Motorola – Method in the madness.

Google’s commitment to Motorola has nothing to do with handsets.

• If the wires are to be believed, Google is going to spend $500m to market the Moto X.
• The Moto X is a new concept of mobile device where the user can decide on certain aspects of the specification and then have the device built to order.
• The device will also be built in the US creating employment for around 2,000 people in Texas.
• The device will also be contextually aware of what is happening around it making it function accordingly.
• For example, it will know when it is in a car travelling at 60mph and could automatically launch Google Maps and navigation functions.
• However, $500m in marketing is not going to make up for the fact that Motorola has very little with which to differentiate it from the Android crowd.
• Furthermore, the gimmick of customisation and being manufactured in the US is likely to result in the device being more expensive than other devices of a similar specification.
• Android is a brutal world where only Samsung has the scale, distribution and hardware know-how to make differentiated and profitable products.
• Hence, I suspect that the Moto X will ship in fairly low volumes which combined with an enormous marketing budget will result in the river of red ink becoming something of a tidal wave.
• However, I think that there is method in Google’s madness.
• The long term threat from Samsung is very real.
• Samsung ships over 50% of Android devices today and is rapidly becoming the de-facto standard implementation of Android as far as developers are concerned.
• Hence, should Samsung decide to fork Android, remove the Google ecosystem and replace it with its own, the developers are likely to follow.
• To me this is inevitable as Samsung must make the move into services if it is not to suffer margin pressure as hardware continues to commoditise. (see here)
• Against this risk Mototola offers some defence as it gives Google’s ecosystem a route to the user when Samsung cuts it off.
• This is the only rational reason for Google to hold onto Motorola because it has done nothing than bleed shareholders dry since the day it was acquired.
• I estimate that advertising revenues from Android devices will be worth $4bn to Google this year and potentially meaningfully more in 2014.
• This is a revenue stream worth fighting for, explaining Google’s seemingly irrational commitment to a business that has destroyed value for nearly 10 years.
• That being said, in the short-term shareholders of Google are going to suffer the ignominy of a spending bonanza where they have no real hope of seeing any return.