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What Is Google's $10 Billion Maneuver About?

By Renjit Ebroo – Feb 14, 2014 at 3:00AM

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Google is selling one hardware company, Motorola Mobility, and buying another, Nest. The stakes are high.

Google (GOOGL -0.55%) announced the purchase the mobile phone arm of Motorola for $12.5 billion in 2011. Almost three years later Lenovo announced that it is acquiring the Motorola division from Google for $2.91 billion. Prior to this, Google had announced the purchase of Nest, a hardware start-up for $3.2 billion. Nest is a hardware start-up by ex-employees of Apple (AAPL -0.34%). What's Google up to?

The sale of Motorola would appear like a loss of about $7 billion taking into account the Google's earlier sale of Motorola's set-top box division for $2.35 billion. It could also be seen as the cost of Motorola's patents most of which Google is keeping while selling the rest of Motorola.

The patents are worth it. They provide a sort of defense against the threats of competitors. A huge number of patents originally granted to Nortel networks were acquired by a consortium including Microsoft (MSFT 0.13%) and Apple in 2011. Google, without patents of its own, could have become easy prey to patent litigation.

Why selling Motorola is a good idea
A probable benefit of selling Motorola is easing of possible strains in relationships with Original Equipment Manufacturer, OEMs, making Android phones. For Google, as supplier of the operating system Android, to take to competing with its partners in their business must have set off alarm bells. Google seems better off trying to increase revenue from Android.

Android needs better monetization
So far Google's position in web search seems secure. Microsoft's Bing search engine has not yet had a significant impact on Google's revenue. Before acquiring Motorola, over 90% of Google's annual revenue came from ads. With a P/E greater than 30, expectations are high that revenue can grow. With Android expected to run in over 1 billion devices in 2014, it's an obvious opportunity for Google.

New revenue models: another take at Google "hardware"
Perhaps it's also time for Google to deliver significant results from a non-ad based revenue model. Google's popular products demonstrate its abilities in consumer-oriented software. However, it is weak in consumer-oriented hardware. The phones launched by Motorola under Google never created a stir like devices from Apple and Samsung.

This could explain the purchase of Nest. Its team brings to Google the experience of Apple's successful entry into new markets after PCs. Key executives in Nest worked with Steve Jobs on the iPod and the iPhone. With Nest, even after Apple, they still make devices that cause a stir.

Google has many hardware projects that show promise but require deeper expertise for successful commercialization. There's a lot of buzz about Google glass and now contact lenses that can measure glucose levels. Chromebook, Google's take on the laptop, has already found market acceptance with lots of room to grow.

The foolish bottomline is...
Android shows little sign of slowing down. Google is just as equipped as Apple to find ways to monetize its mobile platform. While there's a world of difference between Google and Apple when it comes to devices, the price paid for Nest looks like Google's bet to bridge the gap.

Renjit Ebroo has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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