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Google Buys Motorola: The Most Expensive Corporate R&D Experiment of All Time?
By Sean McDevitt and Micah Sachs
Google’s $12.5 billion acquisition of Motorola Mobility in August was the biggest—and perhaps the most surprising—purchase the company has made in its short history. Motorola’s large portfolio of patents offers Google protection against future litigation, but does Google see something more in the company? In this viewpoint, we explore whether Google’s history of experimentation has something to tell us about its latest high-profile move.
As a pithy headline writer at Telecom Redux recently wrote, the rationale for Google’s acquisition of Motorola Mobility is “patently obvious.” Buying the consumer electronics manufacturer gives Google control over 24,500 active or pending patents, essential ammunition in the ongoing patent wars among mobile operating system and device manufacturers.
The more perplexing question is what Google plans to do with the rest of Motorola’s business: you know, the part with 19,000 employees and $11.5 billion in sales. Google has never shown much talent for manufacturing and marketing devices. And despite its public proclamations that Android will remain open-source and that Motorola will remain autonomous, buying a manufacturer that uses your operating system sends some confusing messages to the manufacturers you don’t own.
Speculation has focused on the possibility that Google will keep the intellectual property and sell off the physical assets. Perhaps. But Google has a long history of taking big financial gambles on acquisitions with uncertain outcomes (see: YouTube, Feedburner) and launching services that had no near-term prospects of raising revenue proportional to their cost (see: Google Wave, Google Earth). At heart, Google is an experimenter. Is it possible the acquisition of Motorola Mobility is the biggest and boldest experiment Google has ever undertaken?
The Google Way
Strategic cohesion is not a priority for Google. Just because Google+ debuted two weeks before the Motorola acquisition doesn’t mean they’re linked. Google always has numerous high-profile experiments running simultaneously. Some succeed. Most fail. What connects Google’s acquisitions and initiatives isn’t a strategy, it’s a philosophy.
|“Don’t be evil” is heart-warming, but the philosophy is really about advertising, data aggregation and maximizing audience share. The more data Google has about its audience, the more targeted its ads can be. The more targeted its ads, the more revenue it can generate per ad. The bigger an audience it can get, and/or the more face-time it can get in front of its audience, the more ads it can serve.
When Google launches a project, it often doesn’t have a clear sense of how—or whether—it will generate revenue. But Google’s flexible goals allow the company to sustain projects long after it becomes apparent they won’t be independent profit centers.
In other companies Google Maps would be viewed a failure. For Google it’s a useful tool to hone local search capabilities and maintain audience share. Google+ doesn’t yet carry ads, but it allows Google to map patterns of Internet usage to individual users. The data and face-time Google generates from these applications support its comfortable lead in search, the company’s revenue engine.
The Motorola Experiment
In 2005, Google bought a series of mobile software companies, including Android. The shopping spree fit a familiar pattern: Identify an emerging media or platform. Buy companies in that space. Worry about the revenue potential later. When blogging was becoming popular, Google bought Blogger. As web analytics was becoming more important to businesses, Google bought Urchin. Android was just another in a long line of experiments.
Since its release to handset manufacturers in 2008, Android has far surpassed expectations. Nearly 50% of new smartphones worldwide run on Android.
As successful as Android has been, Google has learned some lessons from relying on other parties to deliver its operating system: One, you can't control the quality of the user experience. Two, you can't guarantee that the revenue-generating components of the OS will be front-and-center. Three, you can't innovate at your desired pace.
Of course, becoming a manufacturer would put Google in direct competition with other Android partners like HTC and Samsung. But nothing in Google’s history would suggest its goal is to create a high-margin “walled garden” mobile ecosystem like Apple or Blackberry. Nor is it likely about stealing smartphone market share from Android partners. It’s more likely about cutting out the middle man.
Google can now directly produce a “gold standard” device running a skinless version of Android, and exploit Motorola’s carrier sales channels. Having control over the value chain would allow Google to deliver its preferred device more quickly, to more people, than it ever could before.
Experimental Devices from an Experimental Company?
The recent debut of Google Wallet demonstrates the challenges Google faces building a critical mass of offline users. Google worked with MasterCard to install near-field communications readers at 150,000 US retailers, partnered with Citigroup to allow all of its MasterCard holders to use Google Wallet-enabled phones as credit cards and implemented conservative security measures to protect Wallet users from theft and fraud. Most of the key components of the ecosystem are in place, save one: almost nobody actually owns a phone enabled for Google Wallet.
