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Samsung/Google Split Would Have Immense Consequences

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Within the last year, a belief has emerged within the minds of many market participants: That Samsung would be well-served to sever its ties to Google’s (NASDAQ: GOOG) Android operating system. (That idea gained new life Monday when The Wall Street Journal reported that Google executives were concerned with Samsung’s power.)

If the two tech giants split, it would have far-reaching market consequences. But it wouldn’t serve Samsung to abandon Android, nor would it serve Google to push Samsung away.

Why would Samsung want to ditch Android?
According to those who subscribe to the idea, Samsung wants to abandon Google’s Android because of the search giant’s decision to purchase Motorola back in 2011. At that point, Google crossed the line -- it went from neutral operating system partner to hostile competitor.

There is clearly the potential for a conflict of interest: If Google wanted to give preferential treatment to its Motorola division, it absolutely could. This would have a damaging effect on Samsung’s handset business, as, in theory, the best of Android would be reserved for Motorola phones. Google has steadfastly denied this possibility, saying that it acquired Motorola simply for its patent portfolio, and that it would run it as a standalone business. Cynics, however, may discount Google’s statements.

A belief in Samsung’s intention to abandon Android has moved stocks
BlackBerry (NASDAQ: BBRY) was rumored to be a takeover target several times in 2012. Frequently, Samsung was said to be a possible buyer.

BGR’s Zach Epstein, in a March 2012 article, notes that shares of BlackBerry (then RIM) spiked 5% after market chatter indicated that the Korean tech giant wanted to purchase (or license) BlackBerry’s mobile operating system.

The rumor surfaced several times throughout the year, ultimately culminating in an explicit denial by Samsung in August.

Google would be foolish to go back on its word
If Google went back on its word, and gave favorable treatment to Motorola, it would be an immense mistake.

Android has emerged as the dominant smartphone operating system (with over 70% of global market share) precisely because it’s an open system. Google gives Android away for free, letting dozens of different smartphone makers use its system. In return, Google gets what it’s really after: continued dominance in search.

Google’s expansion into products may have confused investors, but the company still remains centered around search. With Internet users shifting from desktop to mobile, Google invested in Android to ensure that its business model would survive the switch.

If it showed favoritism to Motorola, Samsung wouldn’t be the only handset maker to abandon ship. LG, HTC and others could follow, perhaps switching to Microsoft’s (NASDAQ: MSFT) Windows Phone 8. That would call into question the entire Google search model, as mobile search done on Windows Phone 8 defaults to Microsoft’s Bing.

In short, if Google wants to keep its search dominant in the mobile world, it must keep Android a major mobile operating system. Showing favoritism to Motorola would do the opposite.

It wouldn’t make sense for Samsung to abandon Android
Just as it wouldn’t help Google to drive Samsung away from Android, it wouldn’t help Samsung to abandon Android either.

The old saying, “if it isn’t broken, don’t fix it is” is obviously applicable. Besides Apple, Samsung is currently the only profitable smartphone maker. The company’s success has been built with phones running Android. Besides shaking up a strategy that has been incredibly effective, there are other advantages Samsung gains from its Android partnership.

First, Samsung gets an operating system for free. Unlike Apple, which must innovate on both the hardware and software side, Samsung must only worry about delivering the best quality hardware, letting Google shoulder the operating system costs.

Secondly, Google is reportedly working on creating a retail operation. As I wrote in a previous article, stores run by tech companies themselves could soon replace traditional electronic retailers. In that case, Samsung would probably want a partner to sell its devices.

Lastly, Samsung benefits from Google’s services. Gmail, Google Maps, Google Docs, Google+ and Google Music, in addition to many other services, have been integrated into the Android operating system. Rather than say, having to develop its own maps (something that proved to be a PR nightmare for Apple) Samsung gets to benefit from Google’s work in all these areas.

Say they split anyway, how would it affect stocks?
If Samsung opted to ditch Android, Google investors really might want to reconsider their positions. With Samsung out, other handset makers would probably follow suit, drawing serious questions about Google’s search business in an increasingly mobile world.

It would also mean that mobile operating systems, like BlackBerry 10, are a much more valuable asset than may have been believed. Even if Samsung doesn’t want to buy BlackBerry (or license its software) a different company might.

Microsoft would also stand to benefit. If Samsung and other current Android makers switch, Windows Phone 8 would be an attractive alternative. That would not only support Microsoft’s mobile operating business, but also its online services like Outlook, Bing and even the new cloud version of Office.

At any rate, the importance of Google and Samsung’s relationship should not be understated. Though it seems unlikely, if they did split in 2013, it would be one of the most significant events in tech.


joekurtz has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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