Google Sells Motorola Unit to Lenovo - I told you this would happen...

In August 2011 Google bought Motorola's handset business for 12.5 Billion dollars. Today we learn that Lenovo has bought the handset business for 2.9 Billion dollars but Google keeps most of the patents it acquired from Motorola.

I wrote right from the start that Google's primary interest was the patents portfolio and Google would sell the handset unit most of all because this purchase caused irritation in the Android handset manufacturer community who didn't want their software operating system provider Google to simultaneously compete with them on making the hardware. That thesis was repatedly proven by press stories that the Android manufacturer community was not happy - and led to several significant developments of rival operating system projects (Firefox, Tizen etc) to purchases of operating systems (Palm WebOS bought by LG from HP).

Now its happened. This has several important impacts to the smartphone bloodbath. First its another consolidation move (and we are still likely to see more of these). So two smartphone brands (arguably 3) become one (by three meaning Google as smartphone maker plus Motorola as its 'independent' brand merge to Lenovo's ownership and eventually all of it will only be known as Lenovo brand just like how Lenovo did with its original IBM PC business purchase.

LENOVO

What does this do to the smartphone battle? Lenovo is currently mired in that mid-field battle with Huwaei, LG, ZTE, Sony, Coolpad/Yulong and HTC for who gets to be called 'third largest smartphone maker' behind the giants Samsung at 1 and Apple at 2. Huawei is the latest also-ran who sits in the 3rd ranking position for Q4 of 2013 (while we still await the last tidbits of the data to complete the Q4 and full-year 2013 results on this blog). Motorola was some years ago the world's second largest handset maker and has been as high as 4th largest smartphone maker but currently isn't even near the Top 10. Still they make in the 12 million to 15 million smartphones per year. So when we add Motorola shipments to Lenovo's latest, we get roughly 6% market share and over 60 million total shipments of smartphones annually. That is the level where Lenovo now climbs to, well above the Huawei level in the 5% market share stage. As Motorola is all running Android as is all of Lenovo, and Motorola has completed its migration of dumbphone production to smartphones the transition to Lenovo unified smartphone portfolio running Android is relatively easy (vs say MIcrosoft's purchase of Nokia where they still have to manage the costly transition from Nokia dumbphones - 89% of the handsets sold in Q4 under the Nokia brand were dumbphones and only 11% were smartphoens - to Windows based smartphones)

So Lenovo now will have about 6% market share and becomes rather clearly number 3 in the smartphone race. Note that just in 2012 Lenovo was ranked 10th largest smartphone maker and powered by mostly only in-China domestic smartphone sales (China towers as the world's largest smartphone market now more than twice as big as the USA) Lenovo had climbed to 4th biggest smartphone manufacturer. It now becomes the clear number 3. In the global handset race Lenovo will be ranked 5th as Microsoft/Nokia and LG are bigger when their dumbphone sales are added to their smartphone sales.

More importantly for Lenovo, it gains a global brand and global distributor channel via Motorola and can far more rapidly boost its market penetration by the Lenovo brand into local national smartphone markets. Motorola's strongest markets left are in the Americas North and Latin America where Lenovo had not yet done meaningful market entry in smartphones (while Lenovo had already entered many Asian markets and some Europeans already). While its market share is modest it is also well trusted in Africa and Middle East. Lenovo should be able to build very powerfully onto the Motorola brand and gains a big leg up ahead of its Chinese rivals Huawei, ZTE and Coolpad/Yulong who are all in the process of also expanding abroad.

The Motorola business has been making losses for years. The Motorola handset business has been declining in sales numbers at alarming rates until Google bought it and stopped releasing unit sales numbers - suggesting quite clearly that the troubles continued. So this is not a healthy unit. But it is a global brand which has a global distributor network something that Lenovo did not have in handsets (remembering that the PC sales distribution channel is very different from the far larger handset industry distribution system that depends on mobile telecoms operator/carrier support), Can Lenovo turn this business around? I think the IBM laptop business purchase shows a very good signal that Lenovo is able to buy a 'US' business and make it work and grow. Yes IBM's PC business was profitable when Lenovo bought it vs Motorola's loss-making but I think this is very promising compared to say Microsoft's bad history of buying hardware makers like its purchase of Danger that it messed up totally into the aborted Kin phones launch. Time will tell but I think Lenovo has a good chance to capitalize on this purchase and propel itself to a safe third-ranking in smartphone wars of the years to come.

