Google's Motorola Deal: Not So Stupid After All

Sep.12.11 | About: Alphabet Inc. (GOOG)

Last week I told you how I thought Google (NASDAQ:GOOG) essentially paid a king’s ransom just to become a clone of Apple (NASDAQ:AAPL) with its 12.5 billion acquisition of Motorola Mobility (NYSE:MMI); a deal that I called a “panic purchase.” In plain point and fact, Apple forced Google into this deal by seizing a significant portion of the smartphone and devices market by leveraging its advantages of having a unified platform; or controlling both the hardware and software of its products, whereas Google had a fragmented development process. It controlled only the software (Android) whereas it relied on its partners such as Motorola, HTC and Samsung to build the hardware. This created separation between Apple and the field, which in addition to Google, also includes Research In Motion (RIMM), Microsoft (NASDAQ:MSFT) and at one point Hewlett-Packard (NYSE:HPQ).

Is hardware Google’s forte? Clearly it is not, but can it be?

As much as I question the merits of this deal, I can see where it offers Google similar advantages to what has made Apple so successful and is causing others such as RIM and Microsoft to continue to play catch-up. Obviously there is value in integrating both the hardware and software of the devices, but at what cost?

Here’s what we know of the deal

Well clearly we know the deal cost Google 12.5 billion dollars, but there will be more costs to pay long before the synergies of this deal can be realized; some of which Google will be able to control and some it won’t. First let’s look at an article by Seeking Alpha contributor Tech Crunch; who described some of the details of Google’s deal in this manner.

  • They’re buying 20,000 employees (almost doubling their headcount.) They’re buying an absurdly daunting armory of over 24,000 patents (I mean, come on: Motorola has the patent on the cell phone.) But there’s one more thing that Google’s buying, and it’s one that shifts up the Android game all together: nearly 30% of Android’s existing market share in the U.S.
  • After years of owning next to none of the hardware market share for their own software platform (even the so-called “Google phone” Nexus devices are made by HTC and Samsung), Google has just become Android’s 2nd biggest manufacturer.

Once partners now competitors

To now become a hardware company Google has also just converted into a major competitor of several of its partners. How does HTC and Samsung feel about this? I am not suggesting that Google should care, but it merits consideration. The fact of the matter is, if I were a shareholder in either Samsung or HTC, I would be extremely nervous. Because obviously, Google now has a vested interest to favor Motorola in future developments of its flagship Android operating system thereby leaving both HTC and Samsung behind and looking for other alternatives. I have said this before; I think this now opens the door for RIM to possibly expand its partnerships to either of the two phone makers.

Both HTC and Samsung may soon have to make contact with either RIM or Microsoft to see if a partnership can be forged in terms of operating system developments. This will be the only way for both companies to remain relevant. They can pretty much kiss the Android advantage goodbye, thanks to the acquisition of Motorola.

It’s not all bad

I’ve talked extensively about Google’s hardware conversion and its impact on its partners, but there are some significant advantages as well that must be considered. Clearly the hardware and software advantages are known; not to be overlooked are the numerous Motorola patents that Google will now own. But has anyone realized some of the initiatives that Motorola has started that will now fall into the hands of Google? I’m sure Netflix (NASDAQ:NFLX) understands what these are and has become concerned about these possibilities.

You see, as with Apple, Google had developed Google-TV. Although not initially successful, one can’t underestimate the potential for Google to leverage Motorola’s successful cable box business to make Google-TV a standard in streaming and other home entertainment content. Google immediately becomes ubiquitous in homes and can make a successful transition into a market where Cisco (NASDAQ:CSCO) could not with its attempt in its acquisition of Scientific Atlanta.

Summary

Google’s decision to enter the hardware realm will have many implications on not only the company itself, but also on its partners, current competitors as well as a few companies that may not know that they are competitors yet. But if one investigates the deal a little more closely, we can see that even on an adjusted basis, Google is still paying well more than 20 times trailing EBITDA for Motorola Mobility but a little more than half of trailing revenue. As I noted previously, I have developed more questions than Google has provided answers. But as I investigate the potential ramifications further, I am starting to appreciate a little bit more of what the company just may be thinking.


Disclosure: I am long CSCO, RIMM.