Google (GOOG) isn’t slated to release fourth-quarter earnings until after the bell today, but the search giant has already stolen Thursday’s spotlight in the world of tech and investing.
News just broke that Google is waving goodbye to its Motorola unit … already. Remember, GOOG announced it was dropping $12.5 billion to buy Motorola Mobility in August 2011 — its largest purchase ever — and didn’t close on the deal until May 2012.
But GOOG is already handing the Motorola handset division off to Chinese tech giant Lenovo (LNVGY) … and for a small sliver of that original price tag: a mere $2.9 billion. That number is good enough to represent China’s largest-ever tech deal, but it’s still a fraction of what Google originally paid.
Granted, while the headline number for the Motorola purchase was $12.5 billion, GOOG also inherited about $3 billion in cash from the deal as well. And Google already had shed parts of the original Motorola purchase, selling Motorola Home (the set-top box division) to Arris Group in December 2012 for $2.35 billion.
Then there are patents — which were a large reason GOOG made the purchase in the first place — to factor in. Following yesterday’s announcement, Stifel said the implied value of the patent portfolio would be approximately $4.3 billion. And while 1,000 patents and patent licenses were handed off to Arris Group, and another 2,000 went to Lenovo (along with the Motorola trademark portfolio), Google still maintains the “vast majority of the Motorola Mobility patent portfolio.”
Once you factor in operating losses, it’s likely that Google still will end up on the losing side of the equation, but it’s not taking a total bath. Still, it’s clear that Google wanted to get the heck out of manufacturing Motorola phones … no matter the cost.
And GOOG stock investors seem to support the move; shares of Google stock jumped as soon as speculation about the sale began circulating and are up almost 3% so far on Thursday.
Why GOOG Is Calling It Quits
Of course, if you look back at the performance of the Motorola Mobility division since the Google acquisition, it’s pretty easy to see why giving up on Motorola phones is likely for the best. Just take a look at these five cringe-worthy data points:
- Big-time operating losses. Tally up the Motorola Mobility operating losses that have shown up in Google earnings reports since the acquisition, and they come to approximately $1.9 billion. And that doesn’t even include the fourth-quarter losses from Motorola that will show up in the Google earnings report later today.
- And they’re not going away. The Motorola Mobility segment first showed up in a Google earnings report during the second quarter of 2012, during which Motorola ate a $233 million operating loss. Since then, Motorola has recorded losses of $527 million, $353 million, $271 million, $342 million and $248 million.
- Sliding market share. As losses for Motorola Mobility and GOOG continue to march higher, the market share of Motorola phones continues to move in the opposite direction. At the start of 2011, Motorola phones held 16.5% of the U.S. smartphone market, according to the monthly comScore report. By the start of 2012, that had slid to 13.2%. By the start of 2013, it was down to single digits: 8.6%. And as of most recent report, which was for November 2013, Motorola phones held just 6.7% of the U.S. smartphone market.
- Disappointing flagship sales. Of course, the Moto X was meant to be the big debut from Motorola Mobility under Google … and theoretically meant to help reverse that trend. But, while GOOG didn’t release hard numbers for Moto X sales, a report from Strategy Analytics claimed a mere 500,000 units were sold in the third quarter. For comparison’s sake, 10 million Samsung (SSNLF) Galaxy S4 handsets were sold during the same time period. And the fact that GOOG recently dropped the price of the Moto X from $550 to $399 seems to confirm that the much-anticipated release didn’t go as planned. As the phone itself failed to lure in buyers, Google and Motorola realized their only hope was to compete on price — a catch-22 move that naturally slices margins.
- Endless competition. Of course, even competing on price is getting increasingly difficult … because the world of smartphone manufacturing is getting increasingly crowded. In fact, Motorola Mobility is just a blip when we consider the many manufacturers there are worldwide. Samsung, Nokia (NOK), Apple (AAPL), LG, ZTE (ZTCOF), Huawei, new parent Lenovo, TCL, Sony (SNE) and Yulong all have more global market share than Motorola, according to Gartner, and there are countless competitors fighting their way up as well. This isn’t the same smartphone market BlackBerry (BBRY) took by storm years ago; it’s a crowded market where snagging a small piece of the pie isn’t enough … and isn’t easy.
All in all, it’s easy to see why Google is saying so long to Motorola Mobility … and why GOOG stock investors are applauding the severed ties.
As of this writing, Alyssa Oursler did not hold a position in any of the aforemention securities. Follow her on Twitter: @alyssaoursler.