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Google buying Motorola: The 3 C's of convergence, competition & core business

Google’s announced acquisition of Motorola Mobility is the subject of many articles and analyses, and the true consequences may not be known for years.  This Grizzly Analytics update points out the following for your consideration:

  •       The reality of recent convergence in the mobile OS area will keep most Android phone makers with Android.
  •       Android’s spread is moving competition back into hardware, where Motorola will have little advantage over other Android phone makers.
  •       Google has a vested interest in separating Motorola Mobility from both its core Android business and its core Google business, and a history of maintaining separation.
  •       Google is likely motivated by Motorola’s patent portfolio.
  •       Google might be quietly interested in Motorola Mobility’s home devices business.

Mobile OS Convergence has resulted in three major mobile OS platforms, two of which (Android and Windows Phone) are available to the broad market of phone makers.  This will limit the options of companies such as Samsung, HTC, LG, Sony Ericsson and others, who rely on Android to sell phones without having to make and market their own OS and app ecosystem.  We believe that these companies will stay with Android in the short term.

In the long term, we do believe that alternative mobile OS platforms, such as Samsung’s Bada, HP’s WebOS and RIM’s Blackberry will continue to thrive and grow.  This is because many smartphone users (including most businesspeople) are more interested in practical capabilities more than games and other cutting-edge apps, and do not need the biggest and broadest app ecosystem.  That said, in the short term, the big Android phone makers are unlikely to leave Android.

Hardware competition:  One consequence of Android’s spread through the market is that competition between phone makers is over hardware, including capabilities and cost, and not in software.  Even if Motorola has some advantage in Google software, Samsung and HTC will still be producing strong and distinctive high-end hardware, Sony Ericsson will still have music and gaming advantages, and others will still be producing unique price-point Android phones.  Google’s acquisition of Motorola will not change the landscape of hardware competition.

Google’s interest in separation:  Google’s core business is advertising, and in the past they’ve been very careful to avoid favoring Android over other platforms too much.  Yes, many services come out first for Android, but most of them come out for iPhone at the same time, and some services come out for iPhone before Android (witness Google Catalog’s recent launch only on iPad).  Their ability to maintain broad markets for their services is likely to be more important than promoting Motorola Mobility phones.

Motorola’s patent portfolio:  Nortel’s portfolio of roughly 6000 patents was recently bought by Apple’s and Microsoft’s consortium for roughly $4.5 billion.  Google will acquire over 17,000 patents in its acquisition of Motorola, at a price of $12.5 billion.  This is virtually the same price per patent as the Nortel portfolio.  While “price per patent” is meaningless without evaluating the particular patents, and while we do not believe that Google would take on the obligations of running Motorola Mobility just for their patents, we think it’s notable that the price in fact might be justified by patents alone.

Motorola’s home devices business:  In the middle of Google’s announcement of their acquisition, they threw in the following line, which has not been related to by most articles on the acquisition:  Motorola is also a market leader in the home devices and video solutions business. “With the transition to Internet Protocol, we are excited to work together with Motorola and the industry to support our partners and cooperate with them to accelerate innovation in this space.”  Google has several options for how to use IP-protocol home devices and video solutions, including Google TV and including sharing video content among home devices.  Most likely is simply seeing any new IP protocol devices as new platforms for their advertising and services.  This may well be a “hidden value” in the acquisition that will pay off for Google in the longer term.

Bottom line:  It will probably take years to fully understand the consequences of Google’s acquisition of Motorola.  Only time will tell to what extent Google favors Motorola over other phone manufacturers, how much advantage this gives Motorola over other manufacturers, how much value Google gains from Motorola’s patent portfolio, and what new areas Google is able to enter by leveraging Motorola’s markets. Grizzly Analytics believes, however, that in the near term Google will maintain a near-level playing field among manufacturers of Android phones, continue to promote its advertising and services on all platforms, and leverage Motorola’s other devices business in their future business development.

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