Google-Motorola Deal: Implications on Smartphone Sector

Google Inc. has agreed to buy Motorola Mobility Holdings Inc. for $12.5 billion or $40 a share in cash to defend its Android ecosystem. Rising IP threats to Android from Microsoft Corp. and Apple Inc. were the primary driver of the acquisition, RBC Capital Markets said.

Google gets Motorola Mobility's portfolio (17,000 patents), and while this deal may not necessarily mitigate some of the intellectual property (IP) wars under way (e.g. Apple and Motorola already suing each other), it may position Google to defend itself against more fundamental IP attacks, and increase counter-threat and leverage in global patent negotiations and litigation.

"Following its tentative Nexus Smartphone strategy, Google would now enter the handset business in a big way, pursuing tighter hardware/software integration -- which for Apple has been a key competitive advantage," said Mike Abramsky, an analyst at RBC Capital.

Abramsky said a Google/Motorola Mobility combination thus may create stronger competition against Apple at the high end of the market.

However, the deal may create significant disruption amongst existing Android original equipment manufacturers (Samsung, HTC, etc) who now may view Google as a competitor as well as partner, possibly forcing some to embrace Microsoft -- or further other/their own software strategies, Abramsky said.

Abramsky said that from the carrier perspective (critical as they helped Android succeed), Google becomes both a handset supplier and a platform -- the conflicting implications of which have yet to emerge.

Following Apple's disruption of the smartphone/tablets industry, Motorola Mobility, Research In Motion Ltd. and Nokia Corp. have been struggling to compete.

Google/Motorola Mobility (given Google's priority for advertising, mobile platform domination and community expansion) may pursue a disruptive share gain strategy versus Apple, Microsoft.

However, in the near term, the challenges and distractions of integration (similar to Nokia/Microsoft) could help Apple gain share. This deal may weaken the hand of Android OEMs (Samsung, HTC, LG, etc.) and may put additional pressure on the BlackBerry maker, Microsoft to win "third platform" status.

"Google is saying this deal won't change their commitment to original equipment manufacturers (OEM), however this takeover may be significantly disruptive to the Android OEMs, who now -- depending on how Google handles it -- view Google as a competitor as well as partner," said Abramsky.

Abramsky said the big risk -- but Google obviously felt the patents were worth it -- is that Samsung, HTC, etc. become less aligned with Android. For example, all the Google Premium Nexus phones will likely be Motorola going forward (its hard to see HTC or Samsung producing a Nexus One now) and may contain unique features unavailable (at least initially) to other Android OEMs, forcing OEMs to look to Microsoft as a mitigation strategy.

Plus from a carrier perspective, this turns Google into both a handset supplier and a platform, which may have some conflicting implications, Abramsky said.

Abramsky said this transaction may accelerate smartphone consolidation. Two possible transactions may gain momentum: Microsoft/Nokia -- this transaction may put pressure on Microsoft to formally acquire Nokia to achieve similar objectives -- although internal Microsoft challenges to this remain; and RIM may be more attractive as a takeout candidate, however its struggles may give an acquirer pause.