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

[Nhick]

Interesting.. can't wait to see who's going to be on top. Let's get it on.

[RottenApple]

@Leebase:

"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."

Correct with one caveat: What WP is completely missing are specialty apps. Like a mobile banking app from your local bank. Such stuff doesn't exist and this will continue to hurt them for a long time.

[John Alatalo]

I am located in Sweden and I just check the local bank app for Windows Phone 8. Avanza bank, Handelsbanken, Nordea, Skandia, Danske Bank and Länsförsäkringar got a WP8 app avaible:

http://www.windowsphone.com/sv-se/store/search?q=bank

The Swedbank is the only one that are missing here, but you can use their mobile website. For 1 year ago it was almost nothing for Windows Phone in banking. I dont know how it is in other markets but I suppose they catch up there in time also.

Anyway I dont see Microsoft leaving the mobil space with smartphones and tablets when the future is there. They will not go back to PC.s only.

[AndThisWillBeToo]

Posted this to wrong thread:
Jolla has updated Sailfish OS. New release "Naamankajärvi" brings in exciting new features such as web browser that also works when phone is in landscape orientation and a security lock that does turn itself off when you connect USB cable to the phone.

https://lists.sailfishos.org/pipermail/devel/2014-January/003225.html

[Earendil Star]

On WP (P)OS. In projecting WP trends, please remember that during the Christmas quarter (which should be the strongest) Nokia (practically the only WP vendor currently) saw decreasing UNIT sales. Not decreasing or stable MARKET share (like Samsung). Now, WP sells thanks to the huge incentives NokiaMS is paying to operators and retailers. If despite being sold at a loss through dumping, WP is losing market share, I do not think things are looking all that well for the "ecosystem". Remember: Nokias were selling only thanks to the Nokia brand. Now that Nokia (the real one) is out of the game, MS will find it much harder to sell its phones.

On the iPhone. I really cannot understand those continuing to say that the iOS products (iPhone, iPad) are bad. They are very good and quality products. Apple (in contrast to MS) produces top quality phones, pads and software. The ecosystem is closed and has its drawbacks, but that's another story. The real issue here, is whether the business model that worked in the past (i.e. thrive thanks to subsidies paid by carriers, especially in the US) is still viable.
Signs are there that this business model is starting to show its limits. And the new tide may start precisely in the US. If this is confirmed, the profitability of the model will be strongly endangered. This is the real threat for Apple.

Will Apple collapse and die? Not for sure, at least as long as no former MS Mr Nobody in mobile as Elop Flop takes the helm at the company. Yet, the fact that Steve Jobs is no longer there to assist with his genius and vision is no minor disatvantage, even if people continue to disregard it. Having people portrayed as geniuses (as Jony Ive) without being it does not help Apple in any way.

The risk is there that Apple might once again be reduced to a niche company, as happened in the nineties, as was correctly pointed out by foo.

Finally, on Google and the profitability of its Motorola acquisition, well, as pointed out before it is much better than it looks. Actually, it may even end up with free patents as a profit. Meanwhile, Google is proceeding with its innovation and in the strengthening of its ecosystem.

So, my take, is that the bloodbath is far from over. Stay tuned.

[AtTheBottomOfTheHilton]

@John Alatalo

There is an app for my bank on my phone but I don't use it because the browser on my phone is good enough to handle the full desktop version. The screen on many phones are today 720 or even 1080 HD resolution so the special app version is quickly becoming obsolete. Also I don't recognize the interface of my bank on the app version so I rather use the full internet site version. It's like WAP which was invented because phones has monochrome low res LCD displays. That changed quickly and nobody uses WAP today. The same will happen with the app craze where you need an app just to display an internet page. If a mobile OS has 500000 apps really doesn't say much to me as most of them are just a browser substitute. It's better to look at a selection of known quality apps if they are available for a particular OS to judge its support.

My point is that the app craze is right now exaggerated but will become less important. Just like Chrome OS is centered around the browser and the phones are heading the same way.

[Baron--9-5]

"Signs are there that this business model is starting to show its limits. And the new tide may start precisely in the US. If this is confirmed, the profitability of the model will be strongly endangered. This is the real threat for Apple."

It is amazing!!! Some posters here - lead by Tomi - just post their wishful thinking for validation. For years, and years, and years, it is the same thing. Apple only sells in the US. Apple is doomed because subsidies will end. Apple is doomed because they don't target the enterprise. Apple is doomed because they don't have physical keyboards, or NFC, or removable SD, or whatever.