I should note that this clearly proves that Lenovo was serious when we heard rumors that Lenovo was looking at buying RIM/Blackberry - and Nokia. I did say on this blog several times that Nokia shareholders would have been better served if they allowed the handset business to be bidded for openly (Lenovo was not the only one interested in addition to Microsoft) and that very likely Nokia could have sold only part of its handset business to some other buyer than Microsoft to get enough cash to continue but still keep at least part of its handset business... (Note that Lenovo also made a $2B purcase of some IBM server business just a few weeks ago so Lenovo obviously had that itch it wanted to buy someone and had plenty of money to burn.) But yeah, that is water under the bridge but I wanted to point this out against those who accused me of imagining things and not being in touch wtih the industry anymore haha...

GOOGLE

What does this do to Google? Google has been having trouble in its Android manufacturer partners base as many of those in partners were pursuing various alternate operating systems to Android in some capacity or another. There is also some talk of some Android partners possibly re-joining Windows in part (most of all Sony possibly launching a business-oriented Vaio branded smartphone running Windows). This sale very clearly establishes Google's ambitions as 'pure' of not wanting to compete with its handset manufacturer ecosystem. That it was true as so many of us speculated at the time in 2011 that Google's primarly reason for buying Motorola was the patents portfolio that Google didn't want to own the handset manufacturing business. Google is a software and services company at heart. So those doubts and irrituations now recede for Google and this should help stabilize the Android base and possibly even gives motivation for some handset makers NOT to pursue alternate OS platforms. Good move by Google. Obviously the Motorola handset business never turned profitable under Google's ownership and the handset sales numbers dimished while the overall industry grew.

MICROSOFT

I should mention Microsoft and its Windows Phone OS platform as well as its Nokia purchase. I accurately predicted that when Nokia would sell its handset business or parts of it, that MIcrosoft would almost certainly end up owning the Lumia unit because Microsoft could not afford anyone else buying the Lumia unit and then ending Nokia's silly Windows project and shifting that to Android. (Microsoft obviously ended up owning all of Nokia's handset business).

I have since said that MIcrosoft will never be able to make the Nokia Windows Phone smartphone business into a viable significant-sized business into the double digits market share. Never. I have also said that in the long run MIcrosoft's Nokia handset business will be a drain to profits and it will be eventually winded down and ended quietly. I still beleive this except now after the Google Motorola purchase I would add a new scenario - Microsoft may at some point decide to sell what remains of the Nokia handset business while still trying to continue on the Windows Phone OS side...  Now that Google no longer owns a handset manufacturing unit the contrast to Microsoft is even more glaring and that irritation that Google felt, will be transferered to ever bigger irritation by Windows hardware manufacturer partners against MIcrosoft. Not just in smartphones but also in PCs because of Microsoft's growing efforts in the larger computing world through its tablets like the Surface and the Nokia phablets. Microsoft's PC side is not helped by this, but the smartphone side is definitely damaged by this. What bad future the Windows Phone platform faced before today - just got even worse.

SAMSUNG

Samsung now sees clearly who is the new number 3 rival to monitor in addition to Apple's iPhone now that Nokia/Microsoft is a non-player. The new number 3 to consider as emerging rival is Lenovo. Not Huawei not LG not Sony. Lenovo. For us in the Bloodbath-watch year 5 Who is Left Alive we have yet another death and the year starts with consolidation. Who is left alive? I believe this year will see still mroe consolidation...

PS first Samsung Tizen phone leaked via Korean gaming site Moveplayer.net and is called the ZEQ 9000 - see it here for example at Digital Trends. 

Comments

[Hansu]

Intresting that Motorolla went for so low as 2,9BN that says something that Google wanted to get rid of it so bad and also the fact that they just wanted 600million upfront and rest they pay later.

[NokiaLove]

The UI of that Tizen device sure looks like the Windows Phone UI.

[Michael Scharf]

Although I agree with you that Google was always planning on selling Motorola, I don't agree with your description of Google as a software and services company. There really are two Googles and that's why some people were confused about the long-term potential of Google purchasing Moto.

Google the Ad company - This is their core business and drives just about everything, search, gMail, apps, and Android. The product is the public and the currency is data. The more data they collect, the better the ad placement the larger the revenue.

Google the laboratory - This is where all the headline making stuff gets done. Autonomous cars, genetic analysis, robots, contact lenses with biometric sensors, etc.

The question was which Google purchases Motorola, and now we know for sure. This is very similar to the purchase of NEST, the home automation company. Is NEST is a platform for gathering data, or is the company a long term experiment that will drive the company after the ad market becomes less of a money maker.

[John Fischer]

Tomi, can you elaborate the same way you did about apple disastrous results about samsumg 18% drop ? Has it peaked or the marketshare / war price is doing its part, meaning samsung will continue to grow in marketshare but its profits will continue to decline.

What are your predictions ?

