Moto E – Last of the line

Google has deep pockets. Lenovo does not.

• The Moto E is a triumph for the consumer offering more smartphone than ever for the dollar.
• However, it is likely to be a financial disaster for Lenovo which, after taking on Motorola, will be just $100m above break-even at the group level.
• In contrast, Motorola’s thumping $200m loss in Q1 14A negatively impacted Google’s EBIT by just 4%.
• Hence, I think that the Moto E and the Moto G it will be the last of these types of devices.
• I suspect that Google loses money every time a Moto G or a Moto E ships and this is something that Lenovo cannot afford to do.
• The Moto E and the Moto G are clearly aimed at getting more capable internet devices into the hands of low end users.
• The objective here is to drive internet use through the Google ecosystem which Google can then monetise.
• This is how Google can justify losing significant sums on the hardware as it hopes it will more than earn it back through growth in mobile advertising revenues.
• However, Lenovo has no ecosystem and can only make money on the hardware itself.
• Hence products that are highly specified, but sell at really cheap prices to drive penetration, are likely to be swiftly killed off once Lenovo takes over.
• That is unless someone compensates it to make these sorts of devices and here Lenovo could end up a member of Google’s Silver program.
• This is a program where Google pays handset makers to make a device and I can see Google compensating Lenovo if it wants to see the Moto G and E line continuing.
• This device is bad news for the other Android makers as it will accelerate the race to the bottom and ensure that Android continues to commoditise at a breakneck pace.
• Consequently, I remain pretty cautious on the handset industry this year as growth is slowing and competition heating up.
• I prefer to look for growth and profit in the ecosystem where Yahoo!, Google and Microsoft are my favoured plays.