Lots of people are scratching their heads over Google's decision to buy Motorola and get heavily committed to the hardware game. Why bother, goes the thinking: margins are better in search and the other digitally-focused, internet-oriented businesses it already dominates.
Nokia, Palm, Blackberry and Motorola itself are evidence of the debacle awaiting anyone who can't effectively compete with the leaders of the pack. But in a global economy in which convergence is inexorably driving competitors into each others way, it may be, as the following article explains, that Motorola and its products have little to do with Google's own plans for the future, but a lot to do with thwarting those of its primary rivals like Apple and even its own erstwhile partner, Samsung.
Given the profits and networks advantages inherent in the smartphone ecosystems other tech companies have created, Google may simply be messing with their margins. By introducing its own well-funded if slightly derivative devices, the company can force the others to be conscious of - and in certain markets - drive it to compete on price. This challenges their financial position (on a purely relative basis), causes management distraction from achieving more significant strategic objectives and may reduce customer loyalty by offering increasingly acceptable alternatives.
All of which is to say, that when you have resources of that scale and power - and perhaps especially when you dont - you must think and act with longer term goals in mind. JL
Farhad Manjoo comments in the Wall Street Journal:
Maybe It Is a Long-Term Effort to Drive Down Rivals' Phone Prices?One morning this summer, I was ushered into a small conference room at the Googleplex to chat with Dennis Woodside, the CEO of Google Inc. 's Motorola division, where he gave me a sneak preview of the company's flagship smartphone, the Moto X, which hadn't yet come out.
I left the meeting more puzzled than ever about Google's decision to buy the struggling device maker two years ago. When Mr. Woodside showed me the Moto X, I found it clever but unspectacular. Though the phone, which came out in September, had a few innovative features, it didn't look like a phone to justify the $12.5 billion Google had spent on Motorola. Phone buyers apparently agree. Last week, amid an otherwise glowing earnings report that sent its stock soaring above $1,000 a share, Google disclosed that Motorola Mobile lost $248 million in the third quarter. The losses are growing—a year ago, Motorola Mobile lost $192 million.
What is Google's long-term plan for Motorola? Did it buy the business just for patents, or does Google really want to be in the hardware business? How much money is Google willing to sink into it?Did Google buy Motorola's business just for patents, or does Google really want to be in the hardware business? Farhad Manjoo discusses on digits. Photo: Getty Images.
Here's a theory that I've been playing with: What if profits aren't part of the plan at Motorola? What if Google's plan for smartphones isn't to directly make money for itself but, instead, an attempt to destroy money for other companies by making the phone a commodity device?
In particular, think of Motorola as a long-term effort to drive down the insanely high profits raked in by just two companies— Apple AAPL -0.29% Apple Inc. U.S.: Nasdaq $519.87 -1.49 -0.29% Oct. 22, 2013 4:00 pm Volume (Delayed 15m) : 18.89M U.S.: Nasdaq $521.00 +1.13 +0.22% Oct. 22, 2013 7:59 pm Volume (Delayed 15m): 183,905 P/E Ratio 12.88 Market Cap $473.66 Billion Dividend Yield 2.35% Rev. per Employee $2,225,220 10/23/13 China's state-run media CCTV t... 10/22/13 Apple Unveils New iPads 10/22/13 T-Mobile Set to Support Apple'... More quote details and news » and, to a lesser extent, Samsung 005930.SE -0.89% Samsung Electronics Co. Ltd. S. Korea: KRX KRW1442000 -13000 -0.89% Oct. 23, 2013 3:00 pm Volume : 171,969 P/E Ratio 7.81 Market Cap KRW237771.83 Billion Dividend Yield 0.07% Rev. per Employee N/A 10/23/13 China's state-run media CCTV t... 10/22/13 Corning to Take Control of LCD... 10/22/13 Why Now for Tablets and Phable... More quote details and news » —on a single product line, smartphones. The iPhone alone is responsible for almost two-thirds of Apple's profits, which makes it by far the most profitable product in the world. Samsung, meanwhile, has earned billions by selling phones running Google's Android operating system. This makes Samsung Google's nominal partner, but considering the power it wields in the Android ecosystem, also an emerging rival. Together, in 2012, Apple and Samsung generated $53 billion in profit in the smartphone business, making phones the most lucrative products in all of tech, and perhaps in any industry other than oil.
Over the long run, Google can't abide these profits. As a corporate entity, Google is obsessively, almost religiously devoted to a single, towering mission. Everything it does, from core products such as Android and Chrome to far-out flights of fancy like robotic cars and computerized glasses, furthers a single goal: to get more people to use the Internet more often.
The profits earned by smartphone makers stand as a hurdle to that mission. Apple sells its newest iPhone for $650. (If you bought the phone on contract, you pay that amount indirectly—$199 when you buy the phone, and the rest as part of your monthly cellular plan.) More than half of that is profit.
In other words, in Google's view of the world, the iPhone is way overpriced. If the iPhone were cheaper, Apple would sell a lot more phones than it does now. So too would the rest of the industry, since other companies peg their smartphone prices to Apple's. This would be a boon for Google: More iPhones means more surfing (especially search), which means more ad dollars for Google. A lower price for iPhones would also mean a slimmer profit for Apple, something that would please Google.
But how do you force Apple to cut its smartphone profits? In 2011, back when Google's Android operating system was just beginning to eclipse Apple's iOS market share, the venture capitalist Bill Gurley wrote one of the most prescient tech analyses I've read in recent years: Android and Chrome, he wrote, are not "products" in the classical sense. Google invests vast sums in creating them, but it doesn't expect any direct return from them, because its real goal is to use them as a "moat" to protect its "castle," the ad business. By forcing competitors like BlackBerry, Nokia and Apple to compete with products that have no profit motive, Mr. Gurley argued that Google may have engineered "the greatest legal destruction of wealth in history." Two years later, we see that Gurley was mostly right: Android is now the world's most dominant smartphone operating system, and by creating a vast market of low-cost competition to iOS devices, it has helped dramatically slow Apple's earnings growth.
But I suspect that's not enough for Google. Today there are lots of companies making cheap Android phones, but many of those phones are junk—underpowered, clogged with adware, and hobbled as Web surfing devices. That's why customers are still willing to pay Apple and Samsung premium prices for smartphones.
Hence Google's emerging vision for its smartphone division. Think of Motorola as the hardware version of the Android strategy—not a profit-seeking entity, but instead one whose only eventual economic motive is to create pretty good phones at reasonable prices. In doing so, it hopes to force Apple and Samsung to slash their hardware prices—and thus earnings—accelerating the smartphone's path toward becoming a commodity device.
The only wrinkle in this theory: So far, there's no evidence that the Motorola is pushing down prices. The Moto X is selling for $99 or less on contract, and is thus one of the best low-priced phone you can buy today. But Apple and Samsung don't seem to have noticed. Even with the launch of the lower priced iPhone 5C—which is basically last year's phone at $99—Apple's pricing structure is largely unchanged from previous years. But Google has always made clear that Motorola is a long-term play. It is willing to wait years and, I suspect, lose billions if the end result is cheap, great phones for everyone
0 comments:
Post a Comment