Should Google Selling Motorola Concern Microsoft?

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If you follow Google (NASDAQ: GOOGL  ) , you've likely heard about the $2.9 billion sale of its Motorola unit to China-based Lenovo. What was interesting, though not surprising, was that Microsoft (NASDAQ: MSFT  ) was almost instantly linked to the Google-Lenovo deal. With its pending foray into devices and services via the Nokia (NYSE: NOK  ) acquisition nearing completion, some pundits cite the Motorola deal as a warning for Microsoft.

According to some, the problem the Google-Motorola deal demonstrates is that Microsoft must choose between hardware and software. As Google learned the hard way, tech companies can't be both a hardware and a software provider, so say the pundits. While not completely without merit, the argument loses a bit of its luster when you consider the particulars of both the Google-Motorola and pending Microsoft-Nokia deals.

Eerily similar...
At first glance, it's easy to see several correlations between Google's mobile hardware efforts and Microsoft's decision to buy Nokia's devices and services unit. Both Microsoft and Google, prior to their respective phone manufacturing forays, were best known for operating systems and software. Android continues to dominate the world's smartphones, and even as the PC market bottoms out, Microsoft Windows remains the hands-down leader. Both giants are also heavy into cloud and related technologies, too.

Microsoft and Google also decided to test the mobile manufacturing waters by going big via acquisitions. The $7.4 billion, based on current exchange rates, that Microsoft is spending on Nokia's devices and services unit pales in comparison to the $12.4 billion price tag Google put on Motorola, but both certainly qualify as big-time investments.

... but different
A significant distinction between the two scenarios is that the Nokia deal only includes the use of some patents for Microsoft, but not the patents themselves. In the case of Google, many have speculated it was Motorola's portfolio of 20,000 patents, give or take, that was the primary driver of the deal to begin with. But that's not the only difference.

When Google agreed to buy Motorola in Aug. of 2012, outside its brand recognition, Motorola had become a non-entity in the mobile phone market. You may recall that 2012 was the year Samsung took over the top mobile phone sales spot from Nokia for the first time, selling 384.6 million units compared to Nokia's 333.9 million devices. During the same year, Motorola sales had dropped to a meager 33.9 million, from just over 40 million in 2011. When Google took the reins, Motorola wasn't just experiencing a downward trend, it was dying.

Granted, Nokia is hardly on a tear itself, as more and more users shift to smartphones in lieu of inexpensive feature phones, its bread and butter in emerging markets. But Nokia still commands the second spot in global mobile phones sales. In Q4 of 2013, Nokia shipped 63.4 million phones, a respectable if not outstanding tally.

It's also worth noting that, unlike Google, Microsoft is already enjoying a measure of success in hardware, as last quarter's Surface tablet sales demonstrated. Though still early on, it was comforting for Microsoft fans to see that Surface revenues more than doubled to nearly $900 million last quarter, up from fiscal 2014 Q1's $400 million.

Final Foolish thoughts
Microsoft would do well to learn what, if anything, it can from Google's Motorola odyssey: That's always a good idea. But to take Google's decision to get out of the hardware business as a precursor of things to come for Microsoft is too broad a brush stroke. It seems like there's a little iCompany down in Cupertino that's done alright from both the hardware and software side of the fence.

Microsoft needs to focus on growing its cloud business, using its Windows 8 and Phone OS to drive search traffic, thereby upping advertising revenues, and make the transition to phones as smooth as possible -- not worry about the decisions Google's making. If there was a warning shot for Microsoft recently, it wasn't Google, it was Nokia's 5% sequential drop in device sales last quarter, which included the crucial holiday shopping season, no less. Now that's something to be worried about.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2014, at 8:51 PM, symbolset wrote:

    It's a little late in this game for Microsoft to figure out where Google was going with Motorola. They thought it was a vertically integrated stack like Apple. Google stabbing their hardware partners in the back and going solo. It turns out it was a defensive patent grab to protect their partners.

    Now Microsoft is holding the "Nokia" bag without Nokia's patents or the tax benefits (Nokia never had much US business to have losses on). A solo phone maker without the partner ecosystem that Google has, trying to push their 3% share platform up the global market hill losing money on every device. There is no way they are going to convince phone makers that they might play nice. They might bribe some to pretend they are making phones, but these are going to be vanity devices that only move a few units.

    And that's the hot potato, isn't it? With Nokia they can't make it work as an ecosystem because the partners won't trust them. Without Nokia their share is 0%, there is no developer interest, no reason to adopt the brand by another maker. Spin off Nokia to get partner trust and Nokia goes straight to Android for the profits, or goes out of business immediately - either way Windows Phone goes to 0 share before it goes up at all, if it does. They can't go forward and they can't go back. They're stuck. What beautiful strategery that was. Quite a piece of work. I hope whoever thought this up gets a bonus.

  • Report this Comment On January 31, 2014, at 12:55 AM, jameskil wrote:

    Google is not well known for operating systems and software, but is well known for it's search engine and advertising. It never had the understanding of global support for a platform like Microsoft has, has no cloud play, no consulting or services group to speak of, only a search engine and cell phone operating system which a college junior can write. Kit dabbles in some interesting stuff, but has it brought any of it to market in scale? The Fool needs to stop writing nonsense ...

    Microsoft does not follow Google's strategy, nor anybody else's.

  • Report this Comment On January 31, 2014, at 9:52 AM, themusicmonk wrote:

    Google is known for Search engines and advertisements and privacy violations. Time and time they dabble into various things and pull back most of them due to failure, the Social network venture being their latest debacle. Now talking about their strategy ? Duh Google's strategy? is there one?

    Microsoft is much seasoned entity to be compared to Google. I remember reading here a few years ago that Google's chrome OS was supposed to be a threat to windows and its future. We know where Chorme is today

    Please stop writing nonsense in the name of press.

    and do not bring in Microsoft to prove your pathetic point.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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