Google Sells Motorola : Bold Strategy or Loss Cutting?

Less than two years after making a bold foray into the smartphone manufacturing business, Google has announced that it is selling Motorola to Lenovo. The deal, announced yesterday, sells Motorola for $2.9 billion, compared to Google’s initial purchase price of $12.5 billion.

So let’s start with the obvious: it’s not as bad a move for Google as it looks. Indeed, it may not be a bad move at all. Google had earlier spun off Motorola’s set-top division (Motorola Home) to Arris for $2.35 billion, and Motorola had $2.9 billion in cash on hand when the Google deal took place. Of course, to counter that, Motorola has not been profitable, so there is a run-rate to consider. But even so, Google is extricating itself from the hardware business while still retaining the vast majority of the patents (15,000) that it acquired as part of the original deal.

That’s the good news. And, realistically, I suspect Google was never truly convinced that it should be a smartphone manufacturer. Motorola’s long phone heritage meant that the patents were the biggest haul for Google and were (and still are) key to helping to defend Android and its partners in the on-going patent battles. But smartphone hardware? Google? Perhaps not such a good fit.

The smartphone business has become an increasingly tough one, with few OEMs really making a clear success of it. As we noted recently, 68 percent of the US smartphone market is dominated by two OEMs: Apple and Samsung. Motorola accounts for a mere sliver of the market at roughly 8 percent. And while Google tried to promote a different Motorola, with talk of a modular device and the latest, customizable Moto X phone, the reality is that there has not been an iconic launch to boost the company’s market share. And, ironically, Google’s own Nexus 5.0 smartphone was built by LG, not Motorola.

For Lenovo, this is clearly a great move: while Motorola’s US share may be relatively small, the company still has strong brand recognition and great distribution at US networks operators, which are extremely hard to penetrate as a newcomer handset OEM. As such, Lenovo has the opportunity to gain a far stronger presence in the US market and below, expanding its PC Plus strategy to further cover its bets beyond the PC market, which my colleague Stephen Baker talks more about.

In the meantime, all eyes will now focus on Microsoft, which is in the midst of acquiring Nokia. Google’s departure will raise further concerns that an Operating System owner cannot be a smartphone manufacturer as well. I would argue that Windows Phone and Android are at very different stages of maturity, and the Nokia deal still makes sense to Microsoft, which needs to continue to drive innovation towards the Windows platform in order to gain market share for Windows Phone. But while that may be the case now, there is the question of longer-term wisdom. One of the concerns many OEMs had regarding Google’s purchase of Motorola was how the company would ensure a fair playing field for the other OEMs when it came to OS innovation and updates. The same question is already being asked of Microsoft, even before the ink on the Nokia deal is dry. Google’s departure will only make the question more relevant for many potential OEM partners, and may deter many from trying the Windows Phone platform.

But is there another reason for Google’s departure from smartphone manufacturer? Having recently purchased Nest, is there a greater focus on a future strategy towards distributed computing within the home? There is a school of thought that says that the smartphone’s hey day is almost past. Wearable devices have the potential to take over some of the key functionality – and creativity – of the smartphone, with a distributed, wearable strategy, as well as a distributed strategy for the home. As such, we may look back on Google’s move as an early indicator of the shift away from the consumer’s fixation on the smartphone as the core device. Perhaps…