Pyramid Points - Implications of the Google-Lenovo Deal
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Implications of the Google-Lenovo Deal
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Implications of the Google-Lenovo Deal

February 12, 2014

Google’s decision to sell its Motorola device unit to Lenovo, while not necessarily seismic, was notable enough to register on the smartphone market’s Richter’s scale. Google will sell Motorola for $2.91bn, slightly less than two years after acquiring the cellphone maker. The transaction inspires a number of quick reaction points:

  • It is a sign of times that Google is –mostly– being heralded for the move despite its taking a bath on the deal. Google acquired Motorola for $12bn, including nearly $3bn of cash the cell phone company had on its balance sheet. After selling for $3bn, and accounting for 2013 operating losses, Google may have lost about $6bn on the deal. Depending on the valuation of the Motorola patents it has retained, its overall loss is around $3bn-$4bn, not much for a cash-flushed company like Google, but hardly anything to sneeze at.
  • The larger story is why Google had little compunction about selling Motorola despite the obvious financial shortcomings of the deal. The sale of Motorola will help clear up muddied Android ecosystem dynamics and steady Google’s own position in the value chain. Many hardware partners were openly queasy with the Motorola ownership, and several had started tweaking versions of Android to become less dependent on Google. Some (including Samsung) had been mooting initiatives to create their own operating systems. The Google-dependence concerns will not go away, but will likely ease up.
  • Further, the deal also signals an acceleration of the inescapable dissociation between hardware and software in the smartphone business; it points to the tricky balancing act needed in effectively managing the two while building scale on both fronts. Google appears to have concluded that it need not hold a strong position in hardware to drive scale growth in the adoption of its Android OS, a position we note is largely antithetical to that of Apple and Microsoft. The move also reinforces that the real Android money is in software rather than hardware. We will now see whether Samsung similarly abandons its –heretofore unsuccessful– efforts to develop Tizen, its own software operating system.
  • We note that the smartphone hardware market is still too crowded, especially at the bottom end, as more Asian players push into emerging markets. As price pressures intensify, there’ll likely be further rationalization. And non-Android players mixing hardware and software (Microsoft/Nokia, in particular) have hard strategic decisions of their own to make.
  • The case for Apple moving deeper to the lower end is increasingly questionable. Apple has faced some pressure to move more aggressively down-market to drive volumes, preserve share and strengthen its iOS ecosystem. The company has mostly resisted such calls, but for some moderate dabbling into medium to low-end market with the iPhone 5c. With the Lenovo move set to intensify competition at the bottom-end, however, Apple can hardly be blamed for being reluctant to partake in what is turning into a low margin bloodbath.
  • The deal vaults Lenovo to the third position globally among smartphone makers, behind Samsung and Apple; in our Pyramid Research 2014 Trends and Predictions analysis, we noted that Lenovo was in a strong position to benefit from operator need to balance the weight of Samsung in the Android ecosystem; in Latin America for example, we projected Lenovo to capture as much as 10% of the smartphone market; the Motorola acquisition will push Lenovo well past those market levels, notably by unlocking markets such as Brazil and Argentina where Motorola has local manufacturing plants.

— Guy Zibi, Head of Consulting

Related resources:

Global and Regional Trends in the Information, Communications and Technology Industry
Pyramid Research Predictions 2014
This report provides key insights into top market trends, written by Pyramid’s worldwide team of research analysts and consultants. Each prediction is supported by fact-based analysis and has been arrived at through extensive discussions among our analysts and experts. The introduction, written by Pyramid’s Managing Director, Daniel Amparán, also reviews the firm’s 2013 predictions and how they matched up to actual events.


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