From the Frying Pan into the Fire – Google’s Motorola Problem


The business world was surprised this week when Google announced it was acquiring Motorola Mobility for $12.5B – a 63% premium to its trading price (Crain’s Chicago Business).  Surprised for 3 reasons:

  1. because few software companies move into hardware
  2. effectively Google will now compete with its customers like Samsung and HTC that offer Android-based phones and tablets,  and
  3. because Motorola Mobility had pretty much been written off as a viable long-term competitor in the mobile marketplace.  With less than 9% share, Motorola is the last place finisher – behind even crashing RIM.

Truth is, Google had a hard choice.  Android doesn’t make much money.  Android was launched, and priced for free, as a way for Google to try holding onto search revenues as people migrated from PCs to cloud devices.  Android was envisioned as a way to defend the search business, rather than as a profitable growth opportunity.  Unfortunately, Google didn’t really think through the ramifications of the product, or its business model, before taking it to market.  Sort of like Sun Microsystems giving away Java as a way to defend its Unix server business. Oops.

In early August, Google was slammed when the German courts held that the Samsung Galaxy Tab 10.1 could not be sold – putting a stop to all sales in Europe (Phandroid.comSamsung Galaxy Tab 10.1 Sales Now Blocked in Europe Thanks to Apple.”) Clearly, Android’s future in Europe was now in serious jeapardy – and the same could be true in the USA.

This wasn’t really a surprise.  The legal battles had been on for some time, and Tab had already been blocked in Australia.  Apple has a well established patent thicket, and after losing its initial Macintosh Graphical User Interface lead to Windows 25 years ago Apple plans on better defending its busiensses these days.  It was also well known that Microsoft was on the prowl to buy a set of patents, or licenses, to protect its new Windows Phone O/S planned for launch soon. 

Google had to either acquire some patents, or licenses, or serously consider dropping Android (as it did Wave, Google PowerMeter and a number of other products.)  It was clear Google had severe intellectual property problems, and would incur big legal expenses trying to keep Android in the market.  And it still might well fail if it did not come up with a patent portfolio – and before Microsoft!

So, Google leadership clearly decided “in for penny, in for a pound” and bought Motorola. The acquisition now gives Google some 16-17,000 patents.  With that kind of I.P. war chest, it is able to defend Android in the internicine wars of intellectual property courts – where license trading dominates resolutions between behemoth competitors.

Only, what is Google going to do with Motorola (and Android) now?  This acquisition doesn’t really fix the business model problem.  Android still isn’t making any money for Google.  And Motorola’s flat Android product sales don’t make any money either. 

Motorola rev and profits thru Q2 11
Source: Business Insider.com

In fact, the Android manufacturers as a group don’t make much money – especially compared to industry leader Apple:

IOS v Android operating profit mobile companies july-2011
Source: Business Insider.com

There was a lot of speculation that Google would sell the manufacturing business and keep the patents.  Only – who would want it?  Nobody needs to buy the industry laggard.  Regardless of what the McKinsey-styled strategists might like to offer as options, Google really has no choice but to try running Motorola, and figuring out how to make both Android and Motorola profitable.

And that’s where the big problem happens for Google.  Already locked into battles to maintain search revenue against Bing and others, Google recently launched Google+ in an all-out war to take on the market-leading Facebook.  In cloud computing it has to support Chrome, where it is up against Microsoft, and again Apple.  Oh my, but Google is now in some enormously large competitive situations, on multiple fronts, against very well-heeled competitors.

As mentioned before, what will Samsung and HTC do now that Google is making its own phones?  Will this push them toward Microsoft’s Windows offering?  That would dampen enthusiasm for Android, while breathing life into a currently non-competitor in Microsoft.  Late to the game, Microsoft has ample resources to pour into the market, making competition very, very expensive for Google.  It shows all the signs of two gladiators willing to fight to the loss-amassing death.

And Google will be going into this battle with less-than-stellar resources.  Motorola is the market also ran.  Its products are not as good as competitors, and its years of turmoil – and near failure – leading to the split-up of Motorola has left its talent ranks decimated – even though it still has 19,000 employees Google must figure out how to manage (“Motorola Bought a Dysfunctional Company and the Worst Android Handset Maker, says Insider“).  

Acquisitions that “work” are  ones where the acquirer buys a leader (technology, products, market) usually in a high growth area – then gives that acquisition the permission and resources to keep adapting and growing – what I call White Space.  That’s what went right in Google’s acquisitions of YouTube and DoubleClick, for example.  With Motorola, the business is so bad that simply giving it permssion and resources will lead to greater losses.  It’s hard to disaagree with 24/7 Wall Street.com when divulging “S&P Gives Big Downgrade on Google-Moto Deal.”

Some would like to think of Google as creating some transformative future for mobility and copmuting.  Sort of like Apple. 

Yea, right.

Google is now stuck defending & extending its old businesses – search, Chrome O/S for laptops, Google+ for mail and social media, and Android for mobility products.  And, as is true with all D&E management, its costs are escalating dramatically.  In every market except search Google has entered into gladiator battles late against very well resourced competitors with products that are, at best, very similar – lacking game-changing characteristics. Despite Mr. Page’s potentially grand vision, he has mis-positioned Google in almost all markets, taken on market-leading and well funded competition, and set Google up for a diasaster as it burns through resources flailing in efforts to find success.

