Tuesday, 16 August 2011

Google and Motorola: What the #@!*%?

It's two days later and I'm still confused.  When I saw the headline yesterday, my jaw literally dropped.  "Google bought who?  That's got to be a misprint.  They must have bought a mobile operator, like Sprint or something.  But Motorola?  Really?" 

Usually when a big tech merger happens you can see the logic behind it.  Even if you don't agree with the logic, you understand why they made the deal.  But in this case the more I think about it the more confused I get. 

Did Google buy Motorola for the patents?  If so, why isn't it spinning out the hardware business?  Or did Google buy Motorola because it wants to be in the hardware business?  If so, does it understand what a world of other problems that will create for Android and the rest of Google?  Seriously, if Google tries to integrate Motorola into its business we could end up citing this as the deal that permanently broke Google.

Why roll the dice like that?  Maybe I'm missing something, maybe Google has a screw loose, maybe both of the above.  Or maybe I'm wrong to look for airtight logic.  Companies sometimes make decisions on impulse, especially when they are under stress, and it's a sure thing that Google is under stress these days on IP issues.

So I have a lot more questions than answers.  My questions are about Google's intent, its next steps, and how other companies will react...

Why did Google do it, really?  The conventional answer is that Google wanted Motorola Mobility for its patents.  That's what Google itself implied, and Marguerite Reardon over at CNET agreed (link).  That might well be the explanation.  Om Malik had a really intriguing take: Google bought Motorola as a defensive move to prevent Microsoft from getting the Motorola patents (link).  And Richard Windsor of Nomura, who I respect deeply, said in an e-mail that this is all about the patents.  He predicts that Google's new patent portfolio will create a balance of power enabling Google to quickly force a settlement to the patent lawsuits against its licensees.

But if you wanted only the patents, I think you'd buy Motorola, keep the patents and then spin out the hardware company to avoid antagonizing your licensees.  Google says it intends to keep Motorola and run it.

Besides, as Andrew Sorkin pointed out in the New York Times, Google could have bought a different but also important mobile patent portfolio from InterDigital for about $10 billion less than Motorola (link).  Maybe there's some magic patent at Motorola that Google feels is worth $10 billion more, or maybe there are some terms in Motorola's patent cross-license agreements that Google desperately needs.  But again, if that's the case, why not keep the patents and resell the hardware business?

Unless Google is lying about keeping Motorola intact, I think Google intends to be in the mobile hardware business.  Which raises the next question...

Does Google know how to run a hardware business?  No, of course not.  The processes, disciplines, and skills are utterly different.  The same business practices that made Google good in software will be a liability in hardware.  Google's engineers-first, research driven product management philosophy is effective in the development of web software, because you can run experiments and revise your web app every day in response to user feedback.  But in hardware, you have to make feature decisions 18 months before you ship, and you have to live with those decisions for another 18 months while your product sells through.  You can't afford to wait for science.  Instead, you need dictatorial product managers who operate on artistry and intuition.  All of those concepts (dictatorship, artistry, intuition) are anathema to Google's culture.  Either Google's worldview will dominate and ruin Motorola, or worse yet the Motorola worldview will infect Google.  Google with Motorola inside it is like a python that swallowed a minivan.

To put it another way, I think Google has about as much chance of successfully managing a device business as Nokia had of running an OS business.

But the real question is, does Google realize that it doesn't know how to make hardware?  I doubt it.  Speaking as someone who worked at PalmSource for its whole independent history, an OS company always believes that it could do a better job of making hardware than its licensees.  It's incredibly frustrating to have a vision for what people should do with your software, and then see them screw it up over and over.  The temptation is to build some hardware yourself, just to show those idiots how to do it right.

I think maybe Google just gave in to that temptation.

But if Google really wants to sell hardware, that raises questions for the other Android licensees...

How will Google really manage Motorola?  Google says it's going to treat Motorola as an independent company without any special access to the Android team.  But what's the point in that?  Motorola hasn't exactly been dominating the mobile device world lately, so I find it very, very hard to believe that Google would buy it and leave it intact.  Wouldn't you want to have Motorola create special products that take advantage of the latest Android features?  Kind of like a flagship operation?  Then when you announce a new initiative at Google IO, you can have some nice new Motorola hardware ready to ship with it on day one.  Of course, the other Android licensees will be allowed to participate too.  They're welcome to run flat out to keep up with every Google software initiative, disregarding expense and business risk, just like Google's Motorola subsidiary will.

Which makes you wonder...

How will the Android licensees react?  I think we can safely disregard the positive quotes from the other Android licensees.  What would you do if your company depended utterly on Android, and Google called you up twelve hours before the announcement and asked for a quote?  Would you risk Google's anger by refusing to give a nice quote?  Of course not.

But would you honestly be happy?  Of course not.  In the last year, you gained share at the expense of Motorola.  Now instead of being a weak and failing vendor you can snack on, Motorola has infinite financial resources and cannot physically go broke.  Sure, I am happy to compete with that.

The other issue is the one everyone else has already pointed out -- even though Google says there will be a firewall between Motorola and Android, you suspect it'll be semi-permeable, meaning you'll always be at a bit of a disadvantage.

