The Ax Swings at Google's Phone Subsidiary

The chop is deep, and it hurts: Google (Nasdaq: GOOG  ) -owned Motorola Mobility, the tech giant's cell-phone-making subsidiary, has informed its employees that around 20% of them -- approximately 4,000 people -- are to be laid off. Also getting the ax will be around one-third of the unit's offices around the world. Twenty percent is a big number; hopefully for anyone connected with the company, good will come from bad and the firings will result in a leaner enterprise able to hold its own in the hotly contested hardware market.

A leader in software, but ...
Google has a commanding market share in mobile operating systems -- its Android is far and away the most popular OS, taking a powerful 68% of smartphone shipments in Q2 of this year, according to data from IDC. That's leaps and bounds over the same period a year ago, when it held 47%. The market is rapidly becoming a two-OS environment, with distant No. 2 Apple's (Nasdaq: AAPL  ) iOS holding 17% this past Q2, down year over year, but largely because of a lull in sales ahead of its next-generation iPhone.

Every other competing OS is pretty much a blip on the market these days. The former princes of the cell-phone kingdom -- Research in Motion (Nasdaq: RIMM  ) , with its BlackBerry OS; and Nokia (NYSE: NOK  ) , with the aged Symbian -- continue to fade. The former had a market share of 4.8% and the latter 4.4% in this most recent period. Those percentages, combined with the weak 3.5% from Microsoft's (Nasdaq: MSFT  ) Windows 7/Mobile, don't even add up to iOS's most recent share.

So Google has a firm grip on the software market. Hardware, though, is a different story. Google/Motorola is not even in the top five list of the world's smartphone makers. No. 1 is Samsung (which, thankfully for the American company, ships Android devices), followed by Apple and -- still hanging in there -- Nokia. It's a tough, cutthroat market, and it's only getting tougher with the recent success of HTC and ZTE, two determined Chinese phone makers.

Falling behind
Motorola Mobility has been a laggard for some time. Although the unit, in one form or another over the years, is responsible for some of the most important innovations in cellular -- including the first commercially available cell phone on the market, way back in the low-tech days of 1973 -- it hasn't been a force lately.

In fact, in its first six weeks as a subsidiary of Google, it lost a steep $233 million. Losing money is a habit for Motorola Mobility; in the past 16 quarters, it has posted a net profit in exactly two of them.

Maybe the bleeding will stop once the thousands of pink slips are handed out (which will include, by the way, around 40% of the unit's vice presidents). After the smoke clears, not only will the workforce be leaner, but the unit's footprint will also be smaller. Operations abroad are to be curtailed, so many of those 4,000 or so unfortunates losing their jobs will be employees from outside the United States. As a result, research and development will be concentrated in three offices -- Silicon Valley, Chicago, and Beijing.

There will be fewer products as well. In 2011, Motorola Mobility released 27 devices, reminiscent of the days when Nokia rolled out what seemed like a new phone or two every week. According to the unit's new chief executive, going forward it is to make only a few products. Presumably, this means it will center its efforts on a flagship model like the iPhone.

Big investment, big problems
So the firings look like a slashing attempt at ramping up Motorola Mobility's efficiency as quickly as possible. With this, can the company turn its now-lean unit into a hardware force? Its last notable success in the cellular space was a while ago now with the Droid series, but that's becoming ancient history in a business that moves quicker than a phone signal.

Google committed a lot to the unit, buying the once publicly traded Motorola Mobility for a rich $12.5 billion in a deal that closed this past May. Granted, the latter company's 17,000-strong portfolio of patents was one of the factors making that price so high -- it's good to have that kind of armor to defend against potentially litigious rivals and patent trolls. But it's unlikely the ambitious Google would have paid so much to ditch Mobility's hardware production entirely.

Any round of job cuts at this level is alarming. It need not be fatal, though. Google's proved that it can win in the operating-system market, so look for it to labor hard to duplicate that feat in hardware. It'll have its work cut out for it, that's for sure.

Apple is holding its own on both the software and hardware front ... for the moment. Will that continue? We have plenty to say about its prospects in our in-depth analysis of the company, complete with one year of free updates. A mere $9.99 gets you the report and the updates, which will undoubtedly be one of the best investments you'll make this year. The report is available for immediate purchase.

Fool contributor Eric Volkman owns shares of Nokia. The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Google and Apple and creating bull call spread positions in Apple and Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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