Lenovo to become world's No. 3 smartphone vendor with Google's Motorola

Analysts: Google sale of Motorola will smooth Android ecosystem
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Google's (NASDAQ:GOOG) decision to sell its Motorola Mobile division to Lenovo for $2.91 billion represents a large financial loss for Google, but it likely means that Google is prepared to reduce tensions with its Android licensees, according to analysts. Additionally, analysts say the deal will catapult Lenovo into a stronger position in the smartphone market, putting pressure on both Apple (NASDAQ:AAPL) and other Android players.

The deal, which was announced late yesterday afternoon, means that Lenovo, which had been the No. 5 smartphone player for all of 2013, is now in a position to exert more muscle in the market. Strategy Analytics analyst Neil Mawston wrote that the firm estimates a Lenovo-Motorola merger would give the combined entity a 6 percent global smartphone share in full-year 2013, and would make it the world's third largest smartphone vendor by volume, behind Samsung (32%) and Apple (15%).

Lenovo CEO Yang Yuanqing said on a conference call with analysts that Lenovo will keep using its Lenovo brand for smartphones in China and emerging markets such as Russia and India, but that the company will use the Motorola brand in the United States and Latin America. He also said Lenovo might also sell phones under the Motorola brand in China.

Yang said the goal is to sell 100 million smartphones in the year after the deal closes.

"This is an entirely logical move by Lenovo," CCS Insight analyst Geoff Blaber wrote in a research note. "CCS Insight has long predicted that Lenovo would make a move to acquire a manufacturer with brand strength and operator and distributor relationships in the West to grow its business beyond Asia. It echoes the strategy it pursued in PCs with its acquisition of IBM's ThinkPad business." Indeed, Lenovo had been rumored to be interested in acquiring BlackBerry.

Industry analyst Jack Gold said he doesn't think Lenovo "is done yet with acquiring markets and market share companies. And it's making them a worldwide player ahead of its local competitors (e.g., Huawei, ZTE, Xiaomi, etc.)."

As for how the transaction will affect the wider Android ecosystem, JP Morgan analyst Mark Moskowitz wrote in a note to clients that Google's sale of Motorola will consolidate the fragmented Android market, and will limit Apple's ability to get Android users unhappy with low-cost but lower-quality devices to switch to iOS.

"In September 2012, we wrote that the smartphone's contribution to growth at Apple could be peaking and that the iPad needed to carry more weight in the model, which has not come to fruition," he wrote. "We think this means that Apple needs to innovate and enter new product categories or services in the next 12-18 months. If not, then there is risk of the China Mobile rollout for Apple being the last major growth catalyst."

The deal could also be a blow to struggling Android manufacturers like HTC, which Lenovo was rumored to be thinking of acquiring last year. As Lenovo gets more prowess in the market, it could put pressure on lower-volume Android handset makers, just as Samsung Electronics has done.

Samsung remains the world's largest Android smartphone maker. But many analysts saw its support of the open-source Tizen operating system as a hedge against Google, following Google's purchase of Motorola. However, earlier this week Google and Samsung forged a wide-ranging, patent-licensing deal that covers the companies' existing patent portfolios and all patents they will each file over the next 10 years. Samsung

"No licensable alternative software platform has emerged to challenge Android despite the fundamental issues of control and profitability that manufacturers are wrangling with," Blaber wrote. "Google recently signed a broad cross-licensing agreement with Samsung, and it is feasible that Google concluded it is now less vulnerable to the departure of Samsung, which accounts for about 40% of Android smartphones. This would largely negate the need for an expensive insurance policy in Motorola Mobility."

Frost & Sullivan analyst Brent Iadarola echoed those comments, and wrote that the deal "reinforces Google's core philosophy that a common software platform crossing disparate hardware providers is superior to an end-to-end ecosystem approach (i.e., Apple and/or BlackBerry)." He also said Google's sale of Motorola move "alleviates the burden of keeping a costly hardware division afloat, which has increasingly been perceived, among many Android partners, as facilitating an unequal playing field for OS feature releases and integration."

Google will retain about 15,000 of the 17,000 patents it got as part of its original $12.4 billion deal for Motorola, and will grant Lenovo a license to use certain ones. Google valued the patents at $5.5 billion in 2012, and has said it will continue to use them to protect Android licensees, though that strategy has had a decidedly mixed track record so far. Google also sold Motorola Home, the part of the business that made set-top boxes, to Arris in 2012 for $2.35 billion.

Notably, Motorola's Advanced Technology and Projects group, the unit led by Regina Dugan, a former DARPA chief, is not part of the deal. According to Re/code and The Verge, which cited unnamed sources, that group will remain part of Google and join Google's Android team. Last October Motorola unveiled Project Ara, which is being spearheaded Dugan's group. Ara is an open-source program designed to bring modular smartphone design to the masses--in effect giving end users the ability to retrofit and continually customize the hardware of their smartphones.

Motorola, which had already cut thousands of jobs since the Google deal closed, will not get any leaner, according to Lenovo. Lenovo plans to keep workers and engineering talent both in Chicago and the San Francisco Bay Area.

For more:
- see this NYT article
- see this separate NYT article
- see this Reuters article
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this Re/code article
- see this separate Re/code article
- see this The Verge article
- see this CNET article
- see this ZDNet article

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