Google has agreed to buy Motorola Mobility for USD 12.5 billion, including cash of around USD 3 billion. The price implies a premium of 63 percent, likely meant to make it a ‘knock-out’ bid shareholders would find difficult to refuse. Management has already backed the offer, leaving it up to the shareholders and regulators to complete the deal. The initial market reaction (Google shares little changed, Motorola up 60%) suggests that Google shareholders are fairly neutral and Motorola investors don’t expect a higher offer.
Motorola Mobility includes not only the handset division of the old Motorola but also 17,000 patents (plus 7,500 applications pending) and the set-top box activities. The enterprise and networking activities were split off earlier this year into Motorola Solutions, and Motorola Networks was sold to Nokia Siemens Networks. Motorola Mobility is expected to remain an independent subsidiary and currently counts 19,000 employees. The company has been active in the Android community since the start of the Open Handset Alliance in 2007 (currently 84 members). It’s the maker of popular handsets such as the Razr and Atrix and the Xoom tablet, plus accessories such as chargers and headsets.
With the takeover Google appears to be following Apple and RIM with the combination of software and hardware. The players on the global handset market are now:
- Apple;
- Google with Motorola Mobility and Android;
- The Android partners (which also use Windows Phone): Samsung, HTC, LG, Sony Ericsson, ZTE, etc. This segment includes 39 manufacturers, 231 operators, 550,000 handsets activated per day and an installed base of 150 million devices.
- Nokia with Microsoft; speculation of a takeover of Nokia by Microsoft is now growing, with Nokia’s shares jumping initially 10 percent after the Google/Motorola announcement;
- Other players with their own OS: RIM, HP, Samsung, Sony Ericsson.
For Google, which had USD 39 billion in cash at the end of June, the acquisition can be justified for a number of reasons:
Supercharge Android. The Android operating system should be strengthened, but will also remain open. With Android under fire from a number of patent claims from the likes of Microsoft and Apple, Motorola’s patent portfolio will offer stronger protection, especially after Google missed out in the auction for Nortel’s patents. At the same time Motorola, a partner in the Open Handset Alliance since day one, remains a licensee. This is an apparent effort to ensure that Mototola does not get a step ahead of the other Android device makers, such as Samsung and HTC. A possible disadvantage is that Android gets weighed down with patents, resulting in partners paying fees. Whatever the case, Google itself published the reactions of a number of important hardware partners (Samsung, Sony Ericsson, HTC, LG), which were all positive about the acquisition. All noted Google’s commitment to Android.
The patent portefolio. Apple, Microsoft, RIM, Sony, Ericsson and EMC won the bidding for the Nortel portfolio (6,000 patents) for USD 4.5 billion and now want to claim a fee of USD 15 per Android handset. Acquiring patents is a defensive move for Google; the market (Apple, Nokia, Oracle) is more or less forcing Google to do this. The US Department of Justice is also getting involved, as it fears this movement may stifle innovation. Google is not standing still and is also reportedly interested in the patents of companies such as InterDigitaal, which has 8,000 patents and another 10,000 applications. It also recently bought a portfolio from IBM (1,000 patents) for USD 1 billion and has acquired various patented technology through previous takeovers, such as DRM-maker Widevine.
‘Time-to-market’. Motorola can help Google brings its innovations to the market quicker – not only for the smartphone market, but also in smart TV. Google has been successful with Android, but its own devices (Nexus One from HTC, Nexus S from Samsung) could not be delivered independently to consumers. A player like Motorola brings its own ecosystem (relationships with dealers and operators, etc.) to help improve the process. This is also true for smart TV, where Google is active with its software product Google TV. The current hardware partners, Sony and Logitech, have yet to make a breakthrough with the product. Google TV 2.0 is underway, and with Motorola, a top player in the STB market alongside Cisco, its chances are improved in the new market, where Apple is also active with its own Apple TV.
Integration. It’s not only about patents but also software in the broader sense. With Motorola Google can ensure an optimum integration of its software (not only Android) in Motorola’s devices. This works not only with smartphones, but also for (next-generation) set-top boxes, in which Google TV can be integrated.
We can sum up Google’s motivation as follows:
- Of all handset makers, Motorola is the only one using exclusively Android. In this respect, Motorola is the best fit for Google. Furthermore, most of the other major players were involved in the Nortel patents acquisition.
- Defensive: Google is making a major play on the patents market.
- Offensive: by taking control of the value chain, Google can integrate its services (Android and much more) quicker and better in the handware and bring products faster to market.
Google could also decide to divest some of Motorola Mobility’s activities. Examples which come to mind include Wimax patents and accessories (eg headsets).
There are also negative points to think of:
- Google is diversifying and entering the hardware market, namely consumer electronics, with its own separate dynamic. The question remains whether a takeover is the right strategy. Google is from the start not a CE manufacturer.
- Google becomes a direct competitor of other Android partners, such as Samsung and HTC. They may say that they see the takeover as positive, but whatever the case they will be competing directly with Google/Motorola. This will likely mean that in addition to Android, they will focus more on Windows Phone 7 from Microsoft, in order to not become completely dependent on Android. In theory, a structural separation of OS and hardware is better for the competitive position of the other Android partners.
Conclusion: Google is integrating vertically in order to gain more control over the launch of consumer electronics (especially smartphones and next-generation set-top boxes) and compete better against Apple. It’s not just about Android and patents. Positive is that Google’s chances in the markets for both smartphones and smart TV are improving grealty, even if many operators fear the company as an over-the-top player. The acquisition of patents can be considered a defensive play to protect Android. However the acquisition also carries serious risks, including the addition of a new activity where Google is inexperienced (CE), the acquisition of a struggling company like Motorola and the introduction of competition with partners.