When in reality....

The business model is healthier than ever. Apple, each quarter is less and less dependent on the US market. More and more operators and caving in to the subsidy model - including DoCoMo, China Mobile, Reliance, Magafon - in Japan, China, India, Russia. We saw the iTunes/AppStore business generate nearly as much net revenues (excluding payment to content providers) as Mac gross revenues.

There is ZERO indication - ZERO - of any problems in the business model.

Apple has one major popular area to cover in smartphones - the 5" class screen size - and it has about 200 mobile operators to conquer.

Simple as that. Apple is not deviating from its plan. Methodical conquering of operators to distribute/subsidize the iPhone, and methodical, feature/capability introduction. We spent 4 years in the 3.5" iPhone era. Now we are in the combined 3.5" and 4.0" iPhone era. By year end we will be in the 4.0" and 4.8" (or so) era.

And then we will see the natural Samsung vs Apple market share at the top end. 2,272 x 1,280 resolution will require 64-bit to manipulate though. Ah, wait. Apple already has that :)

[Henrik Nergård]

@Baron--9-5

About Apple/iPhone. They have a good business model of course, but Tomi write about their marketshare. It will go down in time.
For a reason they have no budget model like Moto G, Nokia Lumia 520 and so on.

In markets where people buy the smartphone and the real price is not "hidden" in a long term contract this things matters.
Even the iPhone 5C is to expensive there.

[Earendil Star]

"There is ZERO indication - ZERO - of any problems in the business model."

Ehm, actually indications abound. And by the way, no business model is always failproof. Especially in mobile, companies must constantly adapt to succeed.

Anyway, there's no reason to freak out. We're just trying to reason on possible future outcomes and scenarios. No crystal ball here. So stop the hysteria and try coming out with statements backed by facts, not just propaganda, as usual.

[RottenApple]

"There is ZERO indication - ZERO - of any problems in the business model."

This way of thinking is the first step to failure. You can bet that nobody at Apple dares to be this arrogant.

[AndThisWillBeToo]

Most sold phone for DNA Finland in January was iPhone 5S. Jolla dropped off from the list.
http://www.arvopaperi.fi/uutisarkisto/huippuiphone+dnan+myydyin+puhelin+tammikuussa+jolla+tippui+listalta/a964475

[John Fischer]

It is amazing!!! Some posters here - lead by Tomi - just post their wishful thinking for validation. Baron-9

I am wondering if there is no objectivity in this blog anylonger, look, apple reported and hours later Tomi was on fire demolishing a company that grew in units sold in every segment

Weeks later not a coment about Samsumg peaking or collapsing profitability, related directly marketshare growth in cheap phones and loss to apple in high end

Samsumg mobile unit clearly is becoming the new Compaq ( remember them ? ) , i worked for one of the big 3 distributors back them, and Compaq obsession with market share led them to sell as many units as possible and Microsoft was so happy...and in the end...IBM, Compac, HP...etc are history with huge marketshare...

Samsumg = Compaq
Android = Microsoft

The absurdity lies in the fact that microsoft was king with around a billion PCs outhere but apple will collapse approaching that number, i rather have 700 million clients that pay $$$ than 2 billion that buy prepaid cards just to sms or call using 99$ phones.

[RottenApple]

Ugh...

Some people just can't read. And it's clearly the Apple Fanbois.

So, please tell me, where did anyone say that Apple is on the road to trouble?

Fact is : They DID perform below expectations. Yes, they grew a bit, but they missed the mark quite strongly.
Remember, back in 2010 Nokia also grew, they were also reporting record sales, so all was great, right? Fast forward only 3 months and all of that went poof.

So, one conclusion here has to be: If the entire industry - including Nokia, Samsung and Apple is performing below expectations, I'd say it's a clear warning sign for potential trouble ahead. Apple will certainly be less affected by such development but they WILL be affected in some way. They can't sell their stuff forever at such overpriced levels if the high end market slowly dries out. And current numbers suggest it's starting to happen.

[Huber]

@ John Fischer: >> Weeks later not a coment about Samsumg peaking or collapsing profitability, related directly marketshare growth in cheap phones and loss to apple in high end

This is not true. Directly on the front page, you can find this statement from Tomi:

"Oh and Samsung is doing its smartphone sales very profitably - don't be fooled by the one-time cost item now in Q4 that was the surprise bonuses the CEO paid to the handset folks for achieving Samsung's dream of becoming the world's biggest handset maker. Without that one-time bonus payment the Samsung quarter was totally on par with its high profit smartphone business as per usual."