[R]

Google's loss on Motorola is more complicated than a simple $12 billion - $2.9 billion = $9 billion loss. http://www.theregister.co.uk/2014/01/30/google_motorola_mobility_lenovo_sale/

[Huber]

@John Fischer:

According to IDC, Samsung's smartphone market share dropped from 31.3% in 2012 to 30.3% in 2013. Sales rose from 219.7 Million smartphones in 2012 to 313.9 Millions in 2013, though.

The Q4 market share dropped from 29.1% in 2012 to 28.8% in 2013 (smartphones sales Q4 2012 66.7 Million, 2013 80 Million.

So I don't know where the 18% drop should be - for me it seems Samsung roughly grew with the market, which is way better than what Apple did.

Source: http://www.idc.com/getdoc.jsp?containerId=prUS24645514

[So Vatar]

Tomi,
Looking at Microsoft I think there is a chance that they will back away from purchasing Nokia's handset business in spite of the contract and the big penalties they'd have to pay.

Why? The decision about the next MS CEO is dragged out and certain high profile CEO contenders backed out. I think the delay in naming the new CEO is an board-internal struggle about MS' future strategy. A group around Ballmer thinks that they need to stay in the mobile business distributing WP, and in order to do that they need the only entity selling WP handsets in relevant numbers: Nokia handset.

I think there is another group that sees any investment into WP as lost anyway, Android and Apple won the day. They see Windows and Office as cash cows to be milked as long as it can be. But Microsoft's real future is somewhere else: Business software, and cloud based business services.

If so, why then invest now over $7B in purchasing a failing handset business and throwing more good money after bad? Why not just eat the penalties and let the new CEO start with a clean slate?

I hope we will see soon which direction Microsoft chooses. The name of the new CEO will give a good indication.

What would it mean for Nokia if they cannot unload their handset business to MS? I fear this will bring the whole company down. In the handset business they do not have market share left, the business is losing lots of money, and if MS backs out their WP portfolio would be osborned (again!). Also after years of mis-management and not offering what customers want, I fear their brand is damaged beyond repair. Nokia bankruptcy?

Not a rosy scenario for Nokia at all.

[Winter]

@So Vatar
There are strong rumors that Nokia will release an Android phone very soon.

[So Vatar]

@Winter:
I read that too. I can see this only as proactive move in case the MS purchase goes sour. I cannot see why this would be in Microsoft's interest.

In my opinion it would be too little too late for Nokia. Times have changed, they are not the king of the hill anymore. Any economics of scale got lost over the last few years. Maybe they can compete in the Motorola league, meaning they cannot compete at all. Samsung is totally out of reach, Lenovo turns itself into a formidable challenger in the Android group, they play to their strengths in a pretty strategic and methodical way. The other Chinese and Korean competitors seem much stronger than Nokia. What is left that is good about Nokia's handset business? Yes, a few years ago they had resources, cash, brand recognition, innovation. They botched it. Nowadays the board is essentially still comprised of the same figures that drove Nokia down. And Flop is still flipping papers somewhere inside Nokia and collecting pay checks.

My trusty N9 gets old on the tooth too. I just bought a Nexus 5 for my son and a Nexus 7 tablet for myself. I am still no Android fan, but my next phone will be an Android. And it won't be Nokia, sorry to say.

[So Vatar]

MS is said to name Satya Nadella as next CEO. He is MS' enterprise and cloud chief.

I place a bet: This is not good for Nokia's intend to get rid of the handset business!

[eduardo m]

Tomi, you say that Nokia shareholders would have been better of with open bidding to buy all or part of the company. I am wondering if the original contract with Microsoft included a provision that MS would have exclusive rights to purchase Nokia.

[AndThisWillBeToo]

@eduardo
> I am wondering if the original contract with Microsoft included a provision that MS would have exclusive rights to purchase Nokia.

Considering the terms under which Elop was going to get the $$$ I would be more surprised if there wasn't such safety clause.

[R]

Nokia really needs somebody to take their handset business. They need the cash. Since before Elop, they've been violating some Indian tax law, and now it's coming back to bite them. They're going to have to pay huge penalties, and they can't do that while their bonds are junk and their handsets are losing money hand over fist.

Motorola has been losing money, but at least it has no major liabilities.

I wouldn't be surprised if Lenovo does a good job with Motorola. I wouldn't be surprised if it crashes and burns. I don't see anything to prejudice me in either direction.

[zlutor]

@LeeBase: "Yes, it never made sense for Google to buy Motorola. They sunk $12.5 billion, then suffered hundreds of millions more in losses from the ongoing business. All for what?

Google
- got ~3 billion $ in cash (inside Moto)
- sold some bussines for ~3 billion $ earlier
- sold Moto foctories to Foxcon (~tens of millions $)
- sold the rest to Lenove (~3 billion $)

Plus it keeps the patents that, even though FRANDed, in fact prevented Android from promised 'thermonuclear (patent) war'.

