Why Did Google Pay $12 B for Motorola Mobility which has Traded only at $7.7 B?

The sensational news of the day “Google acquired Motorola Mobility” makes one thing clear; the power between hardware and software manufacturers in this still relatively young market has shifted dramatically. Only recently has Nokia -once the leading mobile phone manufacturer in the world- announced that all their smart phones will run Windows7 while HP has announced to give up its PC and tablet/webOS business.

This entire shift of power has been caused by the upstart Apple. With the iPhone Steve Jobs has taken the software to the surface of the phone and its touch-sensitive screen. Google has taken up this idea with its own mobile OS and made it accessible to a wider market. With manufacturers like HTC and Samsung, Google found partners that can build attractive smartphones, some of which are significantly cheaper than Apple’s flagship device.

Motorola Mobility has switched entirely to Android. After they have built the Droid -one of the first really popular Android devices- the company put all their eggs in the Android basket. Motorola’s runs an Android version on its first tablet computer Xoom too.

Now the search engine giant acquired the manufacturer of the first commercially available mobile phone for $ 12.5 billion in cash. This came as a surprise to most. The shareholders have not foreseen this move for sure; as late as last Friday Motorola was valued at “only” $ 7.7 billion.

Why does Google want Motorola so badly?

I see three reasons:

1)      Control the entire digital distribution chain.

Google wants to be the better Apple in terms of business model. All IT consumer giants aspire to this strategy. No matter whether Google, Amazon, Microsoft, Apple or Sony (and possibly HP), all have the same wish list:

  • Access to individual users via hardware or software, preferably both.
  • An online shop for digital media content and games.
  • A separate digital payment system.
  • Comprehensive access to usage data for optimal advertising and marketing.
  • Preferably a search engine, of course! and
  • A social network, to map the structure of the customers and to refine marketing and advertising accordingly.

It’s all about controlling the entire digital distribution chain to serve the market for digital information and entertainment.

Now, Google completes this wish list through the acquisition of Motorola. With Android, Motorola, Google Books, Google Music Beta, Google TV/Google @ Home (and Motorola’s consumer expertise), YouTube and Android Market for online media libraries Google has all the key elements to control digital distribution. Google Checkout, Google +, Gmail and Google Search complete this offer proliferating their enormously extensive customer data and insights.

Competitors like Apple are missing the search engine, Microsoft has no hardware platform, and Amazon has so far only the Kindle (but that will change soon). All three lack a functioning social network.

Google has now occupied all the strategic positions to dominate the digital future sustainably.

2)      Patents.

Once the deal will be approved Google will have more than 17,000 mobile patents from Motorola Mobility; thousand more applications are still pending. With these patents, Google intends to defend itself against lawsuits from competitors.

Originally US patents were intended to protect the little guy who comes up with a brilliant invention in his garage against robber knights that won’t give the inventor his fair share. Now it seems to me that patents provide government sanctioned monopolies and market protection. Companies that owe IP use it to extort money from companies that make products or offer open SW.

A bitter dispute has broken out over the appearance and functionality of smartphones. Even basic design features like touch screens or hardware buttons can be patented despite the fact that these ideas are obvious to the skilled in the field. Numerous legal battles are fought because mobile devices look sometimes confusingly similar to each other.

For manufacturers of phones and accessories the escalating patent war is an enormous financial risk. For example, last year Apple has sued the Android company HTC, because their smartphones are too similar to the iPhone. In October Motorola took Apple to court for violating 18 patents with its iPhone. After years of dispute (six courts in four countries) Nokia and Apple have settled this year for an undisclosed sum to be paid from Apple to Nokia. Apple has recently banned Samsung from importing its tablet computer into the EU. Microsoft is said to earn $ 5 royalties for every smartphone sold by HTC. Early August Google accused the competition publicly of patent-bullying. Apple, Microsoft and Oracle have teamed up to buy 6,000 patents from bankrupt Nortel Networks. Google fears licensing fees of $ 15 per unit for Android producers. Just after the Nortel deal ($4.5 billion) Google acquired some 1000 patents from IBM.

With the Motorola acquisition the one-time search engine and advertising giant Google has not only acquired a hardware manufacturer but new ammunition for the patent war. Being a young and naive company focused on innovation instead of filing patents Google has found itself in the past on the short end of the patent stick. The Motorola Mobility acquisition gives Google a much bigger stick to hit its attackers.

3)      Enterprise Features.

Google has been behind in security and other features required by enterprise customers. Bare Android doesn’t support many frequently used VPN protocols while Motorola, Samsung, etc. have differentiated themselves by adding the most needed enterprise features on top of Google Android. Google will probably to the smart move and take this features to all Android licensees for free.

What is the snag?

What will Samsung, HTC, Sun and the other Android partners say?

In the past, Google has developed each new version of Android with a specific but changing hardware partner. For example, Android 3.0 (Honeycomb) with Motorola for Xoom. Before, HTC and Samsung had the first mover advantage of building certain devices in cooperation with Google. All other hardware vendors fell behind because the privileged hardware partner could offer the most current software update exclusively for several months. For example, Motorola Droid was the first phone with Android’s built-in street navigation – a not to be underestimated marketing advantage.

In the future this preferred hardware partner will be solely Motorola. The result will be cell phones the hardware of which is not constructed for the requirements of Google’s SW but hardware that is being developed jointly with the SW.

The upstart Apple has perfected this principle with the iPhone. It’s so sexy and successful because hardware and software development are in one hand.

Google claims that Motorola’s competitors won’t be hurt. I wonder how this complex balancing act will play out.

 

About Paul Hofmann

Paul Hofmann, Ph. D. Vice President Research, SAP Labs at Palo Alto Before joining SAP Research Paul worked for the SAP Corporate Venturing Group. Paul joined SAP 2001 as Director Global Strategic Supply Chain Management Initiative EMEA. Prior to joining SAP, he was Senior Plant Manager at BASF’s Global Catalysts Business Unit in Ludwigshafen, Germany. After joining BASF 1989 Paul headed the development of object-oriented production planning and scheduling software for BASF's plant; one of the first big object oriented software projects in German industry. Paul was Researcher and Assistant Professor at top German and US Universities, like Northwestern University in Evanston/Chicago, Illinois, USA and at Technical University in Munich, Germany. At Northwestern he did computer simulations to explain molecular beam reactions collaborating with Sir John Pople (Nobel Prize Laureate). Paul graduated with a Ph.D. in Physics from Darmstadt University of Technology, Germany, a MS in Chemistry and a BS in Biotechnology from University of Vienna, Austria. About Paul Hofmann
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