Google Undermines Samsung-Led Handset Makers With Motorola: Tech

HTC Corp. (2498), Samsung Electronics Co. and a host of smaller handset makers are at risk of losing their cachet after Google Inc. (GOOG) buys Motorola Mobility Holdings Inc.

Google said yesterday it will pay $12.5 billion for Motorola Mobility, purchasing more than 17,000 patents it can use to defend against allegations of infringement as competition accelerates in the $206.6 billion mobile-phone market.

The rival handset manufacturers, which have been building devices with Google’s Android software since 2008, may have a harder time cranking out bestselling devices because Motorola Mobility may get earlier access to the newest Android technology, said Michael Gartenberg, an analyst at research firm Gartner Inc. The acquisition gives Google an incentive to favor Motorola Mobility, and association with the Internet company will give Motorola handsets a leg up in competing for consumers.

“This is their nightmare scenario,” said Gartenberg, whose firm is based in Stamford, Connecticut. “Google has gone from partner to competitor.”

HTC Chief Financial Officer Winston Yung said he supports the deal. Google also said the transaction is supported by Samsung, Sony Ericsson Mobile Communications AB and LG Electronics Inc. (066570)

Photographer: SeongJoon Cho/Bloomberg

A visitor walks past an advertisement for Samsung Electronics Co.'s Galaxy S II smartphone at the World IT Show 2011 in Seoul. Close

A visitor walks past an advertisement for Samsung Electronics Co.'s Galaxy S II... Read More

Close
Open
Photographer: SeongJoon Cho/Bloomberg

A visitor walks past an advertisement for Samsung Electronics Co.'s Galaxy S II smartphone at the World IT Show 2011 in Seoul.

“We’ve managed our ecosystem really well, and we’re going to continue to do that,” Google Chief Executive Officer Larry Page said in an interview yesterday. “They know we’re committed to them and we’re committed to making that whole ecosystem successful.”

Patent Cover

Android partners are poised to benefit from the patent protection provided by the deal. HTC and other manufacturers are defending against suits that claim their phones infringe patents held by Apple Inc. (AAPL) and Microsoft Corp. (MSFT) Google will use the portfolio as leverage in negotiations over cross-licensing deals, said Abhey Lamba, an analyst at ISI Group in New York.

“We welcome the news,” HTC Chief Executive Officer Peter Chou said in an e-mailed statement today. “Google is deeply committed to defending Android, its partners, and the entire ecosystem.”

Samsung Electronics also welcomes Google’s acquisition because it will protect patents for the Android camp, while not affecting current business, James Chung, a Seoul-based spokesman for the company said by telephone. There is no indication the purchase reflects any change in Google’s Android strategy, LG Electronics Inc. said in an e-mailed statement.

Samsung gained 6.1 percent to 750,000 won, the biggest jump in more than 2 1/2 years. Motorola suppliers ELK Corp. and Interflex Co. surged by the daily limit of 15 percent in Seoul on speculation their sales to Motorola may rise with the purchase by Google.

Foxconn International Holdings Ltd. (2038), which also supplies Motorola, jumped 12.5 percent in Hong Kong trading -- the most since December 2009. Taiwan’s Compal Communications Inc. (8078) climbed 7 percent in Taipei, the biggest advance in more than a month.

Stronger Motorola

Still, a stronger Motorola may make it harder for rivals to add users, said Lamba, who rates HTC a “buy.” More than 80 percent of the handsets HTC sells boast Android, he said.

“Over the next couple of years it’s going to be tough for HTC because the market growth will slow and they will be competing for share,” he said. “In the longer run, this has created more issues that HTC will have to deal with.”

Backing by Google may help Motorola Mobility grab global mobile-device market share. It currently ranks No. 8, with just a 2.4 percent share, according to Gartner. Nokia Oyj (NOK1V) was No. 1, followed by Samsung, LG and Apple. HTC ranked No. 7.

Motorola Mobility’s smartphone market share may increase by half, according to Scott Ellison, a San Mateo, California-based analyst at IDC. He puts the current share at 4 percent. Google could put its name on Motorola Mobility devices, he said.

‘Lot of Opportunity’

“This is a big market,” Page said. “That’s been the strength of Android. It’s a big market. There’s a lot of opportunity. There’s a lot of players. There’s a big world out there.”

Motorola Mobility may benefit in the market for tablet computers too. Even before the deal, it got preferential treatment from Google, receiving first access to the Honeycomb version of Android for its tablet, according to IHS Inc. (IHS)

Google traditionally has alternated which vendors get preferential treatment through early access to the latest version of Android. Motorola will get first crack with future versions, getting “six-month head-starts on the latest and greatest operating systems,” said Mike Genovese, a Greenwich, Connecticut-based analyst at MKM Partners.

Qualcomm Chips

Google will also be able to help Motorola Mobility negotiate a reduction in the already low royalty -- at 4 percent of the phone purchase price -- it pays Qualcomm Inc. (QCOM) for chips, said Ashok Kumar, an analyst at Rodman & Renshaw LLC.

Emily Kilpatrick, a spokeswoman for Qualcomm, said the company doesn’t expect the transaction to have an impact on its agreement with Motorola.

Samsung and HTC may be more inclined to forge closer ties to Microsoft or ally with Hewlett-Packard Co. (HPQ), said James Faucette, an analyst at Pacific Crest Securities Inc. in Portland. Microsoft can sweeten the deal by offering incentives to partners, Faucette said. Hewlett-Packard CEO Leo Apotheker has said he plans to license WebOS software to hardware makers.

“If you are an Android licensee, you’ve got to see what your alternatives are,” Faucette said. “Microsoft has demonstrated their willingness to give money to licensees. That’s got to be the first reaction for an Android licensee.”

ZTE Relationship

ZTE Corp. (000063), China’s second-largest maker of phone equipment, said it plans to keep working closely with Google and Microsoft after Google announced its planned purchase. Currently “most” ZTE smartphones use Android, and only a “very small percentage” use Windows, Rena Qin, a spokeswoman at ZTE, said in an e-mail, without providing figures.

“ZTE welcomes all marketing activities beneficial to the ecosystem of the mobile industry,” Qin said. “We will continue to promote our smart terminal strategy and work closely with industry partners including Google and Microsoft.”

Microsoft is already taking steps to convince partners that Google will treat them as second-class citizens.

Andy Lees, president of the company’s mobile business, yesterday issued a statement saying that “investing in a broad and truly open mobile ecosystem is important for the industry and consumers alike, and Windows Phone is now the only platform that does so with equal opportunity for all partners.”

Hardware Options

To assuage partner concerns and avoid a push into lower- margin hardware, Google may opt to sell Motorola Mobility’s device business, said Brian Barish, president of Denver-based Cambiar Investors LLC, which holds Motorola Mobility shares and oversees about $8 billion.

“I would be shocked if they didn’t sell off the tablet and handset business in short order,” Barish said. “That way they stay fairly neutral.”

Google pursued Motorola Mobility out of interest in the target’s hardware and ability to distribute phones, as well as its software patents, one person familiar with the matter said. Jill Hazelbaker, a spokeswoman for Google, declined to comment.

For now, Google and its partners say Motorola Mobility won’t get preferential treatment.

“They’re all talking like it’s one big happy family,” said Kumar of Roadman & Renshaw. “The reality will be far different. If Motorola has most favored nation status -- whether in perception or reality -- it has an edge.”

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.