Google announced yesterday that it has agreed to buy Motorola Mobility for about $12.5 billion, a premium of 63% to the closing price of Motorola Mobility shares last Friday. Google’s CEO, Larry Page, said in a corporate blog post that the merger will “supercharge Android” and strengthen Google’s patent portfolio. Initial stories focused on Motorola’s patent portfolio, saying it is “the centerpiece of the deal.” I’m skeptical this deal is primarily a patent play. A 63% price premium for a major hardware manufacturer with ongoing operations is a lot to pay for patent defense. The largest patent verdict in U.S. history to withstand appellate review was only $290 million. That’s not chump change, but it is significantly less than $12.5 billion. It’s also telling that Google first raised Android patent issues less than two weeks before announcing the Motorola deal. Google’s recent post alleging patent attacks on Android looks like a transparent effort to focus deal commentary on Motorola’s intellectual property and divert attention from other aspects of the deal.
A comparison of smartphone OS market shares and revenue reveals a much stronger motivation for acquiring Motorola. When I wrote about the smartphone OS wars last August, Q1 2010 data indicated that Android held less than 10% of the global smartphone market. By the end of 2010, Android held over 22% of the global market (with an overall 888% growth rate in 2010), making it second only to Nokia’s Symbian operating system. Android now leads all smartphone operating systems with more than 43% of the global smartphone OS market, whereas Nokia has announced plans to abandon Symbian. In the space of two years, Android’s market share has gone from a baby gorilla to an 800 lb silverback.
Although Google denies it, the deal is a competitive reaction to the success of Apple’s iOS business model.
Significant market share usually means significant revenue, but Google hasn’t been able to cash in on Android’s impressive growth. Despite Android’s number one market share, Android’s advertising-based business model doesn’t generate anywhere near as much revenue as Apple’s vertically-integrated iOS business model. Even though the iPhone’s global market share is only 18%, Apple reported record second quarter revenue of $24.67 billion. Just three iOS products (the iPhone, iPod, and iPad) account for 66% of Apple’s revenue. Although Google doesn’t regularly publish numbers for Android, its global mobile advertising revenue in Q3 2010 was only about $1 billion. To put things in perspective, Apple’s Q2 revenue was close to triple the $9.03 billion in total revenue reported by Google in Q2 2011. As a result of its success with iOS, Apple is now the world’s most valuable company.
Although Google denies it, the deal is a competitive reaction to the success of Apple’s iOS business model. To compete with Apple, Google needs to monetize Android in the same way Apple monetized iOS: by controlling the entire mobile device platform. Although Google could theoretically do this on its own, Motorola’s engineering resources, manufacturing expertise, and product distribution chains will allow Google to emulate Apple’s vertically integrated mobile device platform far more quickly. That’s the real reason Google is buying Motorola.
Coming soon: My take on the deal’s impact, including potential winners and losers.