And of course cheaper smartphones gain market share - this is the current TREND in the market. A Huawei phone for €120 without contract can almost compete with a high-end phone from 2011 like the SGS2. Go figure.

Regarding Apple, focusing on profit share is dangerous, as history shows. Apple will not necessarily go bankrupt, but the strategy can be dangerous. As market share seems to decrease, we'll see what will happen. Note that Q4 usually is Apple's strongest quarter.

[Simon]

@AtTheBottomOfTheHilton:
"There is an app for my bank on my phone but I don't use it because the browser on my phone is good enough to handle the full desktop version."

You can take pictures of checks (cheques) with that desktop website running on your phone and deposit them without going near a bank or ATM? Because that's what people in the USA have now with their banking apps.

[RottenApple]

@Simon:

"You can take pictures of checks (cheques) with that desktop website running on your phone and deposit them without going near a bank or ATM? Because that's what people in the USA have now with their banking apps. "

Actually, no. But that's because Europeans mostly don't use such ancient means of payment like cheques anymore. They are mostly extinct here so we do not need such weird use cases. And even if we did I'd suspect that some laws would prohibit it.

@Huber:

Thanks for this quote. I completely missed it in the article:

"don't be fooled by the one-time cost item now in Q4 that was the surprise bonuses the CEO paid to the handset folks for achieving Samsung's dream of becoming the world's biggest handset maker."

Interesting how this gets conveniently left out when Samsung is being discussed in the press. Let's talk about manipulation again...

[Baron--9-5]

Why is the iPad the #1 Tablet in unit share, when it is the most expensive? As much as 10x the price of some Android tablets.

Why is the iPod the #1 music player, when it is the most expensive? As much as 100x (that is right) 100 times the price of some mp3 players (which are disposable.

Why is the Mac gaining unit market share when it is by far the most expensive? The cheapest "non-integrated-with screen" Mac is $3,000.00 in the US. That is 10x the cheapest well equipped PC tower.

Why is iTunes the #1 music store, when it charges more (as much as 2x)?

There is a perceived value premium that end-users are willing to pay. And for all the products above, only the iPhone has ANY meaningful impact from subsidies.

Yes, the Tomi huggers, keep on harping about that the iPhone only supports high prices because of subsidies.

Well, how come iPad, iPod, Mac, iTunes, support high prices with no subsidies.

The answer is that there is a lot more than subsidies at play. Starts with the shopping experience at an Apple retail store or a dedicated area (e.g. BestBuy, AT&T) inside a store and ends with the comprehensive ecosystem integration (iMessage and FaceTime and iCloud to iPads and iPods and Macs, etc).

The "if it were not for the subsidy" line is used over and over here. Yet it ignores the price premium that exists on ALL Apple products that are not subsidized in anyway.

It is a totally bankrupt, idea. Pure wishful thinking. Tomi is trying to convince himself that Apple was inconsequential to the fall of Nokia and RIM. When it was the one-two Apple/Android punch that doomed both. Apple took away the profit margin and desirability/coolness factor, Android took away the volumes.

[Simon]

@RottenApple
"Actually, no. But that's because Europeans mostly don't use such ancient means of payment like cheques anymore"

But millions of Americans do rely on that capability. Many Americans do not ever send checks (cheques), but they still receive them. That's why banking apps are so important in the USA.

[Baron--9-5]

This is an absurd discussion.

On the subject of Web Site vs App customers have spoken loudly and clearly. They want a native app. Period.

Even the very best attempts (Facebook for instance) of having HTML/HTML5 pseudo apps failed, and mobile Facebook usage took off once they released the updated native apps.

[Baron--9-5]

DoCoMo is now a dumb pipe. Samsung is now a dumb screen.

The WSJ just reported that all carriers - DoCoMo, Orange, Telefonica, Sprint - that had signed up as Tizen members either abandoned the partnership or were on record saying they have NO PLANS to launch a Tizen device.

Bada (AKA Tomi's darling #1) = dead.

Tizen (AKA Tomi's darling #2) = stillborn

Apple is raking in $5B/quarter in net (after paying developers/content owners) iTunes/AppStore revenue.

Google may be raking in $1-$2B/quarter.

Microsoft maybe $250M/quarter (I haven't looked).

Samsung?

Zero.

Samsung the #1 dumb screen provider in the world. Congrats.