If you weren’t convinced of selling Google before, strongly consider it now.  The upcoming battles will be very, very expensive.  This acquisition is just so much chum in the water – confusing but not beneficial.

And if you still don’t own Apple – why not?  Nothing in this move threatens the technology, product and market leader which continues bringing game-changers to market every few months.

Why Sun Failed – unwillingness to adapt

"With Oracle, Sun avoids becoming another Yahoo," headlines Marketwatch.com today.  As talks broke down because IBM was unwilling to up its price for Sun Microsystems, Oracle Systems swept in and made a counter-offer that looks sure to acquire the company.  Unlike Yahoo – Sun will now disappear.  The shareholders will get about 5% of the value Sun was worth a decade ago at its peak.  That's a pretty serious value destruction, in any book.  And if you don't think this is bad news for the employees and vendors just wait a year and see how many remain part of Oracle.  A sale to IBM would have fared no better for investors, employees or vendors.

It was clear Sun wasn't able to survive several years ago.  That's why I wrote about the company in my book Create Marketplace Disruption.  Because the company was unwilling to allow any internal Disruptions to its Success Formula and any White Space to exist which might transform the company.  In the fast paced world of information products, no company can survive if it isn't willing to build an organization that can identify market shifts and change with them

I was at a Sun analyst conference in 1995 where Chairman McNealy told the analysts "have you seen the explosive growth over at Cisco System?  I ask myself, how did we miss that?"  And that's when it was clear Sun was in for big, big trouble.  He was admitting then that Sun was so focused on its business, so focused on its core, that there was very little effort being expended on evaluating market shifts – which meant opportunities were being missed and Sun would be in big trouble when its "core" business slowed – as happens to all IT product companies.  Sun had built its Success Formula selling hardware.  Even though the real value Sun created shifted more and more to the software that drove its hardware, which became more and more generic (and less competitive) every year, Sun wouldn't change its strategy or tacticswhich supported its identity as a hardware company – its Success Formula.  Even though Sun became a leader in Unix operating systems, extensions for networking and accessing lots of data, as well as the creator and developer of Java for network applications because software was incompatible with the Success Formula, the company could not maintain independent software sales and the company failed. 

Sort of like Xerox inventing the GUI (graphical user interface), mouse, local area network to connect a PC to a printer, and the laser printer but never capturing any of the PC, printer or desktop publishing market.  Just because Xerox (and Sun) invented a lot of what became future growth markets did not insure success, because the slavish dedication to the old Success Formula (in Xerox's case big copiers) kept the company from moving forward with the marketplace

Instead, Sun Microsystems kept trying to Defend & Extend its old, original Success Formula to the end.  Even after several years struggling to sell hardware, Sun refused to change into the software company it needed to become. To unleash this value, Sun had to be acquired by another software company, Oracle, willing to let the hardware go and keep the software – according to the MercuryNews.com "With Oracle's acquisition of Sun, Larry Ellison's empire grows."  Scott McNealy wouldn't Disrupt Sun and use White Space to change Sun, so its value deteriorated until it was a cheap buy for someone who could use the software pieces to greater value in another company.

Compare this with Steve Jobs.  When Jobs left Apple in disrepute he founded NeXt to be another hardware company – something like a cross between Apple and Sun.  But he found the Unix box business tough sledding.  So he changed focus to a top application for high powered workstations – graphics – intending to compete with Silicon Graphics (SGI).  But as he learned about the market, he realized he was better off developing application software, and he took over leadership of Pixar.  He let NeXt die as he focused on high end graphics software at Pixar, only to learn that people weren't as interesed in buying his software as he thought they would be.  So he transitioned Pixar into a movie production company making animated full-length features as well as commercials and short subjects.  Mr. Jobs went through 3 Success Formulas getting the business right – using Disruptions and White Space to move from a box company to a software company to a movie studio (that also supplied software to box companies).  By focusing on future scenarios, obsessing about competitors and Disrupting his approach he kept pushing into White Space.  Instead of letting Lock-in keep him pushing a bad idea until it failed, he let White Space evolve the business into something of high value for the marketplace.  As a result, Pixar is a viable competitor today – while SGI and Sun Microsystems have failed within a few months of each other.

It's incredibly easy to Defend & Extend your Success Formula, even after the business starts failing.  It's easy to remain Locked-in to the original Success Formula and keep working harder and faster to make it a little better or cheaper.  But when markets shift, you will fail if you don't realize that longevity requires you change the Success Formula.  Where Unix boxes were once what the market wanted (in high volume), shifts in competitive hardware (PC) and software (Linux) products kept sucking the value out of that original Success Formula. 

Sun needed to Disrupt its Lock-ins – attack them – in order to open White Space where it could build value for its software products.  Where it could learn to sell them instead of force-bundling them with hardware, or giving them away (like Java.)  And this is a lesson all companies need to take to heart.  If Sun had made these moves it could have preserved much more of its value – even if acquired by someone else.  Or it might have been able to survive as a different kind of company.  Instead, Sun has failed costing its investors, employees and vendors billions.