Google Concedes Defeat

| About: Alphabet, Inc. (GOOG)
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In a surprise announcement several days ago, Google (NASDAQ:GOOG) decided to throw in the towel as a smartphone manufacturer and concede defeat. It agreed to sell Motorola to Lenovo for $2.91 billion, after buying the unit for over $12.5 billion.

As many have commented, Lenovo wants the brand in order to be able to expand in western markets. They pulled a similar stunt in 2005 when they bought IBM's (NYSE:IBM) ThinkPad division, and were able to quickly turn the division around and make it profitable. Obviously they want to repeat the IBM experience by buying Motorola, in order to inherit the name and sell devices with the Motorola brand.

To be honest, I can't even begin to express how disappointed I am in Google for giving up so easily. Granted that they bought Motorola mainly for the patents, but for a while there it really seemed that were also serious about making devices. I really thought that they would be going after Samsung for a while.

If Google wanted to, they could have made it very difficult for Samsung (OTC:SSNLF) to use its Android OS, thus forcing it to migrate to Tizen. In the meantime, Google could have expanded manufacturing in the Android space and fill the void. That is, if they ever attempted to do something like this, which they did not.

So instead of taking a shot at becoming the Android device king, Google instead chicken out and is laying the carpet to both Lenovo and Samsung to take over the entire Android space. In addition, there will no longer be any smartphone manufacturing expertise in North America, leaving Asian companies the monopoly in production. My dream that maybe one day Google will make enough money selling devices, as Apple (NASDAQ:AAPL) does, will never ferment.

The question is, why did Google chicken out? I can tell you one thing, it's not because they couldn't take any future losses or because of shareholder pressure. I think Google was terrified because of ongoing developments that have forced Google to think things differently.

Let me remind readers that it was not too long ago that Google and Samsung were at each others throat. Last year the WSJ ran a story saying that Samsung had sparked anxiety to Google. See Google pays Samsung a percent of the ad revenue that it gets from Samsung devices. And with Samsung becoming so big (about 40% of the Android market back then), it was afraid that Samsung might flex its muscles and demand an even higher kickback from Google, than what it was already receiving.

Let me also remind readers that at the Galaxy S4 launch at Radio City Music Hall in New York, Samsung executives not once mentioned the name "Google" during the presentation, and only mentioned Google when they said the S4 was running on Google's Android 4.2.2.

And when the S4 was rolled out, the built-in "Samsung Hub," an app store and media library full of books, movies and television shows was introduced to the world. Samsung placed its "Media Hub" on home screens across the Galaxy smartphone and tablet lines, and in doing so, it posed a direct threat to the Google Play app store and media library. Samsung also replicated many of the same core apps Google builds for Android, including the browser, email system, notifications, messaging service and other apps. It came to a point where device users had to decide which company's apps to use.

But there is also another revelation that Google is worried about. More and more companies are creating their own version of Android for use with their devices, and are ignoring Google. In fact according to ABI Research, about 25% of all Android devices sold today do not have the Google essential suite of installed apps. These are many devices manufacturers out there (mainly from China and Russia) that have developed "forked" versions of Android that do not have 100% Google integration included. The Amazon Kindle FireOS and Xiaomi's MIUI are both good examples.

As an example, I recently ordered a Chinese Android device for my wife (that I could even get even for double the money of a name brand phone) and I had to install most of the Google apps she used. And then when I opened a browser, I was directed to Baidu (NASDAQ:BIDU) with Chinese written all over the browser. In fact G+ does not work well on this phone at all, for her pictures are not automatically uploaded to Google.

So on the one hand Google decided it was not worth the risk losing the platform's biggest device maker (Samsung) and on the other, it has to do something about all these bootlegged versions of Android all over the place. And a peace treaty with Samsung was probably the best way for Google to achieve this.

But in order for Samsung to abandon its "declaration of Independence" plans in trying to develop an ecosystem of its own, it had to get something Google.

And the price to pay is that Google had to sell its Motorola division, so as to never become a device manufacture and a direct competitor of Samsung in the future. See, I am absolutely sure that over time Google devices would have taken over most of the U.S. and North American markets, if not Europe itself. Because not only is Google's Moto X and Nexus phones good devices for the money, but given the choice of Google or Samsung homegrown apps, people in the western world will go with Google. And that in the long term threatens Samsung as a device manufacturer.

So basically, Google selling its Motorola division to Lenovo is nothing more than Google bowing to pressure from Samsung, that unless it stops trying to become a manufacturer itself (and thus possibly threatening Samsung in the long run), Samsung will go its own way and possibly develop its own ecosystem in the long term. And from the look of things, that is not a bet Google was willing to take.

On the next article in this series, I will explain what this revelation might mean for the valuation of Google, and how Microsoft (NASDAQ:MSFT) and BlackBerry (BBRY) might be affected by the peace treaty between Google and Samsung. Stay tuned ...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.