Why Google Will Use Motorola To Become Vertically Integrated

If you look closely at the most successful company in tech today, it is Apple. And they are in this position for a major reason. They are completely vertically integrated. They own the OS, the hardware and the ecosystem. And although they don’t manufacture their own chips, the IP in their chips are homegrown and designed to meet the needs of their advancements in OS and hardware designs. The result of this vertical integration is that they have complete control of their future.

Another company that is pretty much vertically integrated is Samsung. They do their own design, their own chips, and in their case they even do their own screens and manufacture their own products. Their only weak link is with the OS since they are licensing Android for their smartphones and tablets. However, they are about to launch their own cloud services and take even more control of their destiny by tying all of their products together to cloud based applications and servers. And as you know, they have gained great ground in smartphones and while still struggling against Apple in tablets, they have become more aggressive in looking at alternative operating systems to Android and could soon deemphasize their use of Android in favor of their own OS solution to guarantee even tighter vertical integration in the future.

But there are two companies today that at the moment have very little control of their future because of their lack of vertical integration and that is Google and Microsoft. And without out being vertically integrated, their prospects of wide spread success in the future in my viewpoint is highly questionable.

The Vertical-ization Trend

Ironically, at the moment, Google is actually in a better place than Microsoft to develop a vertically integrated strategy but Google is in denial about how important this is to their future at the moment. In their case, they own the software OS and a lot of the services layer but have little control of the hardware and the marketing needed to guarantee that Android will be successful in the future. In fact, if you read a lot of the recent posts about Android, you see numerous reports that suggest that Android is in trouble and losing ground, especially in tablets.

Today, Google has to completely rely on their Android hardware partners to drive Androids success. While this has been OK with smartphones, their partner’s performance in advancing Android in tablets has been dismal. Now to be fair, a lot of this is Google’s fault in the way they have handled the various versions of Android and the uneven, if not disastrous way they handle upgrades and OEM relationships.

But Google is about to have an even bigger problem on their hand when it comes to partners. To date, Android has been the only game in town when it comes to alternative operating systems for smartphones and tablets. But that is about to change. With Microsoft now entering the market with Windows based operating systems for smartphones and tablets, these vendors now have a solid alternative to Android. And pretty much every one of them will be doing a Windows Tablet. And with doing a Windows Tablet comes major marketing dollars from Microsoft as well as huge industry interest for this tablet platform since it includes backward compatibility with existing Windows Apps.

This means that Google has even less control of their partners push for any Android tablets and this probably translates into Android tablets in general losing steam. Sure, Amazon will continue to use Android and in a sense advance Android in tablets. But their version of Android is their own amalgamation of the Android OS and their own special tweaks and in no way really advances Android itself in the market.

Now, when Google is asked about their Motorola purchase, they say it was for the patents and they plan to treat Motorola just as if it is another Android vendor and not give them any preferential treatment. Well, if you buy that, then I have bridge in NYC that I want to sell you very cheap! I believe Google knew full well that at some point Android could become really challenged and that their vendors could desert them. So the Motorola purchase was insurance. At first they could just gleam value from the patents and hope that this alone was worth the price. However, having Motorola in their backpocket that would let them become vertically integrated at the turn of a switch was the real goal of this acquisition.

Now, in my opinion, it is not a question of “if” they make Motorola their hardware arm. It is a matter of when and I believe that this will happen this summer. Put yourself in their position. By the fall, all of their key Android vendors will also be backing Windows 8 and you can be sure that this will be the beginning of these vendors de-emphasizing their Android products. Google better be ready to pick up the ball with Motorola by then or their ability to control their own destiny will take a real hit given the momentum that will come in Windows 8 tablets this fall.

More Acquisitions Will Happen to Go Vertical

A week before Google bought Motorola, my son Ben wrote an article in Tech.pinions arguing that Google should buy Motorola if they wanted to control their destiny. Although Google continues to deny that it will make Motorola its hardware ARM, both us believe that Google has no choice if they want to see Android succeed for their own purposes.

