Earlier today, we learned that Samsung has reportedly agreed to to stop copying Google’s core apps on its Galaxy smartphones and tablets running Android. What did Samsung get in return?
Maybe it got Google out of the smartphone hardware business.
Google announced today that it’s selling Motorola’s smartphone business to Chinese manufacturer Lenovo for about $3 billion. Google bought Motorola Mobility in 2011 for $12.5 billion in what was mainly thought of as a play to acquire 17,000 mobile-related patents. In the deal with Lenovo, Google gets to keep the Motorola patents but will license them to Lenovo, which will also get 2,000 patents from the Motorola portfolio.
“This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere. As a side note, this does not signal a larger shift for our other hardware efforts,” Google CEO Larry Page wrote in a blog post.
Under Google, Motorola released two flagship smartphones—the Moto X and the Moto G—while also continuing push out its Droid devices sold through Verizon in the United States. Motorola is the third biggest smartphone manufacturer in the U.S. and Latin America, according to Google’s release. Motorola doesn’t have a substantial market share in the rest of the world.
In The End, Not A Bad Deal For Google
When you look back on the less than three years that Google owned Motorola, the deal actually doesn’t look that bad in retrospect.
Google previously sold Motorola’s set-top box division for the Arris Group for $2.05 billion. Now it is getting nearly $3 billion from Lenovo (in the form of Lenovo stock, $660 million in cash upon close and a three year promissory note). So Google has recouped almost half of the money it initially invested in Motorola.
That leaves the cost to acquire the 17,000 or so patents at about $7 billion. If we compare that to the $4 billion or so the Rockstar Consortium spent on Nortel’s patents, it doesn’t look all that unreasonable. If we want to do some creative accounting, Motorola had $3 billion in cash or equivalents when Google acquired it, so you can deduct that from the purchase price. Then again, Google has lost more than a billion dollars on Motorola since the acquisition became final, so placing a hard figure on just how much Google ended up paying for the patents is hard to pin down.
“Google got wanted they wanted/needed from Moto—they got patents, engineering talent and mobile market/device insight,” mobile analyst Jack Gold of J.Gold & Associates wrote in an email. “They got rid of old Moto management some time ago and Moto as a device manufacturer was never really strategic to Google. They don’t need to be in the device business, and it got them into some hot water with their leading OEMs.”
Google announces its quarterly and 2013 year-end results tomorrow, but even before the release it was clear that Motorola would cost Google about a billion dollars in losses this year. Those were losses that Google seemed fine with eating while it turned the unit around.
“It gets Google out of channel conflict,” Gold said. “Gets them out of a business they don’t have a chance of making any real money in, and gets them the ability to concentrate on real opportunities without the diversion of having to run a device manufacturing company (I think that was the plan all along – Google would milk Moto for a couple of years then sell it off).”
The Samsung Question
Earlier this week, Google and Samsung announced a 10-year patent licensing deal in which the companies will protect each other from rival lawsuits by pooling their large inventory of intellectual property. And today we learned of the reported Google and Samsung deal involving Android and Google’s core suite of apps.
Then we hear that Google is getting out of the smartphone hardware business. This is not likely a coincidence.
“The recent licensing deal between Google and Samsung will make this deal palatable to the marketplace,” Gold said. “But it clearly establishes Samsung as the Android player to beat in the marketplace.”
What Happens To Motorola?
Of all the places Motorola could have ended up, Lenovo isn’t really that bad. Lenovo was the fourth largest smartphone maker in the fourth quarter of 2013, with 13.9 million units shipped (4.9% of global market share for the quarter).
Almost all of those sales were to emerging markets like China. With the Motorola acquisition, Lenovo has bought its way into North and Central America where the Moto X and Moto G have fared well.
Beyond those smartphone models, Lenovo also gets the Motorola brand and a product pipeline that likely included an update to the Moto X, probably due sometime in mid-2014. The Moto G is considered to be the best quality budget Android smartphone on the market, and that could work nicely in the emerging markets where Lenovo has a strong presence.
Earlier this month, Lenovo also bought IBM’s low-end server business for about $2 billion, making it a busy week for the Chinese manufacturer.
As Goes Nokia, So Goes Motorola
In some respects, the Lenovo-Motorola deal resembles Microsoft’s acquisition of Nokia’s mobile operations. In that deal, Nokia kept its patent portfolio (which it will license to Microsoft) and some assets, including the Here Maps product and team. Microsoft gets to use the Nokia and Lumia brands for a period of years. The manufacturing, engineering, design and development teams from Nokia became part of Microsoft.
In the case of Google and Motorola, Lenovo gets just about everything while Google gets to keep the patents and a part of Lenovo itself with the $750 million in stock that Lenovo is handing over. So if Motorola bolster’s Lenovo’s business profile, Google would benefit from any subsequent rise in Lenovo shares.
Lenovo said it won’t be cutting headcount at Motorola in the short term and will keep open its Chicago office. Lenovo is not acquiring the advanced research unit of Motorola—headed by former DARPA researcher Regina Dugan—that’s pursuing far-out projects such as swallowable pill passwords and electronic tattoos. Lenovo was noncommittal about whether or not it would continue certain Motorola projects, saying only that the company is will be focused on bringing innovative products to market.
Update: This article has been corrected to note that Project Ara will stay with Google in the Advanced Technology Group.
“The Lenovo smartphone brand and the Motorola smartphone brand are very complimentary,” Yang Yuanqing, chairman and CEO of Lenovo, said during a conference call. “The Motorola brand is very strong in North America and Latin America and we will continue to use its brand to leverage our business…. The Motorola brand is very strong in China as well and we will introduce it to those markets.”