Clearing a Path for Google
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
The Justice Department's anti-trust authority and its counterpart in the European Union have just made Google's (NASDAQ: GOOG) life easier. The two bodies helped the company immensely by approving its ambitious buy of telecoms equipment maker Motorola Mobility (NYSE: MMI). Now nothing stands in the way of GOOG completing the purchase of its shiny new toy.
Google considers this a crucial acquisition since it has shifted its strategy toward hardware in a heavy play for vertical integration. It spent a lot of money and other resources to develop the Android mobile and tablet operating system in the mid-2000s; buying MMI, which makes popular Android-powered hardware like the Droid cell phone series and the Xoom tablet, is seen as a natural extension of the firm's business.
More critically, Motorola Mobility has a host of critical cell phone and mobile computing patents. These are hardly minor assets; more and more in the tech space these days, they're the underpinnings of the industry. Without strong patents, you don't have a strong business. And you're vulnerable: companies such as Samsung and Apple (NASDAQ: AAPL) have spent many hours in court and God knows how much in valuable capital suing over patents and defending their own in various countries. Apple in particular is lawsuit-happy; over the decades it's gone after competitors big and small, from low-cost computer maker eMachines to IT giants Microsoft (NASDAQ: MSFT) and Hewlett-Packard (NYSE: HPQ), both of which had the temerity to use resizable, overlapping windows -- just like Apple's operating system! -- in their software products.
So the bigger Google's patent portfolio, the stronger its defense against legal action and the more resources it can devote to developing and selling hardware. But is this the true path to prosperity? The company already enjoys fat margins in its market-dominating search business. Hardware is cool and Google will undoubtedly be able to move many units of whatever phone or tablet or home entertainment appliance it spits out on the market.
However, hardware is also capital-intensive and thus has significantly lower margins than that of software or internet search. In the latter, ideally, after spending a certain amount of capital on a product, a company can sit back and rake in the bucks for years (as Microsoft has generally been able to do with Windows). Hardware, meanwhile, requires constant capital spend no matter how popular the product or immense the economies of scale. Look at Hewlett-Packard, which these days is one of the top producers of hardware such as PC peripherals -- over the last three years, its net margins have averaged 6.4%. Compare this with Google's recent margins, which have run at 25-30%. Will it be able to maintain that level with a stronger emphasis on hardware, or will it become HP-like?
GOOG shareholders should keep an eye on those margins. The EU decision is certainly a positive for the company and a major step forward in its hardware ambitions. It remains to be seen, however, whether those ambitions will be worth the effort and the capital put into them up until now and in the future.
Motley Fool newsletter services recommend Apple, Google and Microsoft. The Motley Fool owns shares of Apple, Google and Microsoft. Eric Volkman 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.