"For patents that were FRAND encumbered? Google has not won a single battle using Motorola patents." - but did not loose any either. And that was they needed, cost did not matter...

[John Fischer]

@ Huber

Oh, sorry, i forgot to write 18% profit drop, its was all over the news.

I was refering to that, a fatal combination when market share does not grow to compensate that.

IBM sold the PC division to lenovo when margins were so thing that there was no sense in keeping it juts to have market share.

If margins peaked for Samsumg and the handset unit only generates returns based on units sold then there is a dangerous trend starting to happen.

Tomi, any insights ?

This was reported a xouple of weeks ago, no one cares so much ?

[Baron--9-5]

"So Lenovo now will have about 6% market share and becomes rather clearly number 3 in the smartphone race."

Clearly #3? Really?

That is far from clear. I think there is a fair chance that Lenovo, chokes on swallowing Moto and IBM Intel server lines at the same time, and starts posting losses. By the time this transaction closes - should be late this year at the earliest, the market would have changed substantially.

So I'd say the best we can say right now, is that Lenovo will still be stuck in the middle tier.

The biggest loser, continues to be Google, who, with its Android mis-adventure, had to spend a net $7.5B to hold on to a subset of the Moto patents. As an investor, I'd much rather have that money in my pocket. I'm still giving Google the benefit of the doubt, but at some point, the Google boys need to tell us what they generated with that $7.5B (plus another $7.5B invested in Android directly). Else, they should be run out of town. Lets get Carl Icahn to get a proxy fight going there.

[Baron--9-5]

@Leebase - don't ask me how I know - but, Google did not put ANY money into Moto. Moto truly operated as an independent, wholly owned subsidiary. They were give a chance with Moto X , Moto G, etc to prove themselves. They failed. Simple as that.

In the end they spent $7.5-$8.5B for a subset of the Moto patents. If you ask me, they overpaid by a factor of 4 or more.

And there was never any loud cries from Samsung on the purchase. Google, if anything, went out of its way not to give Moto any Android competitive advantage vis-a-vis Samsung. And Samsung knows that.

[AtTheBottomOfTheHilton]

I can't really see how Lenovo is going to become number three, not even close. In Europe Lenovo sells almost nothing compared to the other established brands. I can't say how they are doing in Asia but there is fierce competition from other Asian brands there. Lenovo hasn't really any obvious advantage compared to other brands like premium or cost effective ones and I don't think owning Motorola is going to change anything for them.

[Henrik Nergård]

I guess in the long term Lenovo can be in the top three manufactors with the Motorola deal.

But I am not so sure the deal is bad for Nokia/Microsoft, I dont think it matter so much.
I am more optimistic for them.

My reasons:

1. The app market have increased for Windows Phone 8. Over 200.000 for some time ago and still growing fast.
The popular apps who was missing are in place now, like Instagram etc..For the average user the apps are most important.
Not if the handset itself are Android, iOS or Windows Phone.

2. All current WP8 devices will get Windows Phone 8.1, so the problem when they went to Windows Phone 7 to Windows Phone 8 will not happend this time.
Windows Phone 8.1 is not far away. Probably some time in april 2014.

2. Marketshare for Windows Phone 8 (acording to Kantar Worldpanel) have surpass 10% for UK, Germany, France, Italy and so on.

In short its enough for Microsoft to compete in the smartphone market.

[WonTheLottery]

There's no doubt Google selling Moto and sharing their patents with Samsung is a clear case of them sucking up to try and keep Samsung onside but I think anyone that believes that means Tizen is dead is barking up the wrong tree. Samsung want control of their complete 'ecosystem' and they'll never have that with Android, this is just currently convenient for Samsung because Tizen + S-Cloud are not yet ready for prime time.

Don't forget Samsung don't just make smartphones they also make TVs, cameras, fridges, freezers, washing machines, ovens, microwaves, ... and they want their huge breadth of products to network with each other. Tizen is also headed for quality cars like Jaguar, Land Rover and Toyota. Samsung's 'ecosystem' will be much more than email, maps and an app store full of gazillion data harvesting cr4pware apps.

This blog might just be about smartphones but that isn't the limit of Samsung's universe.

Irrespective of Lenovo's purchase of Moto I still expect Huawei will be a clear number three in 2014. The Ascend Y300 is by far the best budget device currently on the market and devices like the P6 demonstrate they have ambitions at the high end too. Anybody that's had a Huawei device knows, despite the affordable price tag, they don't feel cheap in the hand. These are very nice devices.

This is another reason for Samsung to create their own universe, if they stay with Android + Google in the not to distant future they're going to be in a head to head price war with Huawei because there isn't a quality differential.