What does Google's decision to buy Motorola Mobility mean for the future of mobility?
Last week's mega-mobility-deal throws into relief a range of interrelated issues facing Google, its advertising-based business model, and the role and future of the Android mobile operating system. This mélange feature six key items:
It's all about the patents.
In this line of reasoning, Google saw its Android mobile operating system under mounting pressure from patent infringement actions by Apple and Microsoft (and separately by Oracle over Java licensing), and bought Motorola for its 24,500 patents and patent applications as a defensive, some say "desperate," counter-move.
"Google tried to present its $12.5 billion acquisition of Motorola as an opportunity to 'supercharge the Android ecosystem,' but it's clear that the deal was equally prompted out of desire to protect Android from further patent lawsuits using Motorola's strong patent portfolio," writes Nilay Patel, as ThisIsMyNext.com.
Once it takes ownership of Motorola, Google becomes directly involved in two high-profile patent disputes with Apple and with Microsoft. It's already a direct party in Oracle's suit over licensing its Java code for Android.
Patel, echoing a widely held view, says the Motorola patents give Google leverage over its rivals: they'll think twice about starting or continuing Android suits because they open themselves to countersuits based on the Motorola patents, or they can be induced to resolve disputes with a mutually beneficial cross-licensing deal.
"Patents are used often in a 'horse-trading' scenario, in which firms grant one another the rights to license each other's technology," says Craig Cartier, analyst with Frost & Sullivan. "Google's pre-Motorola patent weakness puts them at a disadvantage in these scenarios."
It's not about the patents.
"Android still has patent issues," says Bill Morelli, analyst with IMS Research's wireless group. "The acquisition will not provide much, if any substantive relief from the existing patent lawsuits against both Motorola and Google. In addition, many are seeing this move as an admission by Google of just how weak the Android patent position is."
The number of Motorola patents don't speak to their importance or to their value. Florian Mueller, who describes himself as a "intellectual property activist-turned-analyst" and mobile patent consultant (though not an attorney), argues that Motorola's patent portfolio is actually quite weak. So far, he notes, it hasn't stopped Apple or Microsoft from filing infringement actions.
"Both disputes are at a fairly advanced stage," Mueller say. "For example, the ITC [U.S. International Trade Commission] hearing on Microsoft's initial complaint against Motorola will begin in a week from today. At this stage, Motorola has certainly fired its best shots, and those aren't really impressive.
Really, it's all about greater control over Android
"Today, the [Android] platform is "open" but chaotic — because phone-makers get the software for free and can do whatever they want with it, Android is available on some good phones as well as lots and lots of cheap, bad ones," writes Farhad Majoo in "Android Isn't Free: How Google's acquisition of Motorola Mobility will make it more like Apple" for Slate. "In the aftermath of this deal, Google will seek to exert greater influence over hardware companies. Eventually, the deal will help reduce the number of new Android devices that are released every year, and the few that are released will be of generally higher quality — and sell for higher prices — than what we see in the Android device market today."
"If they did want to increase control of the ecosystem and also chose to keep the Motorola mobile business, they could limit the customization of the Android experience available to partners like HTC and Samsung, and still drive demand for Android with new handsets, compelling other Android partners to follow," says Frost and Sullivan analyst Craig Cartier.
But such a move carries risks. Android has grown explosively because its been incorporated into the handset product lines of seven of the top 10 global handset makers, according Bill Morelli, of IMS Research. "Google will need to weigh whether increased control over the Android OS is worth possibly alienating those manufacturers," he says.
Does Google actually have a "strategy?"
The jury is still out, and a lot experts seem at least uncertain.
"I don't think it's entirely clear what Google is planning yet," says IMS Research's Bill Morelli. "I can't imagine that any company would spend $12.5 billion without having some type of strategy in mind. Whether that is a good strategy or not remains to be seen."
"Usually when a big tech merger happens you can see the logic behind it," writes Michael Mace, a former executive at Apple and Palm and currently CEO of Cera Technology, an early stage startup. He blogs on the "mobile opportunity." "Even if you don't agree with the logic, you understand why they made the deal. But in this case the more I think about it the more confused I get."
