Google-Motorola bears its first fruitNovember 1, 2011: 10:41 AM ET
Aside from a lot of patents, it wasn't quite clear why Google would spend $9.5 billion to acquire Motorola. Until now.
By Kevin Kelleher, contributor
FORTUNE -- It's been nearly three months since Google caught the tech world off guard by offering to buy Motorola Mobility Holdings for $12.5 billion. That's 11 weeks of head scratching, followed by second guessing, followed by some daring analysis, followed by more head scratching. Just what is Google getting out of this deal?
Aside from patents, that is. The immediate and most obvious explanation for the deal was that Google (GOOG) was interested in the 17,000 existing and 7,500 pending patents that Motorola (MMI) owns. Google needed to move aggressively to protect itself from patent litigation. But analysts valued Motorola's patents worth $3 billion at most. So why would Google pay a $9.5 billion premium for those patents, not to mention a 63% premium over the value of Motorola's shares before the deal?
We may be starting to see some signs of what Google was thinking. First of all, there are likely to be substantial layoffs once Motorola is absorbed into Google. The bloodletting is already happening. Motorola is laying off 800 of its 19,000 workers even before the merger takes place. Motorola said this week it will incur $31 million in severance costs related to the layoffs.
But another hint may lie in the release of Motorola's Droid Razr. The latest in Motorola's popular Droid line of Android-powered phones, the Droid Razr will reportedly launch on Verizon's (VZ) wireless network on Nov. 10. While it's unlikely to lure any iPhone lovers away from Apple (AAPL), it could help Motorola gain back some market share from Samsung, which saw revenue from mobile handset sales rise 40% last quarter, compared with a 20% rise in Motorola's mobile devices.
Early reviews of the Droid Razr are positive. Yes, it's another Android phone, but it's one that incorporates the sleek design elements in the hardware that made Motorola's Razr line of clamshell phones the last iconic phone before the rise of the smartphone. Released in 2003, Razr's were once the must-have phones. They were featured in TV shows like Lost and Burn Notice. They sold 130 million units in four years, and made Motorola a top name in the mobile industry.
The Droid Razr tries to recapture that allure, and even tap into nostalgia for any former Razr owners. Motorola says it's 7 millimeters thick, more than a millimeter thinner than the iPhone or the Samsung Galaxy S II, and weighs 4.5 ounces. Its case uses sculpted Gorilla glass, a tough Kevlar backing and a water-resistant coating.
Motorola also claims the Droid Razr is the thinnest smartphone on the market, two millimeters thinner than the 1.9-millimeter thick iPhone. Inside is a dual-core 1.2 Gigaherz processor and a 4.3-inch AMOLED display that helps make it, according to Motorola, the first smartphone that can stream high-definition video from Netflix (NFLX). Its battery promises 12 hours of talk time on one charge, which is good for a 4G LTE phone. Apple balked at releasing a 4G LTE iPhone this year in part because chips available to power those phones drain away batteries.
So the Droid Razr offers Motorola a promising start in the 4G era as mobile carriers build out their high-speed LTE networks. But just as importantly, it looks to be the most Google-friendly Android phone the company has produced to date. The Droid Razr will launch with the current version of Andriod, but will support the next generation of Andriod, Ice Cream Sandwich, several weeks after Google releases it. Normally, that process can take several months.
Of course, Motorola's Droid Razr won't be the first smartphone to run Ice Cream Sandwich early. That honor goes to Samsung's Galaxy Nexus. But unlike that phone, the Droid Razr will soon become a Google-owned phone. Google has acted like it wanted to manufacture its own phones ever since the first Nexus, which saw disappointing sales but at least came close to Google's own vision of what an Android phone should look like.
The Droid Razr will combine Motorola's hardware design with Google's software design. Once it owns Motorola, Google can design smartphones exactly as it wants them to be, only with the brand and expertise of one of the world's top mobile firms. Which gets at the real reason I suspect motivated Google's purchase of Motorola, beyond its patent portfolio: Google has no idea what will happen if it manufactures its own smartphones. Nobody does, really. But the only way for it to find out for sure is to try it.
The mobile industry is young and competitive and rapidly evolving. It is by nature unpredictable. So it's just as easy to say Google will regret buying Motorola as it is to say it will look back on the deal as a shrewd move. This is a risky transaction that my not pan out, but where there is risk, there can also be reward.
And if it doesn't pan out? There is a downside, but it's not so terrible. Google can shut down its phone manufacturing operations, or sell it off. Or, most likely, spin it off into a subsidiary and let Motorola return to the public markets. Minus the patents, of course.