Google Needs Motorola Mobility - Even with the Red

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Motorola Mobility (NYSE: MMI) reported Tuesday a shaky earnings report, the last expected before the company’s pending $12.5 billion acquisition by Google (NASDAQ: GOOG). The mobile device division took a hard hit and while smartphone shipments were up, Motorola remains at the back of the device pack.

The 1Q12 report featured net losses of $86 million (28 cents per share) and operating losses of $98 million. Revenues were up about 2 percent, year-over-year, to $3.1 billion. Analysts had predicted 2 cents per share with $2.99 billion revenue. The mobile device segment losses were $121 million, up 36 percent from the $89 million loss in 1Q11.

The mobile device segment includes smartphones, standard cell phones, and tablets. Smartphone shipments were up 24 percent to 5.1 million but overall device sales were down over 4 percent. There were a total of 8.9 million mobile devices shipped.

On the same day as the earnings report, research firm IDC released new mobile market data that showed Motorola’s weak market performance didn’t even merit it having a category of its own. The leaders were Samsung, which ousted Nokia from its top spot, and Apple.

So why’s Google paying $12.5 billion for so much red?

It’s the Patents  

It’s open knowledge that Google is buying Motorola Mobility for its patents, which number over 20,000 between current and pipeline patents. Allen Lo, deputy general counsel for Google’s patent division, admitted to CNet last month that the search giant wouldn’t be purchasing the mobile company if it weren’t for the fact that Google has meager patent holdings of its own. Lo said that Google doesn’t intend to pursue its own lawsuits but hopes to use the Motorola patents for the kind of countersuit leverage that tends to bring competitors into agreement faster.

At the time of the acquisition announcement last year, Google accused Apple, Oracle, and Microsoft of ganging up against the company in patent disputes.  Google and Oracle are currently wrapping up a brutal legal fight over the Google built Dvalick software, which powers most of Android and is essentially a version of Oracle’s Java. That trial will lead straight into one concerning Google’s potential violations of two Oracle patents.

It’s possible that Google could use Motorola to help solve another problem it has been having…

New Nexus?  

Motorola Mobility is a device manufacturer, after all, even if it isn’t a particularly popular one at the moment. Google has historically found manufacturers for its flagship Nexus products through bidding. HTC won first, then Samsung and – if rumors are to be believed – Samsung might get to produce its second in a row. Turning away from outside manufacturers could strain those relationships but it would be costly for those companies to shun the increasingly popular Android system at this point. And Google needs to get a flagship tablet out soon to compete with the Amazon (NASDAQ: AMZN) Kindle Fire.

According to a recent comScore report, the Fire now has 54.4 percent of the Android tablet market. The second place entry, the family of Samsung Galaxy products, only has 15.4 percent. Why does that matter? The Kindle Fire uses a heavily modified version of Android, doesn’t it?

Yes, but that doesn’t benefit Google. Android isn’t as open source as it pretends to be. The Gingerbread version is available open source for developers to tweak, as Amazon did, but the later versions that manufacturers clamor over need to have the Google seal of approval. This approval includes usage conditions and a bundle of Google products including Maps, Google Play (formerly Android Market), and the Chrome browser. The Fire lacks any of these products, meaning that Google is losing out on a prime branding opportunity. (The Fire does default to Google search on its customized Silk Browser, so there is at least search ad revenue at play.)

The Crystal Ball

The acquisition is still held up by Chinese authorities but Motorola Mobility is expecting it to have moved through before the end of June. There is a possibility of delay but an outright cancellation is doubtful considering all the other approvals the deal has already received.

If Motorola is going to produce devices for Google it will likely be a bit further down the line. Google needs to rush out some Nexus devices, particularly a tablet, and there might not be time to make the dealings with Motorola stick in time. The possibility could give Google added leverage in its dealings with other manufacturers.

LynBetz has no positions in the stocks mentioned above. The Motley Fool owns shares of and Google. Motley Fool newsletter services recommend and Google. 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.

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