google gains a major handset brand in the two biggest national markets for smartphones - USA and China (Motorola is third bestsellling handset brand in the USA, and third bestselling smartphone brand in China). But in most of the rest of the world, what Motorola once was (had 21% market share) is now mostly gone. Yet, if Motorola had the carrier relationships and manufacturing and shipping capablity to support some 500 of the 600 carriers of the world - far more than say Apple - with some Google money and organization and 'intelligence' they could quite possibly now recover. But a brand is very valuable and in these big markets, Google would be wise to keep the Motorola brand alive for a while (perhaps shifting to Google over time) and in the rest of the world, might well want to shift more rapidly to Google/Nexus branding and just use Motorola's sales organization or what remains of it to break into those markets.

WHAT MOTOROLA GAINS

Motorola has been making losses for years now. So Motorola has not been able to capitalize on whatever clever ideas they may have had, and have been far sub-optimimized because at all times they've been struggling to just try to recover profitability. Its not like smartphones cannot be hugely profitable - look at Apple, HTC, RIM etc - and also low-cost 'featurephones' or 'dumbphones' can be profitable look at Samsung, ZTE and (the recent past of) Nokia. So its not like Moto was in a bad industry, they were definitely a diamond in the rough, that was just VERY BADLY mis-managed, as I've chronicled here on this blog for example many times.

If Motorola gains first of all some injection of cash, to hire good staff, to provide long-overdue salary increases to critical staff, to keep best staff from exiting the company etc - and to help boost Motorola marketing and sales activities (stop the bleed from the rapid decline of Motorola's once overwhelmingly powerful sales organization) - there is no reason Motorola could not have a resurgence similar to what it did with the Razr in the middle of the last decade. Google has shown a great interest and ability in innovating in the handset space both via Android and via the various Nexus phones. What Google didn't have was the sales organization and carrier relationships - now suddenly Motorola becomes - SuperMoto! Able to leap over buildings and more powerful than a locomotive (like Superman). There are no doubt many pending ideas sitting in Motorola's R&D and also at Google's R&D, that could be superphones as soon as next summer/autumn.

ANDROID ARMY

So what of the other Android makers? Samsung, HTC, SonyEricsson, LG, ZTE, Huawei etc.. Many of them had been recently in a 'partenrship' with a handset maker who controlled the operating system - I am talking of Symbian and Nokia. And we could see how quickly they all abandoned Nokia and Symbian when Android came along. I think its pretty clear, that all of these makers would prefer that Google is not both the owner of Android, and making a handset. So we come to a conundrum.. What should Google do.

One obvious choice is that Google keeps full control of Motorola, and becomes a full rival to the others of the Android army. Android already has 45% of the total smartphone market, with a vibrant Android apps space etc. Google can spin this story to the Android partners that Google will use the Motorola patents to protect the partners so they don't need to pay Microsoft (Microsoft earned more from Android patent fees than from Windows Phone 7 sales in Q2) or Apple (who just blocked Samsung's Android based Galaxy tablet PC from being sold in Europe) etc. But this is a murky area for a company who says 'do no evil'.

If Google holds 100% ownership of Motorola handsets and sells either Moto or Google branded smartphones, then I think several of the current Android army would seek alternate platforms. Samsung has its own in bada, and I think regardless, this move reinforces Samsung's HQ that the decision to invest in bada was the right move and they'll just migrate ever more of their smartphones from Android to bada. Expect bada to 'grow' into more mid-price and even premium phones soon. And remember, Samsung is the biggest of the Android makers.

HTC is the other big Android maker who just a few months ago complained about how badly they were doing in Microsoft based phones and that they'd shift ever more production to Android. They now feel certainly a bit like being stabbed in the back. So I'd expect HTC to shift some attention now back to Windows Phone 7. SonyEricsson might well also add some new focus to WP7.

Then it gets interesting with the rest. LG, ZTE and Huawei have all committed to MeeGo (the newest OS developed by Intel together with Nokia which was supposed to be Nokia's new OS). Because MeeGo is Linux based like Android, it will be a far easier change from Android to MeeGo. I would expect solid commitments to MeeGo by some of these players and possibly some pick-ups by MeeGo from other handset makers who suddenly dont' feel so happy about Google and Android. LG also is in the WP7 camp but I think because of their loss-making, the far cheaper option is to shift now to MeeGo rather than WP7.

