Can Google beat Apple at its own game?
The financial and technical news is buzzing this week about Google’s [stckqut]goog[/stckqut] acquisition of Motorola Mobility Inc. [stckqut]mmi[/stckqut] My general rule is that when a company acquires another company that is bigger than 10% of the parent then a Confident Investor needs to get cautious. Google’s revenue is $33.3B and Motorola Mobility’s revenue is $12.7B. Too many companies get very confused and get lost during a merger of this size and this is quite likely to happen here. For this reason, I am removing Google from my Watch List until Google has had some time to integrate MMI.
When the news of the merger first broke, the discussion was all about Google buying the robust library of patents that Motorola Mobility owned. While this is an immediate benefit to Google as they fight in the very litigious environment of mobile platforms, it would be foolish to limit this acquisition to just that portfolio.
Google is paying $12.5B for MMI. This is a pretty high premium to pay for the rights to the patents. If Google just wanted the rights to protect against lawsuits then they could have licensed these patents for far less money. Of course, Kevin Smithen, an analyst from Macquarie USA, thinks that Google only wanted the patents and will spin off the hardware business relatively quickly.
If Smithen is correct then the various Android manufacturers have nothing to fear. In fact, this would be the best of all worlds in that MMI will be severely confused as it moves into Google and then shuffled back out to private equity or some other manufacturer. This would be a recipe for near death for MMI going through that many transitions and their competitors will take advantage of that confusion. The various phone manufacturers would also enjoy the fruits of Google’s largess and have fewer patent problems as Apple[stckqut]aapl[/stckqut], Microsoft [stckqut]msft[/stckqut], and Oracle [orcl[/stckqut] try to stop or get a piece of the Android revenue stream.
However, I do not think that Google will miss the opportunity to compete with their top competitor: Apple. It is very clear that the Android OS will continue to be the most popular mobile phone OS just like Windows on the desktop is the most popular OS. However, just like on the desktop, the preferred vendor is Apple. Whenever a new phone running Android is introduced, it is compared to the gold standard, the iPhone. Whenever a new version of Android comes out, it is compared to the gold standard, iOS. Whenever a new tablet comes out, it is compared to the gold standard, iPad.
I do not think that that Google wants to be the Microsoft of the phone. Rather, their culture is much closer to being like Apple. If you look at all of the products from Google (usually creating little to no revenue for the company) most of them are about defining and creating a great user experience. This is what Apple has almost always tried to do. The one place that Google doesn’t do this is in mobile phones where their OS, Android, is placed on so many different form factors that they no longer have a great user experience across the entire platform.
The addition of MMI to Google gives them the unique opportunity to create a phone platform that is tightly coupled between hardware and software that is only seen in products from Apple or Research In Motion [stckqut]rimm[/stckqut]. There, though, is the rub. Few companies have been successful at running a business that is equal parts hardware and software. Apple is the only one true success in that area while others were successful for awhile and then struggled (think RIM and Palm). Most companies do not do a great job of being great in both hardware and software. Rather, they focus on hardware (think HP[stckqut]hpq[/stckqut], Dell[stckqut]dell[/stckqut], and Lenovo) or they focus on software (think Microsoft, CA[stckqut]ca[/stckqut], and Oracle[stckqut]orcl[/stckqut]) and they let the other side be “good enough” to support the core. Yes, HP makes software but that isn’t the core of their business and, for the most part, their software is designed to operate their great hardware. Similarly, Microsoft makes computer mice but few people consider this to be the core of what Microsoft is. For years, Oracle was a software only company until they bought Sun, another company that struggled being a software company and a hardware company.
Apple though has carved out a unique position in that they make great software and equally great hardware and they combine the two together to enable an awesome user experience. That is what Google has the potential to do with MMI. It won’t be easy and they could elect to take the easy way out and spin off the hardware business. In addition to being incredibly difficult to do well, it is also risky in that their Android partners would be very unhappy about a well integrated Android phone competing with a “stock” phone running Android. The road to excellence may force Google to upset their partners a great deal and Google simply may not be up to the task of accomplishing this goal.
The Motorola Mobility deal also allows Google to be excellent in another area that is dominated by no one and may be even bigger than mobile phones. Motorola generated nearly $3.6B in set-top boxes and services for television. Google has dabbled in this area of the market without much huge success. The combination of Google’s software with Motorola’s set-top infrastructure could create an integrated environment that would have everyone else on the outside looking in on a very strong revenue stream.
This acquisition could be only about protecting Android from patent suits but that would be a shame since Android doesn’t add significantly to Google’s bottom line. If Google wants to be truly great, this acquisition could be about trying to learn from Apple and teaching the master a trick or two. The question is: can Google out-Apple Apple? While this will be interesting to watch, I would prefer to watch it from the sidelines and not as an investor so I will sit back for a few months to see how this proceeds.