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The Good, Bad And Ugly Implications Of Google's Motorola Thrashing For Apple

Jan 31 2014, 8:12pm CST | by

The Good, Bad And Ugly Implications Of Google's Motorola Thrashing For Apple
 
 

Many are crowing about how dumb Google’s acquisition of Motorola was. Articles like “Google Ends Its Motorola Misadventure” and “Google stops chasing hardware windmills and sells Motorola” capture the zeitgeist of that position.

I think, however, as I wrote at HBR when it occurred, that Google’s acquisition of Motorola was a good bet. To use an analogy from poker, the pot odds were right.

Good poker players consider more than just the odds of winning when deciding whether or not to play a hand. They weigh the odds of winning against the “pot odds,” which is the size of the pot compared with the cost of staying in the game. In other words, if you only have to pay $100 to have a shot at a $1,000 pot, you’ll do so in a heartbeat even if you only have a one in five chance of winning.

In this case, Google was wagering $12.5 B to get into a mobile device market worth trillions over time. At the end of 2011, there were one billion smartphone subscriptions activated worldwide (out of a total of more than six billion phone subscriptions), and the market was growing at 37% annually. Tablet computers are coming into market even faster than smartphones did, and are predicted to overtake laptop sales. On top of all that, smartphones and tablets are channels to Google’s core search business. All in all, the size of the potential pot dwarfed the Google bet.

But, just because you make a reasonable bet doesn’t guarantee you’ll win the hand. Clearly, Google did not win this one.

So what does this mean for Apple? Here are three observations:

The Good News For Apple

Google’s failure as a direct device competitor is more evidence of how strong Apple’s position is. Apple deflected a direct assault by its arch nemesis while still claiming the lion’s share of the industry profits. It also defused the threat of Google using its advertising profits to continually fund competitive devices. As I noted recently, Google could have adopted a sustained Las Vegas type business model whereby it subsidized devices in order to attract customers to its core advertising business (in the same way that casinos give away dinners and show tickets knowing that those patrons will end up at its gaming tables). Google was headed in this direction with the Moto X but, to its disappointment, consumers showed little interest. (Google’s thrashing in this regard does not bode well for Microsoft and Amazon, who are likely to try their own version of the Las Vegas model. Microsoft, however, might be incented to stick with it longer—because it has fewer options.)

The Bad

Unfortunately for Apple, dropping the Las Vegas business model for devices just allows Google to focus on developing and giving away the OS. Being both the Android OS supplier and a direct competitor never sat well with other device manufacturers. That tension would have only gotten worse if Motorola had been somewhat successful. (And perhaps not mattered at all if Motorola had been immensely successful.) Now Google can go back to being an arguably honest broker of the OS, and help lead Android-wide innovation to compete with Apple’s iOS. Its just-signed peace accord with Samsung is an example of what lies in store for Apple.

The Ugly

By yielding its seat to Lenovo, Google has brought an arguably tougher challenger to the table against Apple. Lenovo will probably not inspire stronger high-end competition against Apple than Google. Instead, Lenovo will be a tougher competitor at the low end. It has better manufacturing prowess and scale than Google, and greater enthusiasm for that end of the market than either Google or Apple. One always got the sense that Google really, really wanted to show that it could build a more elegant a high-end phone than Apple. It couldn’t, so it abandoned the pursuit. Lenovo will instead attack from the below, as Motorola CEO Dennis Woodside recently signaled when he talked about aiming for a $50 smartphone. No one expects that an attack from the bottom will topple the iPhone—but it will inevitably compress margins. It also adds fuel to a very competitive ecosystem aimed at Apple. This is already happening in China, the biggest market in the world, where local competitors are gaining on Apple.

* * *

Taken together, the news for Apple is more good than bad. Google’s thrashing at Motorola is a significant victory for Apple in the long-running “thermonuclear war” that Steve Jobs declared on Android. But the war rages on, and this regrouping and reinforcement of the Android forces points to fiercer battles to come.

* * *

Chunka Mui is the coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups. Follow him at Facebook, Twitter @chunkamui or at Google+.

Source: Forbes

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