Related Column: Why Google Should Buy Motorola

So what about Microsoft and this issue of vertical integration? Aren’t they also completely beholden to their OEM partner’s to carry out their OS dreams and must trust them to be successful in hardware if Windows 8 on tablets and Windows Phone are to be big winners? Absolutely. Their model of using vendors for Windows 8 on desktop and laptops is intact and will succeed on its own. And perhaps even with tablets this will be the case since Windows 8 backward compatibility will be a big driver for these products and all PC OEMs will use this to extend their reach in tablets. But where Microsoft is very vulnerable is in smartphones since they pretty much are relying on Nokia to make Windows Phone–and beyond–succeed in these devices. Early this year, I wrote an article in Tech.pinions saying that Microsoft “will” buy Nokia and reasoned that in the end, when it comes to smartphones, Microsoft is so late in the game that ultimately they need to control its hardware destiny.

Related Column: Why Microsoft Will Buy Nokia

With the news last week that Nokia lost $1.9 billion last quarter and rumors of bankruptcy swirling around them, I am more convinced then ever that Microsoft will buy at least Nokia’s handset business. Although Nokia officials have denounced reports of bankruptcy, if they have another bad quarter their long-term position in the market could be even more questionable. In the end, Microsoft will have to be at least vertically integrated when it comes to smartphones if they want to guarantee the ultimate success of Windows phones.

Take a close look at why Apple is successful and you will see that their vertical integration allows them control their entire ecosystem and as a result, be master of their destiny. I don’t see any way for Google or Microsoft to ultimately control the success of Android in tablets and Windows Phone/8/9 on smartphones and tablets without becoming vertically integrated in these areas. If they do not do this, Apple will continue to eat their lunch and leave them in the dust.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

16 thoughts on “Why Google Will Use Motorola To Become Vertically Integrated”

  1. While I agree with much of your analysis, and while I agree with your conclusion that both Google and Microsoft are moving toward a vertically integrated model, I think that the move will prove to be a disaster for both, and for Google in particular.

    Don’t get me wrong. I’m a big fan of the vertically integrated model. But there are three reasons why vertical integration is a bad idea for both Google and Microsoft.

    1) Vertical integration is just a strategy, it’s not a destiny. Vertical integration CAN prove to be the best strategy but it’s not inherently superior.

    Microsoft’s licensing model defeated Apple in the nineties (although one could well argue that Apple helped by shooting itself in the foot). Licensing and other models work well in many other industries. Vertical integration is a very fine strategy, but it’s not the be all and end all. It’s just one of many possible strategies available.

    2a) Google: I can think of few companies less well-suited for the vertical integration model than Google. Vertical integration is all about sweating the details, going the extra mile, spending 80% of your effort on the last 1% of improvement.

    Google doesn’t finish anything. Everything’s a beta with them. It permeates every fibre of their corporate being.

    This is not a bad thing. They are starters, not finishers. They are initiators, they are endlessly creative and they are endlessly productive. But the idea that they are going to simply change styles – and not just change styles but adopt a style that is the complete opposite of their current persona – is beyond ludicrous.

    2b) Microsoft: is a different story, but the end of the story is still the same. Microsoft is efficient, methodical focused, detail oriented. They have the personality to do vertical integration. But with Microsoft, you’re asking them to abandon the business model that made them great (licensing software, commoditizing hardware) and embrace the very business model that they’ve been battling (and defeating) since the early eighties.

    Further, whenever Microsoft has tried to embrace vertical integration (Zune, Xbox) they’ve struggled and struggled mightily to get their initial offerings right. Shifting from a licensing model (and a licensing mentality) to a vertically integrated model would be hard enough under any circumstances. Doing it in a hotly contested field would be – to mix many metaphors – like changing horses in the middle of a stream and jumping from the frying pan straight into the fire and fixing the roof in the middle of a monsoon. In other words, it wouldn’t be good.

    Which brings me to my third and final point.

    3) Apple is already there. I could have started and stopped my analysis right there. Anyone who moves to the vertically integrated model is going to have to try to out-Apple Apple. And that’s not going to happen.