IF GOOGLE DOESN'T KEEP MOTO HANDSETS

But I think there is a further twist that is possible. Google knows its handset manufacturers do not want Google in the race, that is what Google heard when they launched Nexus One. The carriers also are dubious about Google and fear it might be getting too powerful. Google might be best served to help Motorola onto its feet, and then float Motorola as an independent phone maker soon. And to communciate this very loudly and clearly to its Android family.

This is how I'd do it if I was Google. First, do a lot of cross-pollination of Google and Motorola talent. Give Moto a big long-term low-cost loan (like how Microsoft gave a loan to Apple to keep Apple alive) and then take a group of senior Google engineers and staff who have a particular love or interest in handsets - and send them onto 'sabbatical' for a year or two, to provide short-term brainpower to Motorola. A luxury billionaire-version of an 'apprenticeship' where the staff would remain Google employees, but would get to go do a year or two of 'real work' designing the next generation of superphones for Google - with of course shared patents coming out of that for both Google's and Motorola's shared intellectual property - and these staff would be guaranteed a return job at Google if they wanted to come back in a year or two. Meanwhile Google would also actively headhunt some of Motorola's best talent to pick to join Google..

Then prepare Motorola Version 2 to re-launch as an independent stand-alone handset maker (minus its patent portfolio and some selected elements and some premium talent). Use Google resources to produce a set of superphones for late 2012 time frame that should be able to propel the recovery of Motorola. And once that is done, when Motorola's handsets are back in making profits and back to growing market share, with a hit phone - then sell Motorola and launch it to the stock market back as an independent company - but of course one where Google would retain a small share like 20%.

This way Google would get the best of all worlds. One, they get their patents. Two, they get to 'fix' Motorola which for no conceivable reason is struggling in a market with a strong brand, good sales organization but producing losses year after year. Three, they gain a strong participant in the Android army, but as Google is open about the intent to launch Moto soon to be independent, they would not anger the Android army. And four, to the degree premium smartphones are a VERY lucrative hardware play (witness Apple) by helping Motorola position itself against Apple (powered by Google), Google could gain (20%) out of that opportunity.

Thats what I'd do. Else there is the danger that Android will go the way of Symbian haha.. And the shuffle behind the scenes today is very intensely Intel with MeeGo, Microsoft with Windows Phone 7 and even HP with Palm/WebOS recruiting handset makers to shift away from Android - and these three are all big giants who can afford to put some dollars on the table too - money that a loss-making LG or SonyEricsson for example could be very happy to get..

WHO IS NEXT

So, Motorola Mobility, which has annual sales of 13 Billion dollars was now sold for 12.5 Billion dollars, where its patent portfolio was a very major part of what made the deal so attractive to Google. Who is next? Nokia is the obvious target, their market cap is down to 20 Billion dollars, their annual sales are at 56 Billion dollars (last year) more than 4 times as big as Motorola's and Nokia has the deepest patent portfolio of any tech giant in the mobile space. They also have several highly valued assets that could be sold independently to make the purchase price of Nokia cheaper - ie Navteq the mapping, navigation and advertising unit; NokiaSiemens Networks the networking unit; dumbphones, smartphones, the Nokia brand etc. And on the inside track is Microsoft, no doubt Steve Ballmer's investment bankers have had a plan in place to buy Nokia from the start, just in case the Stephen Elop-led Nokia partnership turned sour at any point. Like Motorola, Nokia too is now making losses so its a very obvious take-over target and as to a Wall Street discount, Nokia is down 58% from its recent peak of early February, thanks to the mismanagement of new CEO Stephen Elop.

RIM is another obvious target, a former smartphone giant who has recently turned into losing sales. But RIM is still making profits. And compared to Motorola and Nokia, RIM is no patents powerhouse.

Its also possible that SonyEricsson might go, but then I think the obvious buyer would be Sony, who might want to stop the partnering with the Swedes, and take full control of SE. As SE is making losses again, Ericsson might be willing to throw in the towel, if Sony made the offer sweet enough.

