Motorola Lenovo

Yesterday Lenovo agreed to buy Motorola from Google for US$2.91bn. On the face of it that's a big loss for Google given that it spent $12.5bn buying Motorola only in 2011. So what's going on? Here I'll take a look at why Lenovo has bought Motorola, why Google has sold it, and what it means for Android and the smartphone market.

Why Lenovo has bought Motorola

Lenovo has operational scale, access to components, and a strong brand name in the important emerging markets of Asia and Africa. Motorola makes great products like the Moto X and Moto G, and brings a very close relationship with Google. Lenovo is buying the soft- and hardware engineering expertise required to make great phones, and bringing the ability to punt them out cheaply and at scale.

Then there is the sympathies between the brands. Motorola is a strong brand in the US and south America, Lenovo in Asia. The joint venture could be a potent mix, as the two brands are quickly merged.

With the capture of Motorola Lenovo just became the third biggest smartphone maker in the world. According to Strategy Analytics the combination of Lenovo and Motorola accounted for 6 percent of global smartphone shipments in 2013. Lenovo alone shipped 45 million smartphones last year according to IDC. Furthermore Lenovo is huge in China, which is a major source for smartphone growth. And it has that ability to manufacture and roll out products on a huge scale (did we mention that?).

Motorola's engineers can design great smartphones, and Lenovo can make sure they reach every corner of the world. Motorola has a full version of Android that is full-featured and easy to use, and as a huge PC- and laptop vendor Lenovo can access all the components it needs. It has one of the biggest channels to market of any tech company, and the scale to make cheaply the great things Motorola designs.

This matters because there are only two ways in the which the global smartphone market will grow. Number 1, first-time purchasers in Asia and Africa. And secondly: budget smartphone purchasers in the saturated Western markets. A combined Motorola/Lenovo will be able to make cheaply great handsets, and ship them to every market. That's great news for them and for consumers, and poor news for the likes of Huawei, ZTE and LG. (See also: Lenovo faces chance to become rare PC maker successful in phones.)

Why Google has sold Motorola

In the short term Google has divested itself of a loss-making division. Moreover running Motorola was a distraction from Google's core business of getting consumers to use Google services and then using the data generated to sell advertising. Running Motorola never sat easy with Google's other Android partners, who must have felt like they were competing with their partner (something publishers of websites understand only too well).

Of course, buying something for $12.5bn and then selling it for $2.91bn isn't great business. But it's also not the full story.

You'll read a lot about how Google has kept hold of Motorola's patents, which will generate revenues in the future. Many analysts are arguing that Google only ever wanted Motorola's patents - the vast majority it is keeping for itself and licensing back to Lenovo. The value of those patents to Google is known only to Google.

Moto XMore hard news is that Google in fact divested of Motorola for $5.3bn, as it sold the set-top part of Motorola to IBM for $2.4bn some months ago. That leaves a $7bn loss on a loss-making business offset only by some patents of dubious value. It starts to make more sense, but what's the real game here?

Ultimately a strong Lenovo/Motorola hybrid selling large volumes of Android phones can only be good news for Google. The African and Asian markets are dominated by Android, but mostly by cut-down flavours of Google's 'open' OS that don't generate the data, or media and app sales, via which Google monetises Android. A successful Lenovo will sell Android handsets in western markets, too, increasing Android market share there.

Motorola's expertise could ensure that those people who get new Android phones spend money on using them, too, and use them for all the web-based activities via which Google generates data and therefore ad revenue. The Android market is hopelessly fragmented right now, but it will consolidate around a few big brands. Samsung and Sony have the high-end sewn up, albeit in a fight with an ailing HTC. Lenovo/Motorola could hoover up the bottom end of the market.

In the long run fewer, better Android manufacturers is good for Google. So the strategy of selling Motorola to the right company makes sense.

Then there's the Samsung question. Samsung is the most successful Android phone maker, but famously never mentioned 'Android' when it launched the Galaxy S4. Using a Samsung phone is very much a 'Samsung' rather than a 'Google' experience, complete with Samsung stores and services. Samsung has even hinted at moving away from Android and on to the Tizen platform, which would be disastrous for Google. Should Lenovo and Motorola perform as expected Samsung becomes less important for Android. It would be a blow to lose Samsung, but it would no longer be a terminal blow. The purchase and sale of Motorola could be seen as a $7bn insurance policy agains the big phone makers jumping from the good ship Android.

Finally, it's worth looking at the economics of Google buying Motorola in the first place, and then selling it for a loss.

Google is incredibly cash rich. In this period of the company's history it has money to spend, and strategic goals to fulfil in a rapidly developing market. We won't know for a while if buying and selling Motorola makes sense, but it certainly doesn't put Google in financial difficulty. It's prepared to buy its strategic goals.

Google bought Motorola to keep an important Android player in the smartphone- and tablet market. It bought it for its manufacturing and design expertise, for its patents, and to ensure Google had a stake in the nascent Android hardware market. It certainly didn't buy it to make money - although I doubt it expected to lose as much money as it has.

Given that the Nexus products Google sells in partnership with other hardware vendors have continued to sell in great numbers during Motorola's entire time in the Google fold it seems highly unlikely that Google ever looked to run Motorola as a going concern. Which is good because it never did.

No. I think Motorola has served its purpose for Google. By selling it to a strong manufacturer such as Lenovo Google will calculate that it stands to make up its losses in future market share and revenue, as well as shoring up the future of Android in a smartphone world that at least hints at further fragmentation. And it is taking up a small amount of shares in the new Lenovo/Motorola business to indicate exactly that.

What Lenovo/Motorola means for the market

We've covered this already, but let's summarise: Lenovo/Motorola means good, cheap, full-Android smartphones, at scale in all corners of the world. It means a powerful large-scale budget phone maker dedicated in the long-term to Android. Already the third-biggest smartphone company on the planet, combined Lenovo and Motorola will be able to rapidly increase market share by offering quality to first-time smartphone buyers in Africa and Asia, as well as the West. It has the brands to do so, the expertise and the manufacturing clout. And it has a visible brand in every corner of the world.

In the long term this is good news for Google, Lenovo and Motorola, and potentially bad news for the smaller commodity Android phone makers and those who wish to see a more fragmented budget smartphone market. And, you know, it's interesting. See also: Group test: what's the best Android phone?