Google Lenovo – The bigger picture.

Google is taking big steps to bring Android to maturity.

Selling Motorola Mobility is a further step by Google to mature its ecosystem from the rather chaotic reality in which it currently exists.
Google has finally decided to get rid of Motorola Mobility letting it go to Lenovo for around half what it paid for it three years ago.
This removes the biggest conflict that exists within Android and now Google can be a proper partner to the OEMs rather than a competitor.
Lenovo is paying $2.91bn for the Motorola Mobility handset business comprising of $660m in cash, $700m in Lenovo shares at the time of closing and a $1.55bn 3 year promissory note.
Lenovo is getting a business that is losing around $200m per quarter, a strong, well-known brand and trademark and around 2,000 patents.
Given the mess that Google has made of its Motorola acquisition, it is getting a good price.
The trajectory upon which Motorola Mobility was fixed would have left it destroying value and consuming cash into perpetuity giving it a negative value to any rational investor.
I suspect that Google has sweetened the deal with the 2,000 patents but the strong brand is what Lenovo really needs.
It has made a good business from its acquisition of the ThinkPad brand and clearly it aims to repeat the same strategy.
I suspect that Lenovo will close down almost all of the existing Motorola Mobility activities, rebrand its devices and push them through the Motorola Mobility channels.
Together Lenovo and Motorola have 6.6% share of the global smartphone market moving it into third position behind Apple and just ahead of Huawei and LG Electronics who had around 5% each in Q4 13. (Data from Counterpoint Research).
This is probably not enough for Lenovo to make a proper return but there is a lot that it can do with the Motorola brand and leveraging its existing manufacturing assets.
However, this is going to require finesse from Lenovo.
Android is a commodity and refinements to the software and cool features will be required if Lenovo ever wants to see a decent return on this investment.
This is not a talent that Lenovo has in handsets and some careful strategic hires are going to be needed to make this work.
I do not think that this will come from Motorola Mobility as most of this sort of talent has long since left the company.
The bottom line is that Lenovo has a shot at earning a good return from this investment but software and service differentiation will be required.
The spectre of BenQ’s disastrous acquisition of the Siemens handset business will be large in its mind.
For Google this move has much wider implications.
The recent IPR agreement with Samsung together with this transaction is a strong sign that Google is finally moving to make Android a mature ecosystem.
Android licensees can now treat Google as a proper partner rather than a competitor and focus on making the best handsets.
It removes the conflicts that have long existed within Android and aligns all players in the same direction.
The Android ecosystem has fantastic penetration but its usage is still far behind that of iOS.
Its users are not very loyal and developers are not really making a lot of money from applications.
All of this must change and it looks very much as if Google has finally woken up to this fact and is taking its rightful place as the leader of the pack.
If usage and loyalty improves Google benefits as it will be collecting the data and selling more advertising as a result.
This is why in the long-term Samsung and Google will come into conflict once again.
Returns on hardware will fall as handsets continue to commoditise and Samsung must move into the services layer if it is to maintain its profitability.
In essence this means throwing Google off its devices and replacing them with its own services which appeal to users.
Moving users from a Google ecosystem (on Samsung devices) into a Samsung ecosystem (on Samsung devices) will have the effect of increasing loyalty and hence pricing power which is the main driver of profitability.
This war is still some way off and recent moves in the Android camp have done nothing to dissuade me of its inevitability.
Samsung, LG Electronics, Sony Mobile and Huawei will be the main beneficiaries outside of Google should the Android ecosystem develop as Google hopes.
This is bad news for Microsoft and its allies that have benefited from the infighting and chaos in the Android camp.

Blog Comments

tatilsever

January 30, 2014 at 9:48 pm

The margins on the ecosystem dependent services might be higher, but I don’t find an OEM turfing our Google all that inevitable.

The hardware commoditization was a problem in PCs, and the margins were obviously much stronger on the software side, but none of the OEMs managed to get into the OS or productivity software business. Many of these OEMs had powerful brands at the time. Still, their executives mostly focused on cost cutting through outsourcing or consolidation through mergers. Granted the former created even more formidable future competitors for them, but how many executives could forego a steady rise in profits for the next two three years, despite the consequences five years down the road?

The alternative of expanding into software would require a lot of expenses for a few years before any pay off while turning Microsoft into a ruthless competitor instead of a partner. Worse, companies cannot be assured of actually creating a good piece of software or getting the marketplace to accept a new ecosystem based around them while they are incurring such expenses. Moving into different hardware business (LCD screens, DRAM, flash etc) usually means large capital investments, but they are easier to “sell” to your investors as they do not show up as expense, but as assets. Presenting current expenditures as “investment into future” goes down well for Amazon’s investors, but that is a rare exception. Samsung may be insulated from investor pressure, but I am not sure if the executives could still risk a very profitable business by getting into open conflict with Google even if the end result could be even bigger profits later. Look at business articles full of admiration for Apple having the “guts” to immediately cut off the very profitable iPod Mini line with spinning hard disks and replace it with flash based iPod Nano line. If that move took guts at the time, what will it take to tick off Google?