HTC is a long-shot, they are growing and making profits. Their patents portfolio is not big so here is a rather expensive rival who would not have very much beyond simply the smartphones maker itself.

Who might be in the game? I think we can easily look at the top 10 top 12 biggest tech companies and find many of them, maybe most of them, eager to consider a purchase. In order of size the top 10 is: Samsung, HP, Hitachi, Siemens, Panasonic, IBM, Sony, Toshiba, Apple, Microsoft. Then we have plenty more in the mid-field like Intel, Amazon, Cisco, Fujitsu, NEC, Philips etc. If Siemens or Philips are experiencing some sellers remorse about getting rid of the mobile handset business (and looking at Apple in an envious way) this could be a fast way to get back. If a bit-player in mobile who once was big, like say Panasonic or NEC would want to get into it at full steam, this would be the fast way. Or some of the tech companies who may have had regrets for 'missing out' on the smartphones opportunity like say Cisco or IBM, this could be the fast track into that game. And obviously for those big players who seem to have mismanaged their opportunity in the past, like say HP and Microsoft - now they could buy a really big smartphone player and get back into the game for real.

Also don't forget the billionaires.. What if Carlos Slim the richest person on the planet - who already knows how important phones are to his business - he made his billions in the mobile telecoms operator/carrier business. Would he want to have America Movil branded handsets to his specs? Or say Hong Kong's richest man, Lee Ka-Shing who owns an empire from harbor installations to yes, mobile phone operator/carrier businesses of the Hutchison Group and Three branded operators in a dozen countries. He even actually owns a small handset maker in Europe called INQ Mobile. If he felt like buying one of these players - like say Nokia (and selling parts of it) - suddenly his early play into handsets would be amplified massively.. Keep a couple of the big Nokia handset factories like in China, India, Brazil etc- and sell parts of the piece he wouldn't find worth keeping etc..

NOKIA NEXT

I do think Nokia is the next on the chopping block. Nokia is a juggernaut, a profit engine that is being ruined by moronic management right now (remember, in the first 5 months of Stephen Elop, before he announced his crazy Microsoft strategy, Nokia was growing sales, growing revenues, growing average sales prices, and grew profits by a Nokia record; and Nokia had a hit new smarpthone OS version of Symbian called S^3 which was so successful in the first quarter it sold 5 million units worldwide - ever since Microsoft's Phone 7 has launched, it hasn't sold 5 million total up to now! and now we have seen, they even have a second even more desirable OS in MeeGo that only a lunatic CEO would refuse to sell when Nokia sits on the hottest pair of superphones, the N9 and N950 that would return Nokia to profits instantly. All that it takes is to remove Elop from the CEO chair and put any recent MBA graduate to run Nokia and it generates profits again) 

And I do think we'll see a visible public rush for it, not this sudden secret sale like Google's purchase of Motorola Mobility. Microsoft will have to bid, their whole mobile future is sitting on that one card they have left to play, Nokia. And equally, if there is a public contest, I think Intel would be foolish not to get into it - the perfect solution for Intel is to buy Nokia and abandon the Microsoft strategy, and for Intel to get its MeeGo OS based Nokia handsets as they wanted - such as the magnificent N9 and N950 that Nokia now is not giving most of the world. We could easily see four or five big tech giants bidding for Nokia.. In almost any case, whoever buys Nokia will sell off NokiaSiemens Networks - and Stephen Elop's career hangs in the balance of whether Microsoft gets him - any other buyer will fire Elop on Day 1 of owning Nokia.

Then I think the biggest loser of the Nokia Sweepstakes would probably almost instantly go use their money to buy RIM haha..  And we might see HTC also sold in the aftermath.

This kind of environment might also see some other 'friendly' mergers, as suddenly some of the players get very big. We might see other big mergers in this environment in the tech space, where one player feels they are losing out on the mobile space. What of Dell for example? Or HP's rather weak showing in mobile after they bought Palm. What of Cisco who has often played around mobile but still play only on the infra side and in a limited way in mobile.

Ok. Thats my thinking right off the news. Exciting times in the Bloodbath Year 2: Electric Boogaloo. I am pretty sure this is not the last merger/acquistion in this mobile space and we may well see a very public race for the carcass of Nokia. Stay tunes, same Bat-Channel, same Bat-Time..

