Google's (NYSE:GOOG) most recent deal to acquire Motorola Mobility kills two birds with one stone. The deal bulks up defenses against Android patent infringement claims, and opens strategic opportunities to operate as a dominant integrated smartphone vendor. (To help you determine if this was a good move for Google, check out Analyzing An Acquisition Announcement.)
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Android's Future Protected
On the surface, the Motorola acquisition is largely about patents. Android has the largest market share amongst mobile operating systems, but without sufficient defense, litigation could cause major problems for the software. By acquiring Motorola, Google gains a portfolio of about 17,000 patents needed to defend the Android operating system against potential infringement claims from competitors like Apple (Nasdaq:AAPL) and Microsoft (Nasdaq:MSFT).
Modern smartphones are subject to a complex web of thousands of patents, even on seemingly small features. Samsung was recently prevented from selling certain Android-based smartphones in several European countries, pending the outcome of a patent infringement suit from Apple. In this case, the disputed item is the Android's photo management software. HTC has had infringement lawsuits filed against it as well.
With the deal, Google becomes a major integrated maker of smartphones, controlling both the operating system and the hardware it runs on. This puts Google on the same footing as Apple, which had previously dominated among integrated companies. The other two integrated players, Research in Motion (Nasdaq:RIMM) and HP (NYSE: HPQ), which recently announced its exit out of the tablet and smartphone market, are both lagging significantly in market share.
According to a study conducted by the NPD Group, Google's Android has a 52% U.S. smartphone market share, and Apple's iOS controls 29%. BlackBerry OS had 11% market share, and HP's webOS along with Microsoft's Windows Mobile and WP7 held about 5%. Up until this point, Google has had very little hardware expertise and had to rely on its network of partners to make compelling phones for its software. Now, however, Google gains 19,000 Motorola employees with expertise in hardware design, manufacturing and logistics.
It's publicly unknown what Google's plans are, but the acquisition opens the possibility of a purely Google phone to compete head to head against the iPhone. Currently, Google's Nexus One phones are made by HTC, and its newest phone, the Nexus S, was created by Samsung. (For more, read Google's Next Move...Mobility.)
A Consolidating Market
Investors in Android partners, like Samsung and HTC, may rightfully be nervous about Google entering the hardware field. Though it has so far indicated otherwise, it's possible that Google will somehow favor Motorola for future Android releases, hurting the competitiveness of other companies running Android. The smartphone market is fast becoming a two-sided struggle between Apple and Google systems.
For Samsung and HTC, the alternative might be increase the use of other operating systems by companies like Microsoft. Unfortunately, Microsoft's operating systems only have a small market share, but they are among the few remaining that are not tied to an integrated smartphone vendor.
So far, most discussion of this acquisition has centered around only smartphone hardware and Android patents. There may also be opportunities with Motorola's other products. For instance, Google TV could be combined with Motorola cable boxes to form a new competitor to Netfilx.
New Risks for Google Investors
For all the potential advantages of this deal for Motorola, there are also significant risks. Motorola stock had been on the decline over most of the year, due to concerns about eroding market share for its products. Google will have some work to change the company's trajectory in markets where the company has little direct experience.
The deal also risks changing Google's vaunted culture. Google currently has 39,000 employees, and Motorola has 19,000, so one in three "Googlers" will be former "Motorolers". Since Google relies on its creative culture to develop new products and attract top talent, integration of the two companies will have to be carefully managed.
The Bottom Line
Google has many opportunities to profit from this deal, but how well Google can execute will ultimately determine whether this acquisition creates value over the long term. (For more on this topic, read Mergers and Acquisitions.)