Google buys Motorola Mobility

On 15th August Google announced it would buy Motorola Mobility for $12.5bn.

Motorola Mobility was the mobile phone arm of Motorola and was spun off from the parent company at the beginning of 2011.

Motorola Mobility’s 2010 annual report showed revenues of $11.46bn, net earning loss of $79k, and total assets of $6.2bn. Before Google’s announcement the market capitalisation of Motorola Mobility was around $7.3bn

The general consensus is that the acquisition is driven by the mobile technology patents which Motorola Mobility holds.

Mobile technology patents are becoming more significant as the Smartphone vendors compete with each other in terms of innovation and new capabilities. Patents could ultimately determine which mobile phone technologies and suppliers will dominate the market. Google’s interest lies in ensuring the success of it’s Android mobile phone operating system.

The figures show Google values these patents at around $5bn. Interestingly, Motorola Mobility’s 2010 annual report mentions the fact that it holds 17,000 granted payments but they are not valued on the balance sheet. In fact ‘Other assets’ are only valued at $697m.

Other companies which are sitting on these type of patents are having their values reviewed. Nokia’s share price has risen after this announcement from $5.35 to over $6, increasing market valuation by almost $3bn.

Unfortunately for Google, their share price has fallen from $564 to $539 since the announcement was made. This reduces the market capitalisation of Google by around $8bn. Their shareholders don’t seem to appreciate the value of the Motorola Mobility purchase.

Nokia’s troubles and a lesson on software

At the beginning of this week Nokia announced a profit warning. They expect their 2nd quarter results to be substantially below their previously expected range. And, probably more significantly, they do not feel they can confidently make a 2011 annual revenue forecast.

Nokia’s problems come down to one thing. They were unable to build a market leading phone and associated ecosystem to deliver internet services to their mobile customers. In effect they stagnated as a product company over the last 5 to 10 years in this emerging market of Smartphones.

Its interesting to note that this doesnt mean they didnt sell Smartphones in high volume. They did, and had many high selling devices in this category. However their issue was people bought the phones for the reason they had bought previous Nokia phones. They were stylish, good looking, and carried the latest high end features such as cameras.

These were the attributes which differentiated Nokia from the pack in the mid-nineties. An era when mobile phones went from being plain ugly, to a stylish fashion accessory. Nokia excelled here and became the dominant player in the mobile phone market.

But despite huge investment in the Smartphone segment, Nokia failed to deliver devices which encouraged their customers to use new Internet and application based services.

This is a classic business lesson in how difficult it is for companies to change their culture. Nokia found it incredibly difficult to go from a hardware focussed engineering organisation to a company which provides an open software platform for others to deliver compelling services from. But what also stands out here is the understanding of how software can change markets and business dynamics.

Software means new, compelling services can be launched overnight. And platforms such as mobile phones which support these services well will prosper. This is where Nokia fell down. Competitors such as Apple, which also made its name in well designed, stylish consumer electronics also made computers. They helped invent the computing industry. So they understand software and how it can be used to change a market. So when Apple launched the iPhone it was packed with new, software driven features, which attracted users to do new things with their phone.

Nokia has now teamed with Microsoft to launch a new range of Smartphones using Microsoft’s Windows Mobile technology. Microsoft understands software but has struggled in the past to break into the phone market. So on paper it is a good combination. The challenge will be for both companies to show they can lead the mobile industry in new, compelling applications and services.