Comments

[Sander van der Wal]

The only thing Google can do to protect Android is to kill Motorola outright. It makes the IP expensive, but it will keep Android on top.

[teklemon]

"whoever buys Nokia will sell off NokiaSiemens Networks."

Easier said than done.
Do you have any buyers in mind for NSN? Siemens?
Also remember they are bound to the JV till 2013.

If I was Nokia or MS, I would bid jointly for RIM or Sony Ericsson.
For obvious reasons. ;-)

[Titanium]

I don't agree with you when you say that a resurrected independent Motorola isn't a treat to Samsung and the other android OEM because a resurrected Motorola will be in any case a stronger competitor for them in an ecosystem with limited profits. Hence this deal is good for Nokia and Microsoft because suddenly this ecosystem is getting more competitive (or less undesirable)

Anyway if there still is some chance to let Meego survive this is the right time to try, the device is there (N9 obviously) and the competitors (android) show sign of weakness

[Poifan]

Nice analysis, there's lots here to ponder. Don't forget that Motorola Mobility also provides TV Set Top Boxes, a nice fit for Google's struggling Google TV project. With one purchase, Google gets a hardware solution for phones, tablets, and STBs. There's a big part of your Google/Android ecosystem.

[kissmyass]

Did I hear Meego? Meego is death

[former N900 user]

I would not call it a "death" in the bloodbath. On the contrary, now together with Google, Motorola will proove to be once and again a very strong competitor for the global lead in smartphones. I think selling Motorola soon isn't the most likely strategy for Google. Instead Google will shift its inhouse hardware development (Nexus, Xoom etc.) completly to Motorola and use motos patents to defend the android ecosystem for HTC, samsung and LG.

I think your analysis of Bada is completly wrong as it is clearly an OS for more mid to lowtier smartphones. Samsung's recently announced new name scheme for smartphones suggest, that the android Galaxy S will continue to be their flagship device.

[zerolinesofcode]

Remember, Nokia (NSN) bought Motorola networks recently.

By the way, recently Motorola was split into two. Namely Motorola Mobility and Motorola Solutions. Google only bought Motorola Mobility. :)

twitter.com/zerolinesofcode

[Anon]

RIM should release an iOS player to accompany it's up-coming Android Dalvik player, and then fix-licence QNX ($5 per device), while keeping encryption algorithms, the BB Gateway, and BBM as their differentiation.

That would make for an interesting day on Wall Street.

[vvaz]

Samsung et al. don't have to be afraid. Much.

Please remember that Google has big problems with monetizing of anything but their search engine. I think they will have similar problems with Motorola. There is only one thing which could kill Android: preferential treatment of Motorola and withholding of Android source from OEMs. Google started to do it with Honeycomb (primarily to protect Samsung et al. from cheap competitors) and if they deepen that process it will kill Android as universal mobile OS.

[peter]

tomi, I made a comment not long ago on google vs nokia where I mentioned nokia phones have 3 long term advantage over google's android phones:
1. deep patent potforlio
2. built-in maps with voice dooor to door guidance
3. meego and symbian are more efficient OS than Java VM (longer battery life)

Obviously google management saw it and made a quick decision to buy MMI for deep patent portforlio. but it has not sovled #2 and #3 problem. Google might want to buy nokia but nokia is still expensive for google cash reserve.

I believe Steve Jobs is looking at buying Nokia to solve ipohnes long term problems as listed in above #1 and #2. yes, apple has much deep cash pocket to buy nokia at 70% premium in all cash.

After buying out nokia, apple will get
1. deep patent portfolio,
2. free built-in world-wide maps, postion based advertisment, turn by turn voice guidance
3. huge loyal nokia symbian and s40 users base
apple will take following actions
1. get rid of Elop,Weber,Jorma immediately
2. keep low to medium range phones with nokia brand to compete against android/mango
3. capture 40% market share in both smart and feature phones.

[Vikram]

Microsoft didn't give Apple a loan that kept it alive. MSFT made a temporary purchase of $150M of Apple stock and made several undisclosed payments to settle lawsuits and some anti-competitive behaviour that they got caught doing against Apple (See Canyon software and Intel)

$150M was in no way anywhere near enough to save Apple at the time and there were several other people looking to take Apple private like Larry Ellison who was going to do it with Jobs before Jobs decided not to do it.

