It’s been done, Google has announced the purchase of Motorola Mobility this past Tuesday. The price: 12.500 million dollars, it could seem a little expensive for a company in decline, but I am sure Google had its reasons. Here we will analyze some of the reasons why the purchase could be good for Google:
1. Economies of scope
Google and Motorola both employ many engineers doing R&D for Android system and its application for smart phones .Before the integration, Google engineers have some knowledge for making phones but there is no place to use it. After the integration, they can use their knowledge on making Motorola phones. Besides, as Motorola sells its phones directly to the consumers, it has more information about the market demands. The integration provides Google access to this market data. So we can state Google benefits from economies of scope after the integration.
2. Improved coordination
In making smart phones, hardware and operating system must fit each other. This is an important issue for Android developers and Motorola since coordination is an important issue for a successful productive activity. Different dimensions for the success of the production of a mobile phone must be taken into account:
- Timing Fit: Google knows how Motorola is doing in its phone making, whether it fits the platform, so that it will not develop a platform that is too advanced for Motorola to use it, or the other way around. Then the development of platform and hardware will be in the same pace.
- Size/Shape Fit: This is also important in this case since the specific parts of the mobile phone produced by Motorola and the operating system provided by Google must fit. With the integration, the coordination between both parts will be much better allowing for a more efficient production chain.
- Communication Fit: Important as well since the producers of the mobile phone have to know how the operating system works or whether it has new options or versions that would fit in a better way into their mobile phone.
Since contracts are somehow incomplete, and some errors on coordination are more likely to arise if the two firms are working independently, firms may not assure proper coordination of design attributes and therefore, they can incur unnecessary costs. With the integration, Google and Motorola can improve their coordination of developing Android platform and design new Motorola smart phones.
3. Better protection for investment
In order to develop better smart phone, Motorola has to invest a lot in developing applications for Android system or other systems. This is called relationship-specific asset (asset only to use to corporate with other related companies). This may engage some risks, for example if Android charge fees for using it. For Google, if Motorola stops using Android as their platform. In these cases, their investment will be useless. After the integration, this risk does not exist any longer as they are in a same corporation now.
Two forms of asset specificity take place in this case:
- Physical Asset Specificity: It refers to assets whose physical or engineering properties are specifically tailored to a particular transaction. In this case, new Motorola’s phones will be specifically tailored to work with Android, creating specific mobile phones that will represent Google in the market.
- Human Asset Specificity: Refers to cases in which a worker, or group of workers, has acquired skills, know-how, and information that are more valuable inside a particular relationship that outside it. This will occur in this case when Motorola’s and Google’s workers get used to work with each other after the transaction for the same firm and under the same management or goals.
4. Avoid private information from being leaked
A firm’s private information is information only known by the firm. Each firm has its own strategy to compete in the highly competitive smart phone market. If the company uses outside resources, the risk of losing some private information arises and its intention for potential products will be leaked.
In the case of Google and Motorola, if Motorola wants to design a new kind of phone, it must consult Google whether the operating system will fit the product produced by Motorola. By doing this, their intention for the new product is leaked and Google could benefit from it gaining more competitive advantage. With the acquisition, there is no such worry for Motorola since they are owned by Google Inc. and the risk has disappeared.
Besides, it shows the trend that hardware will no longer be the determining part of the smart phone, it is its software applications that counts, and Google now is the leading producer of the programs. Even though Android is open to the public, Google can launch a program first to take up more market share. The intention of launching this program is important private information for Google, and, as a consequence, it will affect the strategy of the firm in the long run. In this way, the acquisition will help Google keeping the information inside and making them produce any specific programs or phones with no risk of leaking their information into the public.
5. Benefit from Patents and Labor
In smart phone industry, making a phone involves thousands of patents and problems with competitors. A phone maker may pay a lot for the use of patent of other companies and very often, it may also be involved in many law affairs. This costs a lot for the company and will have an adverse effect on the companies’ development. In this case, Motorola owns over 10.000 patents, which will greatly enlarge Google’s patent portfolio. This fact is very important because phone companies are currently involved in a patent battle for new smart phone designs. Thanks to the acquisition of Motorola, Google will own their patents and therefore, they will be more competitive in the patent battle (See figure 1):
Another important benefit for Google is the labor force that Motorola possess. Since after the acquisition Motorola will remain independent, Go
ogle will try to keep Motorola’s employees since they already have the skills and information needed for the manufacturing of new smart phones.
6. No risk from economies of scale
An important issue for vertical integration is whether there are economies of scale in the market or not. In this case, Google already has economies of scale in the development and distribution of Android for smart phones. But we can see that this acquisition will not be a problem since Google will still produce Android for other phone companies such as Samsung or HTC. The issue of economies of scale will be better understood with the following graph:
-Q1 is the quantity of Android demanded by MOTOROLA.
-Q2 is the total quantity of ANDROID produced by GOOGLE.
– AC1 represents the average cost that GOOGLE will incur of producing Android only for Motorola.
– AC2 represents the average cost that GOOGLE incurs for the production of Android for other companies as well as for Motorola.
Since the acquisition does not mean that Google will not produce Android for other smart phones, they will still have economies of scale and it will not be a disadvantage for them. Instead, it is a good opportunity since Google cost of producing Android will be AC1, and they can benefit from what they will get with Motorola’s and other phones that use Android simultaneously.
“Our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our Android partners to develop and distribute innovative Android-powered devices.” Andy Rubin, Senior Vice President of mobile at Google said.
Having all the information about the acquisition revised and evaluated, we can conclude that Google’s acquisition of Motorola Mobility is an optimal move for Google even though the price paid by Google may seem a little high.
Many new opportunities and advantages arise for Google since they now have an own platform where they will implement their operating system Android. Despite this fact, Android will still remain as an open source for anyone to use, and Google will not lose any Android users after the acquisition because they will still focus their work towards them.
Summarizing, the acquisition is an optimal move because they will benefit from economies of scope, improved coordination, better protection for investments, avoiding leakage of private information, benefiting from patents and Motorola’s labor force and maintaining economies of scale developing Android.