Google and Motorola: Desperately seeking each otherAugust 15, 2011: 1:44 PM ET
The $12.5 billion acquisition is guaranteed to send shockwaves through the mobile sector. Truth is, both companies need each other badly.
FORTUNE -- Google's agreement to pay a princely $12.5 billion to acquire Motorola Mobility is guaranteed to send shockwaves through the mobile industry. Questions are swirling already about other Android partners' hurt feelings and how two disparate cultures will ever come together, not to mention the Mountain View, California giant's existing problems with the FTC. But the truth is Google, knocked around by emboldened competitors, and Motorola, its long awaited turn around sputtering, needed each other. Badly.
The acquisition, Google's (GOOG) largest yet, is partly a defensive move to protect against a growing number of patent lawsuits. Seeds were likely sown earlier this summer when the search titan lost a bid to purchase intellectual property that was fallout from communications gear maker Nortel's bankruptcy. Instead, thousands of patents went to a consortium including rivals Microsoft (MSFT) and Apple (AAPL). With Motorola, Google gets a whopping 17,000 patents -- with another 7,500 pending approval. It will also nab the design expertise of one of America's most iconic device makers as well as a talented and accomplished executive, CEO Sanja Jha.
"Google needed more heft to maintain viability or it would have been at risk of cease-and-desists," explains Jordan Rohan, an Internet analyst at Stifel Nicolaus. "If the risk of that were understood by the markets, it could lead to different decisions by carriers," he adds, suggesting that Android's substantial growth could have been hindered. If nothing else, the deal is proof that patents are crucial for any company that seeks to dominate the mobile web.
Motorola, meanwhile, has struggled to stay competitive in the smartphone market since Jha arrived from Qualcomm in 2008. In January 2011, Motorola split in two: Motorola Solutions makes public safety equipment and barcode scanners. Motorola Mobility produces smartphones, tablets and set-top boxes. Google wants the later to bulk up Android.
Jha hitched the new company's turnaround strategy to the then still emerging Android operating system. While he scored some hits, helping to build awareness of Android with consumers, he also suffered major setbacks. The eagerly anticipated Droid Bionic, a key product for the company, was delayed and the Atrix 4G, a hybrid phone and laptop, never caught on. Meanwhile the much-hyped, Android-powered Xoom tablet has been a dismal failure, selling a mere 440,000 units in the quarter compared to Apple's 9.25 million iPads last quarter.
Those disappointment added up. Last quarter, Motorola lost $56 million and upset Wall Street by saying results for its current quarter would be even weaker than expected. Earlier this year, Jha talked to Fortune leaving the door open to a major deal and casting doubt on the company's ability to go it alone ultimately. "I expect consolidation to occur. Our customers are consolidating, our suppliers are consolidating," he told Fortune's Geoff Colvin. Tellingly, he added that he didn't see Motorola hooking up with another handset manufacturer. "Consolidation across software and hardware manufacturers create [the most] shareholder value," he said, nodding to Hewlett-Packard's (HPQ) Palm acquisition and Microsoft's deal with Nokia (NOK). (Apple and Research in Motion (RIMM) already control both their hardware and software components.)
Thus the strategic maneuvering of competitors and the ongoing threat of patent disputes set the stage for today's announcement. Now, risk has forced Google to purchase a business that is admittedly outside of its expertise and that stands to disrupt relationships with other handset makers. After all, it has brought a competitor in-house. Google has said it will continue to run Motorola as a separate business that will license the Android operating system from Google. Motorola will even have to bid to become the maker of Google's smartphone, the Nexus, which is revamped annually.
So far, Motorola's direct competitors, device makers like HTC and Samsung, have come out in favor of the acquisition plans. They say it's in their best interest for Google to have as much patent protection as possible. That might be true, but even so, they don't really have many other options. CEO Larry Page today said Motorola Mobility is "poised for tremendous growth." Now it will be on him not only to figure out how to squeeze profits from the gadget maker but also how to keep a highly defensive acquisition from becoming an embarrassing failure.