Google Inc announced that it will acquire Motorola Mobility (MMI) for about US$ 12.5 billion, at $40.00 per share in cash, a premium of 63 per cent to the closing price of Motorola Mobility shares. This deal, subject to regulatory approvals, gives Google immediate entry in the hardware and devices space, along with a rich repository of patents. For MMI, it is a fresh lease of life.
Considering that formidable competitors (read Apple Inc and Research in Motion) are present in the hardware and the operating systems (OS) space, and with the recent Nokia-Microsoft alliance, it was a business necessity for Google to get into devices and hardware space. The rising threats on Intellectual Property Rights from Apple, RIM and others is an important driver for this deal at a premium price. This acquisition may put Google on a firmer footing compared to its rivals in the smart phone market.
In that context, it appears to be primarily a defensive deal for Google, to protect and further Android as an OS and shield itself from potential patent lawsuits.
Access to a respected device and hardware company such as MMI provides Google a solid protection ground for Android OS. While Android already has the largest share in the smart phone and tablets market, however the lack of device capabilities limits Google?s potential, i.e. for each device that is sold, a device maker adds significantly more to the EBITDA versus an OS player.
Google will also have immediate access to a much-needed patent portfolio: Motorola has 17,000 patents and 7,000 patents pending. Beyond furthering product developments, this would facilitate the avoidance of large patent-infringement lawsuits and possible payouts against Google. It is also likely to mitigate market uncertainties created by such litigation. Recently, Google was outbid, by a margin of several billion dollars, for Nortel’s coveted patent portfolio by a consortium of Apple, Microsoft, and RIM.
The revenue-generating or offensive benefits of the deal is primarily development of compelling products in the retail smart phone, enterprise devices, tablets, and entertainment devices based on Android platform. While MMI has a decent smart phone portfolio, markets shares are hovering around a low 2-3 per cent. This acquisition will therefore lead to development and launch of killer products.
Besides in smart phones and the likes, MMI has a strong presence in set top boxes, which is a potential upside for Android, provided television distribution businesses are flexible to adopt the same. Considering Google TV hardware has been far from spectacular so far, this deal could provide the much needed hardware-OS combination for Google TV.
The deal also brings to the table other impacts on the larger market place. Many of MMI?s competitors use Google?s Android operating system, notably HTC, Samsung, LG, ZTE. MMI is going to be a licensee of Android operating system, similar to its rivals, but this deal will create uncertainty in the devices ecosystem. It is however unlikely that Google will provide preferential access to MMI in near future, considering MMI?s low market presence.
From an OS perspective, clearly Microsoft looks to benefit from this deal, as other device companies, will hedge their risks and may fall back on Windows mobile/mango operating systems. There could be a fillip to HP (erstwhile Palm) Web OS ? which could gain more acceptances among device players as an open platform. And nothing stops larger players like Samsung from furthering their own operating systems. In the short term, the Android uncertainties will more likely give a small boost to Apple and RIM.
The Google MMI deal is one that has set out ripples in the industry ecosystem. One can expect to see some more action in the devices and operating systems space in the near term.
By Jaideep Ghosh, Executive Director, KPMG Advisory Services, India
