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No, Google is not going ‘horizontal’ by selling Motorola

Another excellent move by Google: Offload Motorola Mobile Devices to Lenovo, while keeping the patents to themselves.

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Skimming through the news this morning, I found there is apparently a lot of confusion about the planned sale of Motorola by Google. From decrying a huge loss by Google by such infotainment sites like Wired and Slate, to seeing Google giving up on copying vertical integration of Apple (hardware + software + services), like Stratechery by Ben Thomson.

Let’s look at things from a broader perspective. The acquisition of Motorola was necessary to protect Android, after Apple, Microsoft and BlackBerry outbid Google for Nortel patents. The Apple-Microsoft-BlackBerry trio made it very clear that they intend to put a drag on then-fledging Android ecosystem and extort royalties from Android OEMs. The cost of doing nothing was huge for Google – just think how much more nasty the patent wars may have turned out for Android if the acquisition hadn’t taken place. Any “profit and loss” analysis of the Motorola deal must account for the opportunity cost associated with Motorola patents. Android is, was and will be critically important for Google’s core online ad business, as I will explain in a bit.

The argument of Google giving up on the idea of vertical integration and going horizontal doesn’t hold water either. Google always was and will remain a vertically integrated company. It’s just that Google is integrated where it matters for its core business of online advertising. Real-time processing of huge data sets is the key for deciding in milliseconds which ad to show to which user, while maximizing the revenue opportunity from multiple bidding advertisers. To excel and outperform competition Google builds and runs a proprietary big data infrastructure, which comprises of proprietary server hardware, custom-built system software (distributed databases, networking, data processing and more) and even uniquely designed data centers.

There is nothing open or horizontal about Google’s core business. On the contrary, Google is very closed and vertically integrated, where it matters for the core business. But there is more.

As any online advertising business, to excel Google needs:

  1. Remove any barriers between eyeballs and Google ads,
  2. Expand the footprint of ad inventory by offering new services beyond search, and, last but not least,
  3. Collect and mine maximum amounts of user data to improve targeting of their ads on both mobile and PC (where most ad revenues are still being made).

Android is critically important for boosting Google’s core business in all of these 3 pillars of online advertising, as we wrote in our earlier note “The Naked Android”.

3PillarAndroidStrategy

Smartphones, tablets and PC are mere complements to Google’s core business. Cheaper and more capable smartphones, tablets and PC mean better business for Google. It’s no different from car makers that will have their business boosted by cheaper fuel available at gas stations on every corner.

The Android ecosystem was purposefully designed to drive commoditisation of smartphones and tablets by reducing barriers to entry for low-cost OEM and ensuring “race to the bottom” in a horizontal value-chain configuration. (Chrome OS does the same for the PC.)

To sum up, Google is vertically integrated around its core business and at the same time drives shifts to horizontal configuration of the value chain around the complements.

“What about Nexus?” some will ask. I hope that by now we all understand that Nexus devices are not about making profits from hardware. Google Nexus is about driving the ecosystem forward (push capabilities up and price down) and, not less important, collect usage data. Being an extremely data-driven company (remember the famous story about testing 41 shades of blue?), how would Google know how people use Android devices and where Android needs to go next, without getting usage data from heavily instrumented Nexus devices?

“But, what about the recent acquisition of Nest?” others will insist. It’s a fascinating discussion on the future of Internet of Things, but in short, both Nest and Google are companies creating value by making sense of data. Thermostats, smoke detectors, or connected cars for that matter, are just means to an end for solving the riddle.

Both the acquisition and the pending sale of Motorola Mobile Devices to Lenovo makes perfect sense to me. Motorola patents were meant to protect the Android ecosystem from patent extortion (how effective they are is another discussion). The sale divests Google from unwanted device business that came as a cost of acquiring Motorola. And finally, Motorola in the hands of a very aggressive Lenovo strengthens competition to Samsung, which has disproportionately high power in an Android ecosystem designed to commoditize handset business.

  • Senaka Balasuriya

    Excellent article. I want to point out that divesting Motorola to Lenovo achieves several things:
    * get rid of an unwanted and costly device business
    * Increase competition to Samsung and other smartphone/TV/etc makers
    * Position a player to compete with the low-end Chinese upstarts in two of the worlds biggest markets: China and India (note: samsung is not doing that strong in China).

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