"Did Google buy Motorola for the patents? If so, why isn't it spinning out the hardware business? Or did Google buy Motorola because it wants to be in the hardware business? If so, does it understand what a world of other problems that will create for Android and the rest of Google? Seriously, if Google tries to integrate Motorola into its business we could end up citing this as the deal that permanently broke Google."
Motorola had been in acquisition mode with several companies including Microsoft "for some time," Om Malik reported on his blog GigaOM.com, citing "our sources."
Microsoft's interest, mainly for the Motorola patents, brought in Google, just after its failed bid for Nortel's patent portfolio, which was picked up by a consortium that included Microsoft and Apple. The multi-billion dollar deal moved rapidly forward. "The high-level talks between Google and Motorola started about five weeks ago," Malik reports. "Google CEO Larry Page and Motorola CEO Sanjay Jha were talking directly, and only a handful of executives were brought into discussions."
Astoundingly, "Our sources suggest that Android co-founder Andy Rubin was brought into the talks only very recently."
Motorola stirred the pot. Its top shareholder, billionaire Karl Icahn, publicly urged the company to "monetize" its patents and CEO Sanjay Jha publicly hinted the company was willing both to use its patents as weapons to defend its Android-based products against infringement suits and as a way of collecting royalties from other Android licensees.
"I think Motorola knew they had Google by the balls," blogs John Gruber, at DaringFireball. "Google needed Motorola's patent library to defend Android as a whole, Motorola knew it, and they made Google pay and pay handsomely." He notes that Google's net income for the latest fiscal year was $8.5 billion, and $6.5 billion last year. "That's for all of Google. They're offering $12.5 billion for Motorola. So Google just spent almost two years of its profits to buy a second-rate phone maker that itself is unprofitable, almost went bankrupt, and is arguably only the third-best maker of Android devices, behind HTC and Samsung."
No matter what they say publicly, Google's Android partners are not happy.
"Given the very high stakes involved, and Google's past history of contentious relationships with its partners, and the onling legal issues that Android is facing, all of the Android licensees are carefully evaluating all the options that are available to them," Morelli says.
"The Android ecosystem is here to stay and this move [with Motorola] would not push partners away from Android completely," says Craig Cartier, at Frost and Sullivan.
But some analysts think Google is prepared to make them unhappier still.
Aberdeen's Andrew Borg is one who thinks Google may use Motorola to offer Android devices - gPhones and gPads under a Motorola label -- at very low cost or possibly even free, subsidized by its ad revenues. "Ultimately we believe Google's end-game is about ad delivery, not handset domination, so they will make judicious choices that keep their dominant position in digital ad delivery on a global basis, while keeping the OEMs in tow for as long as possible," he says.
Florian Mueller voices a similar view. "Google's vision for this world is that all information and communications technology products and services should have a price of zero, or at least a profit margin of zero, as long as Google can sell advertising to McDonalds, General Motors, banks, insurance companies, etc," he says. "To make this happen, Google uses Android, and also Chrome, as a tool to lock end users into its services."
Whatever it is, Wall Street doesn't like it.
"Their biggest challenge will be to appease Wall Street and institutional investors to sit tight and watch them [Google] execute on their global plans for the long term, despite the imminent dilution of profit margin," says Andrew Borg, senior research analyst for wireless and mobility, at Aberdeen Group. "Mix high-margin ad revenue with low-to-no-margin hardware business and dilution becomes inevitable."
So far, investors are unappeased.
The day after Google announced the deal, Standard & Poor's analyst Scott Kessler today cut his rating on the search engine's stock to Sell from Buy, and cut his 12-month price target on the stock to $500, from $700. He's unsure about whether Motorola's patents will do much to protect Android, and he's pretty sure that the deal "would negatively impact GOOG's growth, margins and balance sheet."
Referencing Kessler's analysis, Forbes reporter Eric Savitz noted last Tuesday that "Google's market cap has been trimmed by $8.7 billion in the last two days, suggesting serious doubts among investors about the company's strategy."
At end of day Thursday, the stock continued its all-week slide, closing at $504.88, down $28.27 or 5.30% for the day.
John Cox covers wireless networking and mobile computing for Network World.
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