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Second only to Oracle, Google is the great integrator of large acquisitions. DoubleClick, YouTube, Android, Docs, AdSense, Keyhole, Postini and AdMob all were acquired and well integrated. Many of them became $1B annual businesses.

Motorola will be Google’s largest acquisition to date both in price and in employees added. It’s hard to point to any definitive conclusions about the merger of a company whose first product, a car radio, became the eponym for the brand: Motor (for car) + ola (from Victrola), and one of the defining companies of the Internet. But there’s no question of the strategic importance of the patents for Google, who will use them to defend Android against patent warfare.

As for the future, I’ve put together some observations and thoughts of potential impacts below:

Observations

The businesses are very different. In 2010, Motorola (MMI) generated $12.6B in revenue with 26% gross margin and $656M in operating cash flow (MMI deck). Google generated $29B with 64% gross margin and $10.4B in operating cash flow.

The acquisition cost is $9.5B net of cash. MMI’s patent portfolio is valued at $6B meaning the rest of the company is valued at $3.5B or 0.3x ttm revenue – very inexpensive.

Before the acquisition, Google had 650 granted patents. Motorola adds 17,000 and 7,500 pending many of these in core mobile phone technology. The average cost per patent at the net purchase price is $560k, about 20% less than the Nortel patents.

MMI is was recently displaced as the top set-top box manufacturer with 30% according to IHS, though the company still is market share leader in dollar terms.

MMI owns about 4% of the global smart phone market according to Canalys. (4.4M devices of 107.7M in Q2 11). Of the Android market, Motorola owns about 29% in the US according to Localytics.

Impacts

With the patent acquisition, Google will be able to defend Android and create breathing room for handset makers (also called original equipment manufacturers or OEMS)  Android has faced many patent lawsuits including some that have halted the sale of Android devices in some countries. With the large patent portfolio in hand, Google will be able to countersue for infringement of the Motorola patents which cover core mobile phone functions. The goal of these countersuits is to reach a conclusion where both sides drop the lawsuits. With tens of thousands of patents at its disposal, Google can begin to push its weight around. The relative strength of the patent portfolios of Apple, Microsoft and Google/MMI, though, is unclear.

Google will have doubled its employee base with the acquisition adding 19,000 employees. The logistics of running a hardware business are very different from a software business. The margins are significantly poorer. For the meantime, Motorola will continue to operate as a standalone company with significant oversight from Android. Over time, I would expect to see layoffs, restructuring and division sales.

Gartner speculates this may weaken the commitment of the 39 OEMs to the Android platform. And instead of putting their full support behind Android, these OEMs may build Windows Mobile phones to hedge the decline of Android and at the same time prevent Nokia from gaining share of the Windows Mobile market.

But I believe this will enable the Android OEMs to pursue market share more aggressively than before, assured they have protection from Google. Some have argued there are no examples of open ecosystems where the center of the ecosystem has been vertically integrated (Windows is the canonical example). But this time may be different, since the Android ecosystem is already so robust and the ecosystem is competing for a different set of dollars (handset dollars) than Google (ad dollars).

The Google purchase may trigger other M&A activity in the sector. Microsoft, Amazon, Apple, Nokia, RIM and others may respond with strategic acquisitions. I had argued that Amazon should acquire a carrier a week ago and think this is a stronger move now.

Android vertical integration, where Google controls the OS, handset and the interface between the two will impact developers and users. We may see faster software updates to Motorola devices if the carriers are amenable. We may see Nexus devices, those running stock Android, made by MMI. And we may see Google designed hardware. If the rumors of high Android return rates are even close to true, Google may decide there is value in showcasing best in class Android OS/handset pairing hoping the rest of the OEMs follow these best practices.

GoogleTV may still have life in the product, despite its catastrophic beginnings. With the knowhow and relationships of the MMI set top box business, the combined entity may be able to impact electronic programming guides (EPGs) and bring new products to market.

Bold moves

The Google/Motorola deal holds some great promise. In some areas, it will exceed expectations and others, disappoint. But there’s no question about the strategic importance of mobile. Many large tech companies with tens of billions in cash have reached this conclusion and if today’s news was any indicator, this is no time to be timid. Sit back and enjoy the fireworks.

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3 thoughts on “No time to be timid – thoughts on Google/Motorola

  1. It seems a bit depressing that patents, meant to protect novel and genius inventions, have become just numbers to be counted in the ongoing cold war of big technology firms. If I’m to believe the articles out there, the only useful thing about any of the Motorola patents is that there are 16,999 more of them. 🙂

    • Ha, strength in numbers. Patents need reform no question. Business model patents are one thing. I think though that the term of patents at 20 years, which made sense 500 years ago when the first one was given, are far too long in duration. Technology cycles are moving faster than two decades.

  2. Pingback: 20 years is too long for patent protection « ex post facto

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