933RA- Google Acquires Motorola Mobility and 17,000 Patents; Microsoft Wins?

What is Happening? — Google helped wake up and shake up Cloud, mobility, consumer, and enterprise IT markets with its announcement early Monday August 14 that it plans to acquire Motorola Mobility. Motorola Mobility in turn announced Monday that it had accepted Google’s offer of $40 per share, about a 60 percent premium over its traded share price on Friday August 12. The total deal value is placed at $12.5B, assuming regulatory and shareholder approval as structured. No timetable for deal approval and consummation has been released by either company, but it is widely expected to complete by the end of 2011.

Broadcast and web-based news, business and trade publications, blogospheres, the Twitterverse, and all other associated media have already pumped out millions of words and bytes of analysis and ideas about the deal. Opinion and analysis seem almost evenly split on whether or not it’s a good deal for Google, its competitors, and users.

Saugatuck’s take on it is very simple:

•   While the deal provides Google with substantial benefits, it is a very dangerous path for Google to embark upon;
•   The deal opens doors for HP and Microsoft, and throws both Microsoft and Nokia a mobile-market lifeline, and
•   The mobile market will not see significant impact from this deal for at least another year.

Why Is It Happeing? — The cornerstone of the deal for Google is 17,000 or more Motorola patents for mobile telephony networking and manufacturing. Control of such patents has become the sine qua non of IT market protection over the past decade.

Building around and on top of that patent cornerstone is an immediate strengthening of Google’s presence and influence in mobile device markets. As leader and head cheerleader of the Android OS community, Google already exerted great influence within and over mobile device manufacturing and design. With Motorola, Google gains hard assets, hardware research and development IP, and sales and distribution channels that it lacked.

Those assets, real and intangible, also provide Google with more presence and influence over the growth of Cloud IT and Cloud business. Mobility was until recently a fringe market between the Cloud and enterprise; it is now an integral enterprise Cloud marketplace with trillions of dollars of potential revenue worldwide.

Google of course also gains some competitive position and capability against mobility competitors Apple and HP, which already control their hardware and OS both – and therefore have tremendous control and influence over a very long-tail ecosystem of development communities, channel partners, and customers. However, HP has not yet been able to translate its WebOS ownership into the type of market presence and influence that Apple enjoys with its neatly vertically-integrated value chain of “i” devices, OS, retail presence and economic ecosystem.

Google of course also gains some ground on the burgeoning Microsoft+ Nokia alliance. Despite the prevailing, mostly negative trade and analyst attitude toward that alliance, it has retained exceptional customer presence, channel presence, and revenue streams that can support it through a current, possibly lengthy, mobile market downturn for both companies. In some ways, Google buying Motorola may strengthen both Microsoft and Nokia.

Finally, Google gets another revenue stream in a market that (as noted above) is huge and growing. The established Motorola business and ecosystems allow Google to avoid its previous mistakes made in mobile phone development, marketing, sales and support, while ensuring a profitable stream of revenue – assuming that Google does nothing to negatively affect that.

Market Impact — Let us begin assessing market impact by saying that very little is going to happen as a direct result of this acquisition for six to 12 months. So we will point out the biggest and most likely points of action and friction, and lay a foundation for ongoing examination and analysis.  

The biggest friction point is this: Google just became a hardware vendor for its own operating system. That is a huge conflict of interest for any vendor, and one not easily managed throughout the last 20-plus years of IT history.

Despite the best intentions stated by Google CEO Larry Page, there will be fragmentation and friction between Android licensees and Google. Google has already come down hard on developers and other licensees for straying from its vision for the OS. We fully expect that at leading mobile device makers with Android licenses have scheduled at least exploratory meetings with Microsoft regarding Windows Phone 7 since Friday August 12.

We should also point out that since the 1980s, hardware vendors, especially mass-market hardware vendors, have had considerable difficulty in building and sustaining success in owning and controlling relevant OSes. IBM could not make its quite-capable OS/2 work in mass market PCs. Sun could not build and sustain the necessary market strength for its combination of servers and Solaris OS. Palm very recently was unable to do it with an OS that was highly regarded by mobile market-watchers and users. And Nokia has, very visibly, been unable to translate the success of its own OS dominance in feature phones to smartphones. Apple has been one of the few successes – and its success derives from its abilities on the consumer device front, not the IT front.

Yes, each of these vendors made significant mistakes in development, marketing, and R&D, and none of these examples are exactly comparable to the Google Android/Motorola instance. But they are very consistent mistakes across IT markets and timeframes, and mistakes that Google could readily be expected to make itself.

Put bluntly, Google has not shown itself to be adept at hardware marketing, sales and support. And its decentralized, try-anything, beta-everywhere approach has hurt it in many commercial IT . . . Click Here to Read the Full RA