Motorola – Google’s Addition by Subtraction?

Google recently announced the sale of Motorola Mobility to Lenovo for $2.91 billion. It acquired Motorola only two years ago for $12.5 billion (see After Big Bet, Google Is to Sell Motorola Unit). Many have interpreted this move as an admission of failure in the hardware space. According to the New York Times:

Motorola was Google’s biggest acquisition by far…Yet Motorola has continued to bleed money, troubling shareholders and stock analysts, and its new flagship phone, the Moto X, did not sell as well as expected…Selling Motorola is an acknowledgment that Google is better off focusing on its core competencies — making software and selling ads — particularly as the profit margins for phones are shrinking over all.

Some analysts even went so far as to describe the decision to buy Motorola as “the extravagance of being a company with over $350 billion in market cap” and the sale as “slipping the millstone off your [Google’s] neck.”

Maybe that’s partially right. But it’s not the whole story. And the New York Times provided an excellent analysis demonstrating how Google didn’t quite lose as much money as the headline numbers might suggest (see Did Google Really Lose?).

But even if we concede that the sale was not as bad as headlines suggest, there’s still much more strategy involved in the sale.

First, you have to understand the deal in the context of the competitive marketplace for Android devices - that is, with Samsung in mind. Don’t forget, Samsung is, by far, the largest manufacturer of Android devices. It dominates the market, with upwards of 65% market share. It is the 800-pound gorilla of Android hardware, and it can therefore exert a lot of power over Google.

It is in Google’s best interest to have as many makers of Android devices as possible. This reduces the power of any one manufacturer individually, and increases Google’s power vis-à-vis those manufacturers. In fact, one of the reasons (among others) that Google acquired Motorola was to have a captive manufacturer of Android devices, reducing Google’s dependence on Samsung, and any threat to Google posed by Samsung. For example, if, in the extreme, Samsung decided to stop manufacturing Android devices, Google still had a viable manufacturing partner in Motorola.

With that as background, we come to the interesting part of this sale.

Google is selling Motorola Mobility to Lenovo, bolstering a manufacturer of Android devices, especially in the U.S. market (where Motorola is strong and Lenovo weak). In addition, Google has retained all of the relevant intellectual property (patents) owned by Motorola Mobility, not only assuring some licensing income, but also preserving the right to reenter the hardware market at a later date should the need arise. That is, should something happen with one of the current Android manufacturers (e.g., Samsung, HTC, LG, Lenovo), Google has the know-how to reenter the handset game.

So overall, you can’t take this sale simply at face value. It may, at first glance, seem like a huge loss for Google. But there is more to it than a wholesale admission of failure. If you dig a little deeper, it looks like a pretty sound strategic maneuver. Now if only I could say the same for the Nest acquisition…

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