Hardware or software? Google the answer

info

ISSN: 1463-6697

Article publication date: 3 June 2014

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Citation

Curwen, P. (2014), "Hardware or software? Google the answer", info, Vol. 16 No. 4. https://doi.org/10.1108/info-03-2014-0017

Publisher

:

Emerald Group Publishing Limited


Hardware or software? Google the answer

Article Type:

Rearview

From:

info, Volume 16, Issue 4

A regular column on the information industries

Many readers will wish that they had invested in Google back when it became a public company. But even if they had delayed to the end of 2004, they would have paid a mere $200 a share. At the time of writing, the share price stands at $1,200 (adjusted for dividends and share splits) – a 500 per cent appreciation in roughly a decade. Whichever way you look at it, Google has been almost consistently successful. Meanwhile Microsoft’s share price has risen from $26 to $40 and that of Nokia has fallen from $22 to $8 during the same period.

The previous Rearview discussed how Nokia and Microsoft came together to overcome Nokia’s deficiencies on the software side – with Samsung and its Android OS disappearing over the horizon, the immediate objective for Nokia was to turn itself into a direct rival to Apple. But that implied a rivalry based upon the OS and the user experience, and how could Nokia hope to rival Apple in those areas?

Interestingly, Google also appeared to be thinking along the same lines only in relation to Motorola Mobility – an acquisition in May 2012 that achieved little other than to create financial problems, disputes with other Android licensees and a messy range of devices. It must be borne in mind that Google started out as exclusively an applications provider. However, it took charge of the Android project and turned it into the world’s most popular OS. The next logical step was to move into the hardware business, as the software and hardware appeared to be inextricably related – at least according to Apple.

But whereas it was possible for Google to leverage its expertise in software to move into a related market, this meant competing with companies that had previously provided complementary products. And just because you can, doesn’t mean that you should.

Google paid $12.4 billion for Motorola’s consumer hardware business (including patents). Google tried to keep the peace with Android vendors such as Samsung and Lenovo by promising that its Motorola subsidiary would not receive preferential treatment such as early access to new versions of Android and by keeping the Android team physically separate from Motorola Mobility workers. But it rapidly realized that it was never going to be able to integrate its software and hardware divisions anything like as well as Apple, so it decided to sell on the hardware business to Chinese vendor Lenovo for $2.91 billion in January 2014, while retaining the 2,000 or so patents which would be leased to Lenovo.

As indicated, the Google share price appeared to reflect untrammeled success, but this strategy could only be deemed to be a failure. Naturally, it is possible to counter-argue that Google was fairly desperate to lay its hands on Motorola’s extensive patent portfolio, which it succeeded in doing, but the price to be paid was high. True, relations with other members of the Android community did not collapse into the customary endless court proceedings, but the likes of Samsung were quick to express their discomfiture. Perhaps if the latest Motorola products such as the Moto X had taken the market by storm, Google would have been willing to continue paying the price, but that simply wasn’t the case.

Google has been at pains to make clear that the sale to Lenovo does not mean that Google has given up entirely on hardware ventures – it remains heavily involved in the wearable and home equipment markets. As for Lenovo, acquiring Motorola Mobility on the cheap is at first glance something of a coup, as it now has a brand with far wider brand recognition than its own and access to the US and Latin American markets which are not altogether enthused about companies based in China, not to mention a business generating billions of dollars in revenue each quarter. Its market share will not rise by much in the short term, but it has a reputation for turning around companies, and market leader Samsung is beginning to suffer competitive pressures that are now only likely to worsen.

Nevertheless, the pressure is likely to affect other sub-scale vendors more severely, and this may lead to mergers and acquisitions. For this reason, not everyone is persuaded that Lenovo will be successful, as driving down the price of the Moto X to boost sales is not exactly helpful for margins. From the perspective of Google, it can at least now sit back and claim that it is no longer posing a threat to Samsung at a time of increasing downwards pressure on prices.

Precisely how much the Motorola foray has cost Google is unclear because of the retained patents which allegedly accounted for $9.6 billion of the total outlay, the $3 billion in cash it inherited and the sale of set-top box division for $2.4 billion. The net cost of probably around $3-4 billion – account must also be taken of Google’s investments in Motorola, meeting its losses and paying out for lost cases during the constant patent wars – is not going to drive Google to the wall, as it has cash reserves of $59 billion. It is widely believed that Google tried hard not to acquire the hardware business in conjunction with the patents but was forced to do what Motorola wanted, which is something of a blot on Google’s reputation for astute deal-making.

The most obvious lessons to draw from the above are as follows: first, do not suffer from Apple envy; second, do not irritate your partners unnecessarily; third, if you cannot solve a problem, don’t simply hang on and hope for a brighter future. It is worth observing that Apple, Nokia and Palm all preferred to concentrate upon extolling the virtues of their hardware while playing down leasing deals for their respective operating systems. In contrast, Google sacrificed its mobile hardware business to protect its software and patents.

But as indicated earlier, this is far from spelling the end of Google’s relationship with hardware. The wearables project Google Glass is, if nothing else, attracting vast amounts of free publicity. In addition, in January 2014, Google paid $3.2 billion to acquire Nest Labs – a cloud-enabled thermostat and smoke detector start-up. A year earlier, Nest Labs was worth a mere $800 million, so there are reasons to hark back to the bubble of 2000/02. However, it can be counter-argued that what Google is buying is less the current range of products than the human capital involved. If Google can print its brand name on a wide range of products within the “Internet of Things”, it will be securing its future in a manner that Motorola Mobility never could provide.

So Google is taking a gamble and showing a degree of ruthlessness in realigning its strategy for the rest of the decade. It may or may not turn out well financially, but its share price suggests that there are plenty of believers.

About the author

Peter Curwen is a Retired Professor, Leeds, United Kingdom. He can be contacted at: mailto:pjcurwen@hotmail.com

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