07:32 AM

Analysis: Larry Page's Smashed Handset Strategy - Google Ends Bid To Be Apple


Google’s handset strategy lies smashed. 

Google sells its handset business at a huge loss and helps Lenovo finance the deal. It ends an expensive chapter in Google’s attempts to diversify from publishing ads. 

Lenovo agrees to buy Google’s Motorola handset business for $2.91B. Larry Dignan and Zack Whittaker at ZDNet report:

Google confirmed after markets closed on Wednesday that Lenovo has acquired Motorola Mobility in a deal valued at $2.91 billion, just two years after the search giant bought it for $12.5 billion.

Lenovo will pay $1.41 billion when the deal closes in cash and shares and the remainder will be in a $1.5 billion note over three years.

In a company blog post, Motorola confirmed Google will retain the "vast majority" of the patents it acquired when it first bought the mobile company in 2011, including "current patent applications and invention disclosures." Lenovo will license the patents as part of an ongoing relationship with the search giant.

Foremski’s Take:

Google kept the patents because it needs them so it can protect Android OS app developers from legal claims by signing cross-technology license agreements, such as the recent one with Samsung. Intel, Microsoft and PC makers all engaged in cross-technology licensing agreements in the 1980s and 1990s and it helped expand the PC market.

Big U-turn…

The sale represents a U-turn for Google, and for Larry Page, CEO. Google has been trying to build an Apple-like hardware business consisting of smartphones, music players, portable computers, and TV Internet devices. It has now abandoned the smartphone handset business.

Google has been laying off thousands of people trying to make its smartphone business profitable. But very high marketing costs and an always-listening smartphone that was good, but didn’t wow the geek community or regular people, left it holding a business with mounting losses.

[Google’s Ad Partners Suffer As It Pursues An Apple-like Business, And Cuts 5400 Jobs]

Google gives away its Android operating system and it must also continue to support it with new features, which is an expensive burden. Google does not disclose the percentage of revenues it receives from mobile advertising but it is a growing revenue stream.

When will mobile revenues cover the costs of maintaining Android and also defending it from legal challenges? That’s a question I’d like Wall Street analysts to ask tomorrow, when the company reports Q4 2013.

Good decision…

The decision to sell to Lenovo was a bold one for Larry Page, CEO because it will be seen as a mark against him. He took over as CEO in April 2011, from Eric Schmidt, former CEO at Novell.

Page’s management of Google’s hardware strategy would certainly be something that Google shareholders would have a right to complain about. They can’t do much but complain because the founders and insiders hold shares that give them majority voting control.

Will Page find his voice and face Wall Street analysts at the Q4 report on Thursday? Last year he said a medical condition was affecting his speech and he would likely not participate in future calls with Wall Street.

It is better to pull out earlier than later and he has made the right decision. Shareholders will benefit because hardware is a low margin business. If you aren’t in a premium position like Apple it will drag down earnings per share and your share price. 

The more $GOOG tried to be like Apple the more it risked alienating shareholders. 

If Google’s investors wanted to own a hardware company they would have bought $APPL. 

In after-hours trading Wednesday Google was up more than 2%.