The consensus among Google bulls seems to be that all Google is really buying in the Motorola deal is a bunch of patents.Google has no intention of getting into the crappy, low-margin, commodity hardware business, these folks argue. Google just scored a huge bag of patents for less than the going rate, and they’ll quickly ditch all the Motorola manufacturing and distribution operations that came with it.
This is a smart plan, the bulls observe, because then Google won’t have to worry about:
- Massive channel conflict with other Android partners like HTC and Samsung, who Google is now competing directly with
- The enormous challenge of fixing Motorola’s global hardware business, which is currently losing money on an operating basis
- Integrating an acquisition so huge that it will increase Google’s headcount by more than 60%
- Managing a massive global business Google knows nothing about
- Competing in a hyper-competitive, low-margin hardware industry in which Google has no real edge or expertise.
In short, the bulls think Google will quickly dump Motorola’s operating business as soon as possible, thus preserving its focus, culture, profit margins, and core competency.
Don’t be so sure.
There remains a distinct possibility that Google is buying Motorola not just to “defend Android” from patent attacks that no one even thought about 6 months ago (already a huge negative), but because Google wants to compete directly with Apple in the integrated hardware/software business.
Apple has commandeered a major share of the smartphone market–and the vast majority of the industry’s profits–by selling integrated hardware/software devices. Meanwhile, Google’s software platform, Android, has been fragmented and customised by many hardware providers, none of whom have managed to produce a product as beloved as the iPhone, iPad, or even Apple TV.
Larry Page and others at Google may well believe that, with themselves in charge, and Motorola’s huge manufacturing and design capabilities under their control, they can produce smartphones, tablets, and set-top boxes that will finally prove to be real competition for Apple’s gadgets.
One of the attractions of that strategy could certainly be Apple’s vast profits, which are far greater than the rest of the gadget industry’s combined. (Perhaps Larry thinks he can turn the money-losing Motorola business around).
But Google need not be in search of profits: Google may well plan to run its hardware business at break-even, just to fuel its core search engine and make sure that Apple can’t come between itself and its search users.
In support of this theory–that Google actually plans to become a hardware company–Om Malik at GigaOm just reported the following nuggets:
- Microsoft wanted to buy Motorola’s patents, too, but had no interest in acquiring the hardware business. One of the attractions of Google’s offer was reportedly that it wanted both.
- Google’s Android boss, Andy Rubin, was only brought into the talks with Motorola recently. For the past 5 weeks, the negotiations have been between Larry Page and Motorola’s CEO Sanjay Jha. If Google were only interested in patents to protect Android, wouldn’t they have wanted Rubin to be more intimately involved? (UPDATE: As an astute reader points out, this could presumably support the opposite conclusion, too–that Rubin didn’t need to be involved because Google has no intention of keeping the business.)
Based on these nuggets as well as Google’s public statements about Motorola so far, we think there’s a distinct possibility that Google is planning to keep Motorola’s manufacturing business and try to compete directly against Apple.
We also think this will be vastly more challenging to do than most observers think, especially given the size of the deal and the fact that Google knows nothing about designing, making, and selling hardware. We think it will alienate the rest of Google’s Android partners, thus putting its leading market-share position at risk.
Overall, we continue to think that, regardless of the imputed price Google is paying for Motorola’s patents, this deal could turn out to be a disaster.