Reactions to Google's (GOOG) $12.5 billion Motorola Mobility (MMI) purchase have been stunningly bipolar. The title to TechCrunch's recent SA piece, "Google's Motorola Acquisition Is Brilliant... Or Really Stupid", is a good example. Opinions abound, with some focusing on the defensive nature of what appears to be primarily a patent play, while others have praised the potential for growth.
Not content with the attention it's already been getting after downgrading US long-term debt, Standard & Poor's promptly made its skepticism public, as detailed here by equity analyst Scott Kessler. But many technology pundits have praised the move as strategic and forward-looking, emphasizing how it better positions the search giant to compete against the iOS phenomenon.
The variety in outlook on this bombshell development represents a very real problem for disciplined investors looking to benefit from the most rapidly growing part of consumer electronics. The smart-phone business remains an extremely volatile sector, with huge shifts happening on a weekly if not daily basis. There's widespread agreement that Google's play has fundamentally altered the landscape, but equally widespread disagreement about its implications.
The aim of this article is to present a survey of how this development is likely to impact major mobility players on a short (under 6 months) as well as long (12-24 months) term basis.
Short Term Losers
The Mountain View giant is paying a close to 60% price premium on its purchase, and it's hard to put a positive veneer on such valuation or the additional attention it'll inevitably attract from anti-competitive watchdogs. Investors reacted by dumping shares, with the stock seeing about an 8% drop on the first two days of the week. From a trading standpoint, there looks to be real weakness behind the equity.
Nokia's shares vaulted on Monday on further acquisition speculation, but the announcement couldn't have come at a worse time for the Redmond-Fin alliance, with Windows Phone 7.5 "Mango" devices poised for release in the next couple of months. Early adopters who may have been previously keen on trying out a new game in town are now less likely to take the plunge to a new platform as there are prospects for an even newer game; Motorola-branded Android devices which deserve the "Google phone" moniker, designed for tighter integration and potentially benefiting from subsidies from Google's significant cash hoard.
I've praised Microsoft's efforts to hedge its bets in the sector by leveraging its legal arsenal and extracting what essentially amounts to royalties from major Android OEM's, with a reported $5 and $15 per sold phone interest from HTC (HTCXF.PK) and Samsung (SSNFL.PK) respectively. But Google's new patent trove may put an end to that rather lucrative setup.
As Microsoft looks to position its Windows Phone 7.5 "Mango" and Windows Phone 8 offerings as serious platform alternatives to Android and iOS, it's likely that its relationships with manufacturers and rivals will grow increasingly complicated, requiring more and more compromises and choking this stream of free cash.
Larry Page appears to subscribe to the theory of bringing cannons to gun fights. As the deal was announced on Monday, talking points from Mountain View converged on a single point for the benefit of analysts, industry watchers and legal experts. When it comes to patent wars and embattled Android partners, reinforcements have arrived.
Although presented with new hurdles in its many pending legal challenges, Apple stands to benefit from real vindication as Google ventures into hardware, a recognition of sorts that an integrated, end-to-end, hardware, software and everything in-between business model may be superior after all. One expects some "our competition is trying to be more like us" snickering in the run-up to what's shaping up to be the official announcement for the imminent iPhone 5, and marketing campaigns to go with it.
Although it benefits short term, Apple stands to lose the most as it faces a new level of head-on competition to one of its most successful and profitable products from a brand with as much if not more technology cache. As I've previously mentioned, consumers are likely to respond strongly to devices with an official "Google Phone" label, and Motorola's hardware expertise, which has produced very successful hand-helds such as the original Droid and Droid X, is not to be taken lightly.
While manufacturers will doubtlessly benefit from Google's patent arsenal, to say major OEM's such as Samsung, HTC and LG are keen on the acquisition misses the forest for the trees. The truth of the matter is that one of the largest players in a very crowded playpen just got taller and meaner, and everybody going up against it is at a significant disadvantage. Reports of intense internal discontent at Samsung are likely to be the tip of a very large iceberg.
Research In Motion (RIMM)
After a surge in interest on Monday on the assumption that its intellectual property portfolio could also become an acquisition target, the struggling Canadian company has seen its shares resume their slide as reality sets in. Already reeling from plummeting market-share woes and terrible press from recent UK riots, Research In Motion may have suffered a death-blow. With legal challenges and uncertainty around Android looking to clear up, RIM looks set to continue losing the fight for consumer's interest and wallets.
Google wants your phone to be your wallet, and it wants to be your bank. Between Google+ and Google Wallet, the future of mobility payments points to dwindling prospects for institutions largely dependent on revenue streams derived from use of debit and credit cards. On the heels of general weakness in the financial sector, this serves as confirmation that it's time to rotate out of these equities.
Historically, the most successful Android devices have been the ones backed by strong branding efforts--witness the original Droid, which Verizon so successfully championed. Devices officially branded as "Google phones" may for the first time ever attract the kind of consumer interest, loyalty and price premium that Apple's iPhone commands. Alternatively, Google may elect to subsidize products in an effort to more clearly establish Android dominance in market-share, bulldozing its competition with nearly unbeatable features-per-price offers.
Pending time horizon and price action, I believe investors should closely watch both Google and Microsoft, as they may experience further short-term weakness which should be viewed as a buying opportunity.