Having purchased Motorola just eighteen months ago, apparently motivated by the desire to shore up intellectual property rights related to its Android operating system, Google Inc (NASDAQ:GOOG) has sold its interest in the component manufacturing company Motorola. Lenovo’s purchase of Motorola for $2.91bn in cash, stock and deferred payments represents a significant move into the western computing and mobile phone market by the Chinese multinational. Under the terms of the deal, Google will retain a 5 percent stake in the Chinese hardware producer.
Google’s patent plan
At the time of Google Inc (NASDAQ:GOOG)’s purchase of Motorola it was generally assumed that they had bought the company due to its exceptional portfolio of 17,000 patents, rather than due to any hardware benefits that acquiring the company may entail. Nonetheless, with Google hoping to move into the smartphone market with its own branded devices at some point, having access to a renowned component manufacturer would reap obvious advantages in the future.
However, with Google Inc (NASDAQ:GOOG)’s main interest related to the mobile phone market being with as a supplier of Android to established hardware manufacturers, the purchase of Motorola and intention to release its own smartphone devices risked alienating other important partners within the smartphone industry.
It is unclear whether this means Google is permanently shelving the idea of releasing its own branded smartphone, but this decision would undoubtedly make the process more complex. Of course, releasing a smartphone into the marketplace is complex anyway, due to the sheer wealth of competition, and it is highly debatable whether or not Google Inc (NASDAQ:GOOG)’s name carries the cachet required to flog a mobile phone to the public.
One should never underestimate the influence of branding; it is noticeable that Amazon has done tremendously well within consumer electronics that are perceived to be related to reading; an appropriate area for the company given its bookshop background. But even a big name such as Amazon, with an established retail history and very successful electronic devices in its arsenal would struggle to take on the iPhone and the Galaxy on anything like a remotely even keel.
Thus, there is no guarantee that Google’s name would carry the clout required to launch a successful smartphone into a very competitive market. By comparison, imagine the difficulty that Apple would experience if they attempted to develop a search engine to compete with Google. You don’t need to fully comprehend the technical aspects involved to understand that they would be faced with a titanic task to induce people to use their software.
Regardless of the long-term plans of the company, the sale of Motorola appeared to have a significant knock-on effect on the company’s trading. Google’s stock traded significantly down on the deal, with its share price falling about 2 percent during day trading.
It seems that the decision to sell Motorola was also motivated by the fact that the corporation was taking a hit on its acquisition. Google’s Motorola lost $645m in the first nine months of last year.
Lenovo prominence growing
Meanwhile, Lenovo will be extremely happy with the deal, and this represents the second multibillion-dollar deal acquisition signed by the company within just seven days. Just last week Lenovo were involved in a $2.3bn purchase of IBM’s industry-standard server business, whose main purpose is to manufacture low-margin desktop computers.
This could be a landmark deal for the Chinese company. Lenovo is already the world’s biggest manufacturer of PCs, but this clearly signals their intent to become a major player in the smartphone sector. It was only a couple of days ago that the media widely reported that the company is now ranked fifth in the world with regard to smartphone shipments in 2013, and that its overall shipments rose more than any of the top smartphone makers.
The situation is a stark contrast to just five years ago, when Lenovo sold its smartphone division for a mere $100 million. The company had clearly intended at that time to focus on its core computing division, but it became evident in the year that followed that the mobile sector was going to be one that showed exponential growth in the coming years. Former world chess champion Garry Kasparov once said of his great rival Anatoly Karpov, after he’d moved a piece back to a square it was occupying previously after retreating it, that it showed great strength of character. The same could be said of Lenovo, who then bought back its mobile division in 2009 for double its sale price.
Evidently, this has paid off as the Chinese corporation is now in a very strong position to become an even more major player in the smartphone market in the near future. This is a quite incredible transformation for a company that had a virtually non-existent market share just two years ago. But with the 1.2 billion mobile phone subscribers in the vast populace that is the Chinese public, the potential for Lenovo to grow in the medium to long-term is obviously quite considerable.
Motorola’s share price hasn’t exactly shot up, but it traded moderately higher on the news.
Meanwhile, Google Inc (NASDAQ:GOOG) will lick their wounds and suss out what their next move in the mobile market will be.