The Googorola dilemma
By Kate Bulkley
For Digital TV Europe.net September 05, 2011
The marriage of Google and Motorola Mobility raises a number of intriguing possibilities, writes Kate Bulkley.
Several years ago the verb ‘to Google’ entered the dictionary. It meant finding something online, generally by using the world’s most popular search engine site. But the recent US$12.5 billion (€8.7 billion) acquisition by Google from Motorola Mobility, which includes the mobile phone handset and set-top box making businesses as well as 17,000 patents, means that for the pay TV industry, and the technology business in general, the term Googling could be taking on a much bigger definition.
Google has built its reputation on search software and knowing stuff about those who use it. Any interest in hardware was minimal – for example, the Google TV set-top is more a means to an end than a destination in itself.
And that generally has been the thinking in the technology business: hardware suppliers were one kind of company and software suppliers were another. Of course Apple has shaken that up big time, re-introducing the vertically integrated model to great success by owning hardware, software and services. Others have taken note: the first big thing the new head of Nokia did after he joined the Finnish mobile handset maker was to tie-up an exclusive software deal this past spring with Microsoft.
The needs of Google’s own Android operating system – and the lacklustre performance of Google TV – have led the search giant to take a page out of Apple’s handbook. By buying Motorola, Google has power in both the hardware and software worlds and, crucially, it has the patents it needs to build an intellectual property fortress around Android and against rivals (including Microsoft and Apple).
It’s pretty clear that it is Motorola’s patents that are the most important part of the deal. Protecting the Android mobile ecosystem is key to Google’s future as its moves beyond the PC. There is a patent war underway in the mobile space and Google needs ammunition to defend Android. It is little wonder that the shares in companies like HTC and Samsung went up on early news of the deal because the market figured that Googorola would license the Motorola patents to these handset makers, strengthening their own positions in the ‘Android versus the others’ battle.
The hardware businesses produce much lower margins, and it is argued that Google doesn’t ‘get’ hardware. Google itself has downplayed the importance of the hardware side of the business, although Googorola could integrate its hardware with Android and leave other handset makers out in the cold. So far the market believes that keeping other manufacturers on board is more important than a vertical integration strategy like that of Apple. (Of course Google could just label the hardware businesses – both handsets and set-tops – as ‘too difficult’ and sell them off.)
On the set-top box side, pushing an Android-only agenda could prove difficult. One industry executive told me he couldn’t see big US pay TV clients (including Comcast) that buy quite a bit of Motorola kit being told they now have to accept an Android-powered set-top box that opens them up to sharing advertising revenue with Google.
For the moment at least, Google has said that it will run the Motorola hardware businesses as a separate operating unit. Googorola would be the single largest equipment supplier to the US cable industry, beating Cisco by two-to-one in sales. The set-top box business produces US$3.7bn in revenues and throws off over 85% of Motorola Mobility’s operating profits, but once subsumed in Google it would be a minnow. According to Bernstein Research, on a 12-month basis the set-top business would represent 8% of Googorola’s consolidated revenues and just 2.6% of the new company’s operating income. And perhaps more importantly, the set-top business in the US is more open than it was, with companies including Pace, Samsung and Technicolor picking up business. (Smaller players might face a slightly different situation, especially if they are up against Google’s applications such as YouTube and Google TV sitting on top of the operating system in a hybrid IP/QAM set-top box.)
A handheld device using Android and integrating Google search and Google Plus, the fledgling social network, could make competitors from Apple to Facebook sit up and take notice. But on the other hand, Google has had little success up to now selling the idea of Android to pay TV operators and Google TV is not even out of the starting gate yet. I can see the attraction of ‘doing an Apple’ but I think Googorola will face a tough sell.
According to Bernstein Research, Googorola should try to keep the US cable business onside by offering help with addressable advertising and audience measurement. But success would hinge around what the percentage is for both sides as well as who owns the data. I can imagine that this won’t be an easy discussion, in any case. The new definition of being Googled? Pay TV operators should probably keep their set-top box options open or it could come to mean more than they bargained for.