So what do you do?  A lot of people are predicting that Android could be in danger of losing licensees.  For example, Horace Dediu at Asymco drew a parallel to the Symbian consortium, whose members were uncomfortable because Nokia held the largest share of the ownership (link).  But when Symbian was launched, those companies were happy to sign up, despite the asymmetric ownership, because they thought Symbian was going to dominate the mobile OS market, and they were scared of Microsoft.  They dropped out only after it was proven conclusively that only Nokia was capable of making a Symbian phone that sold well in Europe. 

I can tell you from personal experience at Palm that licensees don't care about governance issues when they think your OS will help them sell a lot of units.  It's only after growth slows down that they get twitchy.  As long as Android continues to grow explosively, the licensees will be right there with it because they're terrified not to be.

Google probably knows the licensees can't go anywhere.  In fact, it has a history of treating them very roughly in private (check out the nasty tone in the private memos between Google and Samsung exposed by the Skyhook lawsuit here).  So in some ways the Motorola deal is just more of the same.

But there is still a risk to Google.  Android licensees will probably be more willing to talk to Microsoft now, and they might do a few more Windows Phone products, if only to get leverage against Google.  So Google has just thrown a lifeline to Windows Phone, which otherwise might have been headed for extinction if the first round of Nokia products failed.

This might also be an opportunity for other mobile platforms.  If there were any...

Is there a third path?  The Android licensees are probably pretty wary of both Google and Microsoft at this point, and may be wishing forlornly that there was a third alternative for mobile operating systems.

Unfortunately, I don't think there is.  The handset vendors' embrace of "royalty-free" Android strangled the other Linux mobile platforms.  TrollTech was bought by Nokia and then killed, while Access's evolution of Palm OS died for lack of customers.

There's speculation that HP might broadly license Web OS (link).  But HP has its own hardware conflict of interest (a much stronger one than either Google or Microsoft).  Far more importantly, keep in mind that mobile phone companies license an OS because they believe it's going to sell millions of units for them.  If HP, with all of its resources and channel presence and strong brand, can't sell significant numbers of Web OS phones, why would HTC or Samsung believe they could do it?

[Edit: In the original version of this post, I failed to mention MeeGo.  A couple of people have told me that was unfair, and I think they are right.  Based on past experience, I have a lot of skepticism about OS consortia, especially ones involving Intel.  But if MeeGo's ever going to get serious consideration from hardware companies, now is the time, and I should have acknowledged that.]

Hint to Android licensees: If you build up HTML 5 as a platform, you won't have to depend on anyone else's platform.  But in the meantime, your realistic choices are Android and Microsoft.

Speaking of Microsoft...

What will Microsoft do now?  Steve Ballmer faces a very interesting decision.  Windows Phone just got a boost because it's now seen as a more vendor-neutral platform than Android.  The door is probably open for Microsoft to build deeper relationships with Android licensees.  If Microsoft sill believes in its licensing model, it will focus on walking through that door.

But as others have pointed out, Microsoft's position is now a bit lonely in some ways.  The other major smartphone platforms (iOS and Android) now have captive hardware arms.  Even RIM has both hardware and OS, although it's been a while since RIM was held up as a model for others to emulate.  Will Microsoft feel exposed without its own hardware business?  And if it does feel exposed, will it buy Nokia?

I'd be very surprised if it did.  Buying Nokia would decisively end the Windows Mobile licensing business.  You'd be betting Microsoft's mobile future even more completely on the ability of Nokia to execute in hardware.  Besides, why buy the cow when you're already milking it?

I'd also like to think that Microsoft learned from the Zune debacle that it's not great at creating mobile hardware.

And then there's the fruit company...

What will Apple do?  Apple's history since Steve returned is that it doesn't react to competitors; it forces competitors to react to it.  Apple is brilliant at setting the terms of the competition so other companies are forced to compete on Apple's turf.  Everyone else is focused on building licensed commodity hardware, so Apple creates integrated systems.  Everyone else has optimized their supply chains to sell through third party retailers, so Apple creates its own stores.  Everyone else stopped making touchscreen smartphones, so what does Apple make?

You get the picture.  So I don't expect Apple to make any changes in response to the Motorola deal, but I would be shocked if Apple didn't have plans for changing the terms of the competition again now that Google is trying to build more integrated hardware and software.  There are all sorts of game-changing moves Apple could make -- do a much larger push in web services, create an iPhone Nano (fewer features and lower price), even create its own search engine or social network (potentially valuable just to make Google crazy).

What's next?

To sum it all up, it's impossible to predict what will happen.  Hopefully the new balance of power in patents will make the big lawsuits go away, although I doubt we'd see a resolution before the deal closes, and that could take many months.  If Google bought Motorola for the patents, it'll either sell the company or let it gracefully rot, and we'll go back to business as usual. 

On the other hand, if Google tries to integrate Motorola into its business, that's a noble mission, and I hope they'll succeed because the mobile industry needs more competition to Apple in systems design.  I dearly hope Google will take the challenge seriously and recognize that it'll need to make fundamental changes to its culture.  But those changes would be daunting even for a company experienced in mergers, and Google's never done a deal this big before.  I think the most likely outcome of the Google-Motorola merger is some flavor of train wreck.

I hope I'm wrong.

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