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What will Google do with Motorola Mobility?
|26 августа 2011|
Google's proposed $12.5 billion acquisition of Motorola Mobility is ostensibly for the hoard of 17,000 issued patents and a further 7,500 pending, so why keep a handset manufacturer that is merely one among 40 Android licensees?Motorola has done a great job in turning itself around with its focus on Android-based smartphones, but it has only recently started making profits after several years of losses. Without special treatment by Google, it is unlikely to recover much more than its cost of capital due to brutal competition among Android licensees.
In my column here last month, I described Google's strategic challenges with Android, including maintaining the attention of developers, platform fragmentation and small patent holdings that have left licensees vulnerable to infringement suits. Whereas the acquisition might deter or help in future litigation against other Android licensees including Samsung and HTC, these patents have not prevented Apple and Microsoft from suing Motorola itself. That litigation is ongoing and there is no reason to presume Motorola will prevail.
Nevertheless, major Android licensees appear to favour the acquisition, and share prices for Samsung and HTC jumped following its announcement. Competitive harm to them that might ensue if Google shows favouritism to the captive manufacturing company is somewhat mitigated by the ability of Android licensees to walk, or at least to hedge their bets with an alternative software platform such as Microsoft's Windows Phone.
What benefit is the handset business to Google? The acquisition also includes a manufacturing company that will add 19,000 to Google's workforce of 29,000. Whereas Android has achieved a rapidly growing per cent of the smartphone market--Gartner said Android captured 43.4 per cent in the second quarter--Motorola'ss share is only 5 per cent in smartphones and 3 per cent in handsets globally. It is too far behind to make meaningful market share impact with Google's ambitions for Android.
The U.S. is the major "theatre" for competing technology development, consumer adoption and patent litigation across the entire ecosystem in smartphones. Silicon Valley is the epicentre of innovation, and wealthy U.S. consumers acquire, and most rapidly replace, highly-subsidised devices. Most smartphone patent litigation is also stateside. However, the large device markets in Europe and elsewhere are as important financially long term.
With retrenchment, Motorola's rebound is mostly a U.S. phenomenon. Whereas Motorola has mitigated severe volume and unit market share declines with significant smartphone sales in North America, the company has an insignificant position in Europe. Motorola's average selling prices have doubled within a year or so, with success with its Droid phones on Verizon Wireless' CDMA network as unit sales volumes have plunged. But with around two-thirds of sales in North America and low-end sales volumes in Asia, Europe represents just a few percent of sales and its market share is less than 1 percent. Motorola's weak European showing (i.e., despite market presence of Atrix and Defy smartphones) is overshadowed both in terms of volume and revenue by other Android licensees.
Outside of North America in particular, Android has enjoyed enormous success, largely at the expense of Symbian, from the efforts of various Android licensees other than Motorola.
Licensor and licensee
Whereas Google states that Motorola will be independent, Google seems likely to upset other Android licensees by discriminating in favour of Motorola. The temptation to achieve the coherence that Apple enjoys with its vertically-integrated business might be just too strong. However, that strategy has major conflicts with what it achieves with other licensees. It is inconceivable Google would jeopardise its large and sharply increasing Android market share from Samsung, HTC, LG, Sony Ericsson and many others.
Apple is the gold standard in smartphone with its vertically-integrated approach incorporating excellent hardware, software and a whole lot more with its Apps Strore, iTunes and strong brand. In recent years, this strategy has also served it well in computers and music players. Apple is extremely profitable, with global market shares in the mid-to-high teens for personal computers and in smartphones. It is unlikely these percentages will increase much so long as Apple pursues its vertically-integrated business model. That works just fine for Apple, but search company Google needs much broader market coverage with Android so it can exploit its main business lines to the fullest.
The alternative, horizontal approach, of licensing many hardware manufacturers, as pursued by Microsoft in PCs, continues to command around 85 percent market share in desktops and laptops. Google would not want vertical integration with Motorola to prevent Android also from achieving very large market shares. However, even the possibility of favouritism to Motorola will prompt Android licensees to pursue alternatives such as Windows Phone.
Will Google try to have its cake and eat it too with both vertical and horizontal business models? Google's CEO Larry Page introduced the acquisition with a rhetorical and yet vague statement: "Together, we will create amazing user experiences that supercharge the entire Android Ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."
The implication seems to be that not only will Motorola be contributing its patent protection, but also innovations, beyond open source contributions, to the greater good of all Android licensees. This is inconsistent with Page's statements in a conference call to discuss the announcement in which he vowed it would remain a "separate business."
Google chooses one model from one handset manufacturer, each year, as its lead device and flagship phone. That company's designers team up with Google engineers to integrate the latest hardware and Android innovations. Android's Andy Rubin said that Google's new division would have to compete for this position on an equal basis with other licensees. This is not credible with ownership of Motorola
There is significant speculation among analysts that the hardware division, also including cable set-top boxes, will ultimately be sold on with the patents stripped out and retained by Google. "We're pretty sure they will sell the [MMI] hardware business on," said Richard Windsor, a technology specialist at Nomura, told the Financial Times.
An alternative would be for Motorola, or part of it, to create reference designs including chipset integration with software for radio modems, application and graphics processors that could be implemented by many Android handset manufacturers. That business model has succeeded in much simpler 2G phones with MediaTek serving hundreds of "white box" manufacturers. Open source software is notoriously difficult and costly to turn into finished products, in comparison to proprietary packaged software solutions. This business model could help restrain Android's problematic fragmentation and it would save or reduce the need for Google's Android team to repeat hardware and firmware integration work with multiple licensees. It would also dramatically reduce the market entry barriers for smartphone manufacturers and help Android expand the smartphone market as well as increase its market share. Market expansion potential is enormous in connecting the masses with a personal Internet connection, including billions for the first time in developing nations.
Other Android licensees will enjoy Google's acquisition with the promise of patent protection while hedging their bets. Whereas Apple has an outstandingly successful business model, Google is in far too different a strategic position to emulate that. Its search advertising-driven model needs the broad market coverage that only licensing many manufacturers can provide. Notwithstanding Apple's stellar profit margins, it commands less than 20 percent of the global smartphone market, whereas Android is rising rapidly toward 50 percent.
Google's core business with advertising demands large market shares on devices, even at low profit margins on each handset, over the more modest market shares delivering high margins at Apple. Favouritism could improve Motorola's market position, but would harm Android's market overall share by encouraging manufacturers to defect to other platforms. An independent Motorola makes no sense because it adds very little to Google while still being a perceived threat to other Android licensees. Repurposing Motorola to develop high-end reference designs for smartphones could reduce fragmentation, limit the integration design workload for the Android team and expand market reach, particularly in emerging markets, through more manufacturers selling Android phones.
Google is expecting to get its hands on Motorola's patents; but perhaps it has not yet figured out what it will do with the rest of the business?
Keith Mallinson, leading industry expert, analyst and consultant.