The idea that MSFT saved Apple is a myth from the anti-Apple crowd or is sheer ignorance.

Of course, I expect Tomi to delete my post as he typically does with those who disagree with him.

[vvaz]

@LeeBase

Google doesn't have maps. Despite much hype most of stuff is still bought or licensed from third parties. In this company only Nokia has its own in-house maps.

@Vikram

MSFT saved Apple with some money and more important - promise to make MS Office for Mac OS. They did it to avoid monopoly related problems. If they stalled a bit Apple wouldn't exist but also very probably MSFT would cease to exist as single company split into several entities due to anti-monopoly regulations.

Apple will not buy Nokia as a whole - the only one part of company which would make sense for them is Navteq. They don't need patents - they can bluff their way through legal system with good lawyers and laughable UI patents - as we saw in case of Samsung tablets and they are not into heavy iron of NSN (that one can be valuable for Chinese or maybe Samsung).

[peter]

@LeeBase, you missed my point about built-in gps maps. while google/apple do have maps, they are online maps not built-in maps. it needs wireless data flow to download which becomes expensive every day and conusmers do not want to pay for the data downloading. and both google/apple have to pay tomtom huge money to use its telenav maps (directly or indrectly)

[peter]

@vvaz, apple do need nokia's deep patent portforlio to avoid paying royalties to nokia per iphone and to block/charge roylaties from its competitors.

[peter]

@LeeBase," Android customers get turn by turn maps as a default app." most of them have to download wirelessly to use first time and cached somewhere to reuse them. but the cache can not exceed certain side, lets say 10MB in order to avaoid further charge on google/apple from tomtom.
so every time you go to new location, it needs download wirelessly again and replace previous cache.

think about if you go aboard and use your big screen android phone as your gps, you'll be charged a huge wireless data fee from carrier.

In usa, all big carriers have removed unlimited data plan. put a rate like 2GB/$15/months

[peter]

tomi, I am thinking the exclusive partnership agreement between miscoft and nokia is illegal.
Jorma Ollila and Steven Elop have betrayed nokia investors interests. Is there any official way to get the details of the agreement as an investor ?

[Yuri]

Tomi, I don't think that it is in Google's and its partners best interest for Motorola to get sold eventually. If Google keeps control over Moto they will be able to steer them in a way which is beneficial both for Google and its partners.

Google's interest is to have Android as wide-spread as possible. They should simply focus Moto on producing low-end devices and at the same time leave the more lucrative high and mid segments to its partners.

Google can also use Motorola as a lab for new device concepts, which will allow them to pile up patents and prepare them to fill niches not occupied by their partners. If a niche proves popular, they will be able to offer patent indemnification to their partners (only), thus continuously promoting the platform.

Google is in the position to make a complete win of this acquisition, simply because their business model does not conflict the device manufacturers.

[peter]

@tomi,
recently another crap hired by Elop has made some media splash, Chris Weber.

he plans to stop selling all nokia current cell phones including hit smart phone n8 and super phone n9.

now he wants to flood usa with nokia WP7 mango phones at a price lower than lowest android phones.

can nokia get any net profit after paying out $15 per phone royalty fee to microsoft ?

N8 is selling at $370 unlocked which is at the average price of android phones. and it has best sellings among all nokia phones without putting in any market promotions.

This crook exec ms employee has also to be fired immediately.

[peter]

@LeeBase, consumers have to pay for the apps. and its map is not free to update for life and is restricted to its country/region.

nokias is free for life and for world-wide.

[teklemon]

@Vikram Does Tomi delete comments that disagree with his anti Elop/MSFT stand? I thought my comment in the earlier post was deleted by accident.
I dont believe someone like Tomi would do that.
But if thats the case haha.

By the way Motorola has got much more patents than Nokia (not sure by domain and relevance, but by number, if my memory is correct its more by a few thousands) and triple than that of Nortel.
Whatever be the case of murky patent battles, I believe this is a bad move by Google, unless they sell Moto minus patents quickly to some Chinese manufacturer.
:-)
12.5 billion is not really cheap considering Moto has cash of 3B or so. So effectively its only 9+ billions.