Google's Channel Conflict- Digesting Motorola
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Google's (NASDAQ: GOOG) aquisition of Motorola (NYSE: MMI) set to close, and their earnings having surpassed Wall Street expectations, (as I predicted in this column) I thought it would be useful to analyze what the purchase will mean for the world's internet leader. But first, a potential hiccup in-
While the American, and European governments have signed off on the Googarola deal, the Chinese still haven't. How someone can call the acquisition monopolistic with the rabid competition in the smart phone market is beyond me, but the Chinese government doesn't play nice.
Google, sticking to its ethos "don't be evil" made a partial withdrawal from China a couple of years ago, refusing to kowtow to the country's enlightened regime and its demand for total web censorship.
So now China has "questions" about the deal, which is no doubt a way of exacting a measure acquiescence from Big G on the censorship issue. Hey, whatever it takes to stay in power, right?
Let me tell you something about China, they don't care about "fair," to predict the behavior of the Chinese government is merely an exercise in game theory, whatever they perceive is best for them at any given time will be their course of action, fairness be damned. Yes, you could rightly say this applies to 98% of the world's population, but to counter, it was not in Google's immediate economic interests to go to showdown with the Chinese government over the censorship issues, which is part of what makes me love the company so.
However, in this case, given the fact that Google would owe Motorola a substantial penalty should they abandon the deal, and, on the flip side of the coin, the Chinese government would hear shrieks of "protectionism" regarding its own industries should they attempt to block the merger, I foresee some type of agreement being reached, as neither party benefits from obstinance.
What Google Gets
Nortel patents sold for four times estimates when they went to auction, and Google scored a goose egg in the bidding war, but in purchasing Motorola, Google receives not only patent protection, but earns itself the nuclear launch red button of assured mutual self destruction, with the threat of its new ability to counter-sue giving other companies an incentive to settle and cross-license patents. It's the Cold War all over again.
An interesting point is that looking at the amount that Nortel's intellectual property sold for, the sheer volume of patents that Motorola holds would be able to fetch a pretty penny, and that the sum of Motorola's parts, broken up and sold, might be worth more than the whole.
Absent from my argument is the fact that in purchasing Motorola, Google robbed the marketplace of one of its primary patent bidders.
With that being said, let's all breathe a collective sigh of realief that Gordon Gekko/ Goldman Sachs ain't the ones running Google, for this it is innovation that creates long term societal wealth, and not greedy short term self interest.
Channel conflict- when a company supplying a vital component for an end product, say Google's Android system for mobile devices, comes into direct competition with their customers; in this case the acquisition of Motorola seemingly putting their handset manufacturers and Android OS users, like HTC and Samsung, directly in Google's competitive cross-hairs,.
The POV of the handset manufacturers- Google might somehow favor Motorola, and how can we leave our company to the whims of the competition's "fairness," so let's create our own OS, (in Samsung's case Bada) or move to another vendor, like patent troll Microsoft and their Windows 8 OS.
So Google needs to tread very carefully here, and give OEMs (Original Equipment Makers) a nice song and dance, a few nice bottles of wine, and Larry Page's first born child as collateral.
To be completely fair, Google does have a better chance to mitigate the channel conflict crisis than anyone else in their position because of their ...
Google's Brilliant Strategy
The genius of Google's Android strategy is as follows, and I explain it from my personal experience as a consumer which many others have likely experienced.
While I used to use the Google search engine, I was never an unwavering fan until I upgraded to an Android three years ago. Suddenly I found myself needing a Gmail account to link to my phone seamlessly, and BAM, I learned how superior it was to Yahoo Mail. Then I converted to all things Google, search engine, Maps, blogger, Google docs, etc.
Google will not necessarily be trying to squeeze a profit out of Motorola Mobility, but rather using the sold devices to drive users into the Google Internet Eco-System, creating lifelong users like myself.
Google recently announced it believes there is going to be success at the lower end of the tablet market, and will likely use Motorola as a production house for these low end tablets, possibly even subsidizing the costs.
Amazon adopted a similar strategy in subsidizing the Kindle Fire, not only on the hardware side, but a free year's subscription to Amazon Prime (streaming video, plus two day shipping both included at no cost) The theory of course is developing the most loyal of consumers, and making themselves a one stop shop for e-commerce.
While Motorola will definitely expand the revenue side of Google's balance sheet, don't look for it to be a big contributor to net profits any time soon, as it acts as a big drag on margins. I don't forsee China blocking the purchase, and the patent protection and intellectual property alone make the 12.5 bills (my slang for "billion"in high finance) a worthy acquisition.
We'll have to see how everything plays out, til next time, stay thirsty my friends.
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