Henry Blodget | Aug. 15, 2011
A very interesting move by Google this morning, buying handset hardware maker Motorola for $12.5 billion.
Google deserves credit for a big, bold move.
But let’s be real: This deal could end up being a disaster.
Well, for starters, the deal creates major channel conflict: Google is now competing with its partners. And hardware manufacturing is an entirely different kind of business than Google’s core business. And hardware manufacturing is a crappy, low-margin commodity business. And Motorola is massive–Google has just increased the size of its company by 60%. And the deal appears to be purely a defensive move, not an offensive one. And so on.
Let’s have a look at some of the host of questions and challenges the deal raises, starting with the channel conflict:
And we mean, how do they really feel, internally, not “what are they saying in public?” (The quotes Google has assembled from HTC, LG, et al, all appear to have been written by the same PR person–note the similarity in the language.)
The only reason Android (and Google) have any share of the mobile game, after all, is because hardware makers like HTC and Samsung adopted Google’s software platform. And now Google is stabbing them in the back.
By now, it’s probably too late for Samsung and HTC to switch to another platform, so they’ll have to smile and make the best of it. But still… having your software “partner” suddenly fire a missile down your throat can’t feel too good.
And if Google-owned Motorola starts to gain share in the hardware business, the feeling (and tension) will only get worse.
Second, is this an acknowledgment that, in smartphones, Apple’s integrated hardware-software solution is superior to the PC model of a common software platform crossing all hardware providers?
It certainly appears to be.
Android’s biggest weakness thus far has been its fragmentation: The combination of many different versions, plus many different customizations by different hardware providers, has rendered it a common platform in name only. To gain the full power of “ubiquity”–the strategy that Microsoft used to clobber Apple and everyone else in the PC era–Google needs to unify Android. And perhaps owning a hardware company is the only way to do that.
Third, how is Microsoft feeling? Is this a great deal for them…or confirmation that they’re screwed?
Is this the best thing that has ever happened to Microsoft in mobile? Now they’re the only platform provider that doesn’t compete against its partners for hardware sales. Or is Microsoft now peeing its pants in the realization that, in mobile, you have to have an integrated hardware and software solution; that the disaggregated model doesn’t work?
Fourth, is this deal purely defensive, as it appears to be, or does Google actually have a positive reason for doing it?
Based on the comments on the conference call and the phrasing of the quotes Google has provided from partners to defend the deal, a big rationale for making this deal seems to be about buying mobile patents–and, thus, “defending” Android from Apple’s and Microsoft’s attacks.
It seems safe to say that, six months ago, investors and partners did not realize that Google was going to have to shell out $13 billion to “defend” Android, let alone start competing with its hardware partners.
Fifth, how will Google investors feel about the company entering an entirely different kind of business, one that could destroy its partnerships (and margins) in one of its most important new business lines?
Early on, investors hate it. Google stock has gotten smacked in the pre-market.
And no wonder: Hardware sales are a brutally competitive business, with a core competency entirely different from Google’s. Hardware manufacturing and sales are about supply chains, parts, factories, physical distribution, and consumer marketing–all things that Google has little or no experience with. And Motorola itself is not exactly knocking the cover off the ball these days in all these areas.
Additionally, Google just added 19,000 new employees. 19,000! Google itself only has 29,000. Google just increased the size of itself by 60%–in a company in which culture is crucial. Does Google really have the management in place to manage that?
So Google investors are smart to be worried.
Yes, there’s a chance that Google could pull off a miracle here and transform the Motorola Mobility business into a direct competitor of Apple’s–in which Google gets not only Android distribution, but super-fat iPhone-like profit margins to boot.
But doing that will be super-challenging. Motorola’s current hardware team has displayed none of the magic that Apple’s has. And the more Google tries to mimic that magic, the more Google’s other Android partners will likely rebel against Google’s competitive threat.
Far more likely, Google will just continue Motorola’s mediocre also-ran status in the handset business, thus adding a big, crappy commodity hardware business to its glorious monopoly software business in search. And that won’t make investors happy.
Bottom line, a bold move by Google. But one that raises a lot more questions and challenges than answers. And one that could end up being a major disaster.