Motorola After Marriage
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After initially announcing their intention to purchase Motorola mobility in August, Google’s (NASDAQ: GOOG) new CEO Larry Page recently announced that the deal had passed its last hurdle and that Google now owns Motorola Mobility. For Motorola mobility this acquisition easily made financial sense, at the forty dollar per share selling price Motorola shareholders received a 60 plus percent premium. Motorola has also faced increasing competition from the likes of Samsung and seen its global market share drop to roughly 2% in the first quarter of 2012 and Motorola’s operating lose doubled from 2011 to seventy million.
For Google this acquisition, which was the company’s largest at 12.5 billion dollars, presents several potential sources of profit going forward. Even though Google has stated that they will continue to run Motorola as a standalone business and licensee of the Android operating system that does not mean that Google won’t take advantage of their newly acquired asset. Google has already replaced the CEO of Motorola with a long time Google employee Dennis Woodside, there is also a new financial chief of Motorola, Vanessa Wittman, a new head of supply chain management who has experience from Nokia and Amazon, Mark Randall, as well as a half dozen other management changes. The question before Google now is what they will do with Motorola to make it worth their 12.5 billion dollar price tag amid ongoing quarterly losses.
There are two major places where Google will profit from the Motorola deal; the first is the 24,500 granted and pending patents that the eighty odd year old Motorola has amassed. Android handset makers are facing dozens of legal battles from Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and others that claim certain aspects of Android infringe on their intellectual property. In fact HTC smartphones were actually held by customs for a few days due to a legal snafu between Apple and HTC, though that delay has apparently been lifted. During the same week the ITC ruled that Motorola infringed on one of Microsofts patents dealing with scheduling events in Android. Motorola could face an import ban in 60 days if they do not win an appeal, remove the infringing material or license with Microsoft. These two examples are far from the only examples of the huge increase in legal battles taking place in the smartphone market. Microsoft has patent licensing deals with 70% of Android smartphone makers and according to an estimate by Goldman Sachs, Microsoft is making 444 million dollars from Android in fiscal 2012, which could be more than they make form their own Windows Phone platform.
The legal battle will only escalate in the coming years and although Motorola has recently lost a suit against Microsoft, having the Motorola arsenal at the disposal of not only Google but hopefully all Android licensees who are coming under legal fire will help them fight back. Additionally this patent portfolio may allow Google to go directly to companies like Apple and Microsoft and strike cross licensing deals whereby Android gets to use their intellectual property and Microsoft, Apple and others get access to Motorola patents. Microsoft has been willing to license with many Android makers and Dow Jones reported a few months ago that Apple is also willing to license at least some patents. This cross licensing done by Google and applying to all Android handset makers would reduce the individual legal burden that each Android maker currently faces when they produce Android devices and give Android legal strength going forward.
The second area where Google could benefit from the Motorola Mobility acquisition is with Motorola’s actual devices. Google could gain valuable expertise on the hardware side of the smartphone business, something they have been lacking as only a software designer. Apple has this expertise since they make both their hardware and software, and Microsoft essentially acquired this expertise when they struck their billion dollar deal with Nokia. Now Google can have a stronger in house hardware design team to ensure continued excellent hardware software integration on the wide variety of devices that run Android.
Another hardware based initiative that Google and Motorola could pursue would be that of set top boxes, cable boxes and DVR’s which cable companies often lease to customers and which Motorola currently makes a large percentage of. The opportunity here would be if these boxes could in the future run Google TV, which currently has been a largely unsuccessful attempt by Google to get itself in your TV. Since Motorola already makes this hardware and has the distribution deals in place, this may present an easier route to get Google TV adopted widely than the limited success Google has had thus far. Apple makes a competitor to Google TV, the Apple TV, and Steve Jobs supposedly had thought up a new brilliant TV concept before he passed away, indicating greater competition is likely on its way. Additionally, Google has stated that Motorola will be involved in longer term hardware projects, possibly the creation of better Android tablets. The wave of Honeycomb based Android tablets that hit the market last year were somewhat unready for prime time and the two Android based tablets that have caught on are the Amazon Kindle Fire and the Nook Tablet.
Google consulted with the top five Android licensees before acquiring Motorola and all supported the deal, Samsung stated that the deal “demonstrates Google’s deep commitment to defending Android, its partners and the ecosystem”. China was not as convinced of this and the Chinese regulatory authority made Google agree to keep Android open and free for five years. Google will have the challenge of benefiting from Motorola to the fullest extent while maintaining the ‘literal firewall’ that they claim to have between the Motorola team and the Android team now that the Chinese have given the deal the green light to the acquisition. Rumors have been flying about layoffs at the new Google owned Motorola or even a future spinoff of part of Motorola into a independent company and Google has launched a listening tour throughout Motorola. Regardless of what move they make, Google walks a tight rope between strengthening the Android platform with their Motorola takeover and hurting it by giving any type of preferential treatment to Motorola, perceived or not.
ded004 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.