Google and Motorola: bad business?

My Friday column in leading Spanish financial daily Expansión is titled “Motorola, bad business? and explores the ins and outs of an operation that has obviously hit Google’s very deep pockets hard, but is one that is based on reasons not without a certain logic.

Google bought Motorola in summer 2011 for $12.5 billion, mainly with the aim of acquiring its patent portfolio. Finding itself amid a major war in which patents were the best weapons to fight with, by forcing other companies to pay for their use, Google was defenseless, in part because it had not bothered to address the issue, and in part because of its belief until then that patents hold back innovation. But when it decided to weapon up, it turned its sights on one of the most important and long-standing companies, one that had created some of the first cellphones, but that had lost ground over the years to its rivals. Nobody else was bidding for Motorola at the time, but Google increased its offer to include in the deal the company’s entire patent portfolio, and which at the time seemed to the be principal objective of the acquisition.

Google bought a company that was not enjoying its finest moment, with a poor position in the growing smartphone market, but that held patents dating back some years. After the acquisition, it sold Motorola Home for $2.350 billion to Arris in December 2012, and is now selling off the phone manufacturing and sales division to Lenovo for $2.9 billion. Along the way, everything suggests that the use of Motorola patents has not panned out as hoped. Cellphone patents have a fairly short life, and a series of rulings against the company has led to the widespread conclusion that it paid over the odds for the portfolio.

Basically, when Google bought Motorola, it was buying a company that makes cellphones, which within Google’s hardware strategy, presented a major problem. Google’s business consists in part of convincing other manufacturers to use its technology, something that clearly creates a conflict of interest if it is also a competitor. The potential losses resulting from the big manufacturers deciding to drop Google because of its ownership of Motorola were too high to contemplate.

So, despite having pumped a lot of money into Motorola in a bid to restructure it and to launch competitive products, Google finds itself having to apply a golden rule of business: costs over time cannot be allowed to influence making a decision to pull out. The price Google paid is no longer a factor, what matters at this time is maintaining good relationships with phone manufacturers so that it can continue growing Android. A bad business decision? There is no question that Google burnt its fingers on this particular deal and that the patent portfolio would not seem to have been worth the money. But a company has to do what a company has to do, and the nature of Google’s business is to dominate the hardware market, but without making the hardware. Anything else would be to attribute the company objectives that, aside from occasionally, it never had, and that it would be unlikely ever to have.

Here’s the full text of the story:

Motorola: a bad business?

Google is selling its Motorola cellphones business to Lenovo for $2.9 billion, and in so doing proving that hardware, while an essential part of its roll-out strategy, is still a marginal, or even accidental part of its business.

Buying Motorola was one of the big surprises of 2011: costing $12.5 billion, and giving Google ownership of a mythical company that had enjoyed better times, but that nevertheless still possessed a huge patent portfolio that could play a key role in the array of lawsuits that it was planning to unleash.

At the same time, there was a downside to the acquisition: if Google’s Android strategy was to make itself attractive to smartphone makers, how would these companies feel about buying software from a company that was now competing with them in the hardware market? Becoming a phone manufacturer was a dangerous step for Google to take.

The long and the short of it is that Google bought Motorola for $12.5 billion, then invested more money in the company in a bid to make it competitive, and it must be said that models such as the Moto X and Moto G are very promising; it has now sold the company for $2.9 billion, while holding on to the patent portfolio. Bad business?

Google’s hardware strategy is robustly effective: through an open and free licensing system it has managed to dominate the smartphone market, while making serious inroads into the tablet niche, and establishing itself as a contender in the laptop sector thanks to Chromebook.

In other words, hardware is simply a means to an end, about being the soul of the machines that others make. For many years, Microsoft dominated the technology scene thanks to its operating system. Google is hoping to repeat the trick.

(En español, aquí)