That's because Google Wallet requires a particular near-field communications chip that is only available on Google's Nexus S phone, which is only available through Sprint. Google hopes that the Nexus S won’t meet the same fate as its precursor, the Nexus One. The original Nexus model earned rave reviews upon its debut in early 2010, but Google never could get the phone to the mass market.
Google first offered the phone through a Google webstore. The webstore shut down within five months. Google attempted to market the phone through Verizon and AT&T, but neither carrier ever sold the device. During its first 74 days on the US market, Google sold 135,000 Nexus Ones—vs. the 1 million first-generation iPhones Apple sold during its first 74 days on market. Only one manufacturer has sold more first-generation smartphones more quickly: Motorola. 1.05 million first-generation Droids were sold during the phone’s first 74 days on sale. That kind of distribution power can't be built from scratch.
With Motorola in the fold, Google can ensure that hardware enablers for its services are baked into the latest mass-market consumer electronics. The next new Motorola phone will undoubtedly come pre-installed with the Google Wallet near-field communications chip. And where Motorola leads, the other handset manufacturers using Android are likely to follow.
More long-term, Motorola's manufacturing base allows Google to experiment with devices that might be too radical for the standalone device manufacturers. Google could eventually launch a cloud-based phone. Like the Amazon Kindle Fire, it would require minimal memory, but would go one step further and run all applications straight from the cloud. Google is already pursuing this model in the laptop market with the Chromebook. In this “pie-in-the-cloud” vision, all applications, including contacts, email and photos, are pulled from the Internet, using Google’s cloud-based software. With the advent of HTML5 and the convergence of desktop and mobile OS user interface designs, webpages written in HTML5 may eventually be indistinguishable from what we now call "apps."
Or take set-top boxes, the second-biggest source of revenue in Motorola Mobility's device portfolio. Google’s expertise at search could produce a radical improvement over the clunky, slow and dull viewer guides used by cable operators. An all-IP TV infrastructure allows Google to mine viewer data: what you watch, when you watch it, what you record. Armed with knowledge about viewing habits, Google could transform TV advertising into a dynamically generated, highly targeted service.
Or consider Motorola’s GPS devices. GPS only allows for one-way transmission of location data, but Google could take a page out of the Amazon Kindle playbook and embed cellular and Wi-Fi chipsets in GPS devices. The devices could occasionally transmit data on driving patterns and receive ads (dressed up as destination recommendations) tailored to the driver's behavior. GPS devices offer Google a convenient way around mobile phone users’ privacy concerns over location-based ads. You may not want your phone to know where you are, but who doesn’t want their GPS to know their whereabouts?
The Harsh Reality of Hardware
Of course, there’s a big difference between online and offline experimentation. Online projects are typically much cheaper and more mutable than offline ones. Google is constantly upgrading its online applications, but you can’t tinker with hardware once it’s left the factory.
Most importantly, Google’s dominance in search gives it control over the primary channel to its web services. Selling consumer electronics, however, requires Google to partner with external players, something it has had difficulty doing in the past. Will mobile operators be willing to sell a cloud phone that would stretch their network capacity? Will the developer community abandon Android if Google makes the app store obsolete? Are cable operators interested in renting out a set-top box that could alter their business model? How would media companies react to a device that could fundamentally redefine the notion of a TV channel? Experimentation is easy in the limitless expanse of the Internet, but partners may be less willing to risk valuable shelf space on devices with uncertain demand. This could even give mobile and cable operators leverage with Google they haven’t had before.
A Free Toy?
Given the unknown returns from experiments, it’s likely that Google’s purchase price for Motorola was driven by the value of the patents. Even for a risk-taker with $39 billion in cash, $12.5 billion is a bit too pricy for a sandbox.
Frost and Sullivan analyst Craig Cartier has observed that Google’s valuation of Motorola translates to a price of $510,000 per patent. That’s the same bounty per patent that Novell received when it sold off 882 patents in 2010, and significantly less than what Nortel’s patents sold for. Perhaps Google bought a stockpile of patents and got a device manufacturer thrown in for free?