Was Google’s acquisition of Motorola Mobility (& Hardware Biz) a good idea? Or is that a rhetorical question?
So far, it isn’t paying off at all! Google spent $12.5 billion for Motorola’s mobile phone handset business and Set Top Boxes (STBs), which are sold to Comcast and other MSOs. Motorola Mobility had a $505 million operating loss in the third quarter, compared to an operating loss of $41 million in the same quarter last year, when it was an independent company. Motorola Mobility had revenues of $2.58 billion, below analysts’ estimates of $3.3 billion.
According to the Wall Street Journal, Motorola’s sales of mobile devices dropped significantly. In the third quarter, the mobile unit’s sales were $1.78 billion, down about 26 percent from the year-ago quarter when Motorola was an independent company.
“It’s hard to see how results are going to improve dramatically in the fourth quarter as Apple pushes its new iPhone 5 aggressively around the world, and Samsung continues to drive sales of its popular Galaxy S III smartphone,” the Journal‘s Spencer Ante commented.
Not only is Motorola Mobility losing sizable chunks of cash, but sales are shrinking. Turning around the division will not be easy since, unlike much-larger rival Samsung, it can’t harness huge cost efficiencies. Revamping the business will also take time, making the Motorola unit a likely drag on profits for several quarters.
Breaking Views writes, “Getting advertisers to pay more for mobile would supercharge Google’s ad business. Unfortunately, Google executives have plenty of other messes to sort out, such as fixing the phone business – and finding snappier quotes from Chief Executive Larry Page.”
Here’s what Infonetics analyst Julien Blin wrote in an email about Moto Mobility’s drag on Google’s earnings:
“So the obvious question for Google is: “Where do we go from here? Do we stick to Motorola’s smartphone, tablet and set-top box business or sell all these units and keep the IP portfolio?” Although management mentioned that they were fairly pleased with the progress at Motorola as Google continues to streamline Motorola’s business, and the acquisition is still pretty recent, these are tough questions that Google execs will need to answer in the coming months.”
“Pressure is on Google execs to execute on the best-of-breed Android devices strategy. Over time, if Motorola
continues to be a drag on Google’s earnings, Google is likely to sell Motorola’s smartphone, tablet and STB business. When Google announced the Motorola acquisition, Google execs were quick to say that their intent was to build
best-in-class Android devices, but as a result of that many OEMs were worried about the relationship between them and Google, as Motorola, a competitor, was now part of the company.”
“The reality is that Google does not need to get into the hardware business, as it presents the risk of pressuring its overall margins. Google could just rely on its pro-Android OEMs (Samsung, LG, HTC, etc.) to do so, and these partners could
also help them win the mobile OS platform war against Apple. With that in mind, we believe that over time Google is likely to sell Motorola’s smartphone, tablet, and set-top-box business and keep Motorola’s IP portfolio, as it could be very valuable to address potential patent lawsuits.”
Financial impact was very negative: The mistaken early release of unexpectedly weak earnings knocked over $20 billion off Google’s market capitalization on Thursday October 18th with an 8% decline in share price. That decline continued on Friday, October 19th. At least seven brokerages cut their price targets on Google’s shares after the company missed Wall Street earnings expectations.
Do you think it’s a good idea to own individual stocks, especially high flyers like Google (and Apple)? 🙂
References— related articles by this author about Motorola Mobility and Google’s wireless aspirations:
and this quote from Ken Pyle in August 2011; “Alan Weissberger may have said it best when he suggested that the Google purchase of Motorola Mobility is representative of what has become a sort of patent mania these days.”