Google started out in humble beginnings. Originally created to index the world’s websites, the company is now an omnipresent entity that is involved in a breadth of industries across the globe, and this week it confirmed its intentions to dominate the mobile phone market. On Monday Google made its single biggest acquisition in purchasing Motorola Mobility, Motorola’s mobile division, for a cool $12.5 billion (representing a 63% premium on the company’s share price). On the surface this acquisition was a shock to the market, but on further inspection it tells a lot about the state of the mobile market today and where it is likely to be in the future. In order to fully understand why this acquisition was made we need to back track a few years and explore the evolution of the mobile phone market.
Like computers, mobile phones run Operating Systems (OS), but historically the public at large took little interest in knowing what type of OS theirs was running. I for one was simply interested in small phones that could be quickly dropped into my underwear when the threat of being mugged was imminent. This was a time when a phone’s USP was that you could change its cover or listen to an FM radio, and apps were nowhere to be seen. The industry was stagnant, held back the piecemeal development of an advanced mobile internet. Phones were phones and the world was a pretty dull place.
Fast forward to 2005 and Google decided to enter the mobile phone industry by buying up Android. Google worked alongside a plethora of handset makers and formed the Open Handset Alliance from which the Android as we know it today was developed. The first Android handset was brought to market in 2008, a year after the now ubiquitous Apple iphone changed the face of the industry. Over the years Android and Apple have brought to market continued iterations of their OS’s and the two have grown exponentially at the expense of the industry’s other operating systems; notably Microsoft’s Windows and Nokia’s Symbian. Fast forward further to 2011 and Apple and Google are battling it out to be the world’s number one mobile platform.
So why did Google buy Motorola Mobility? First and foremost, Google and its partners who incorporate Android into their handsets are being brought to litigation on patent infringements. Companies like Microsoft who have been in the business for decades and Apple, who pioneered much of the technology we see today, have huge treasure troves of patents. In contrast, Google has few patents to protect itself and thus litigation is Android’s biggest external threat. To make matters worse, Google’s competitors have enhanced their arsenals by shelling out billions of dollars in buying up patents from Nortel, a Canadian Telecommunications company that went bust. What this meant for Google was that they would either face continued litigation or pay fees of up to $15 per handset to its competitors in compensation. Rather than being held ransom, Google bought Motorola Mobility and gained access to 17,000 existing patents and a further 7,500 pending ones. Effectively, Google spent $12.5 billion on legal protection.
Secondly Google has changed its business model. The company has vertically integrated Motorola Mobility into its midst, which means that for the first time Google is a handset and software manufacturer. In creating this new model, Motorola is now likely to be the flagship brand that supports Android (whereas before, each handset manufacturer was on equal footing). In being a flagship brand the phones are likely to ship with a few extra Google goodies, and most importantly will most likely receive software updates before all other Android-packing phones. Ostensibly, Google is shifting its business model to look much more like Apple’s where hardware and software are developed in unison; a model that has clearly worked.
In the end, by buying Motorola Mobility, Google has managed to somewhat level the playing field. The company can stand on its own and ward off potential law suits from the likes of Apple, Microsoft or HPpalm; and in doing so it allows the company to focus on bringing more compelling software and hardware to the market. However, Google may be biting off the hand that feeds it, as Android would not have experienced this level of success without the help Original Equipment Manufacturers (OEM) who have supported it. HTC, Sony Ericsson and LG have all invested heavily in an infrastructure to support and promote the Android platform, and they now find themselves competing directly with the very company that supplies them with the software! Although all of these companies’ respective CEOs have come out in support of the acquisition, noting that it defends Android from litigation, it is clear that it poses them all a very real threat. The purchasing of Motorola Mobility may have secured Android’s present interests, but it may also be pushing OEMs into the open arms of a slowly waking giant in Redmond Washington.
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