    Not only is Apple the leading maker of vertically integrated personal computing products but they’ve raised the concept of vertical integration to an art form. And their products are entrenched. And they are the largest, fastest growing large cap in the world with $100 billion in cash reserves. And did I mention that they’re really, really good at vertical integration?

    I’m a fan of military strategy. Trying to out-Apple Apple is about as dumb a strategy as there is. You don’t attack the enemy where he’s strongest. And you don’t try to attack Apple at the thing it does best, at the thing that is the very essence of its being.

    Conclusion: Now you may well ask, if I don’t think Google and Microsoft’s current model will beat Apple’s integrated model (and I don’t) and if I don’t think that Google and Microsoft can out-Apple Apple at its own game (and I don’t), then what strategy AM I proposing?

    Ya’ got me. I really haven’t thought much about what Google and Microsoft SHOULD be doing. It’s much easier to see what they SHOULD NOT be doing.

    I will say this. There are leaders and there are fast followers. Each strategy can be successful. Apple spent (at least) 15 years banging its head against Microsoft’s Windows monopoly. They finally broke out because they went in an entirely different direction with the iPod, iPhone and iPad.

    – Microsoft needs to stop thinking that they can do what’s already being done, do it better and then spend their way to market domination. Those days are gone. Microsoft needs to stop making the next iPod, the next iPhone and the next iPad. We don’t need those, we have the originals. Microsoft needs to create something original, not something that is marginally “better” than what already exists.

    – Google needs to forget about phones, per se, and think about who they are and where they should be going instead of reacting to every move that everyone else makes. Google is like a ship with no compass. They react brilliantly to take advantage of the changing wind but going fast does you little good if you’re not going in the right direction.

    Android was supposed to be the moat that protected the Google search castle. Now Google has spent countless millions on Android and 12.5 billion dollars on Motorola and they’re moving toward making a vertically integrated phone model? In essence, Google is spending all of their time and resources on the moat that was supposed to protect the castle instead of directing their focus and energy on improving and expanding the castle.

    Is any of this terribly helpful advice? Perhaps not. But it’s way, way, way better advice than becoming vertically integrated which is doing what you’ve never done and being who you’ve never been in order to compete with the best who ever was.

    1. Whether or not either MSFT or GOOG go vertical, if they do they will approach it differently. When I wrote my original analysis of why Google should buy Moto it was based on two key points. 1. That hardware only business will have a hard go of it over the next few years and I felt Moto would continually be in financial trouble. Goog was a logical choice since Moto supports no other OS than Android. 2. That Google could give the hardware away or highly subsidize it in order to get as many endpoints on Android out there as possible. Google makes money the more people they can get ads to and one sure way of that is to give them the hardware for basically free.

      I am not saying this may be a great consumer experience or that the consumer really wins in this scenario but if they took this approach and could justify it financially it is hard to beat free.

      MSFT would probably go the other way and look to add value throughout the chain including hardware like Apple. Nokia could help them do that but I still think its a stretch.

      Regardless, this industry like many others requires that companies re-invent themselves and often that means major strategic thinking of their business (think Big Blue and getting out of hardware). The next 5 years will be fascinating to watch how competitors to Apple look to try get chunks of the market.

      One thing I have been thinking quite a bit about is whether the period we are in right now with Apple is reflective of the period of the late 80’s and 90’s when the Microsoft platform / ecosystem was so dominant. If that is true and this cycle looks the same then where Microsoft was dominant when computing was maturing in business, Apple will be dominant as computing ala smart phones, tablets, etc., mature in pure consumer markets and even emerging markets. I’ll probably write an analysis on this at some point in time.

      1. “Google makes money the more people they can get ads to and one sure way of that is to give them the hardware for basically free.”-benbajarin

        Do they? There’s plenty of evidence that Google makes two-thirds of its mobile income from iOS and little from Android. Google would be better off leaving the OS business and making certain that their search products ran on every mobile platform (although that ship may have already sailed).

        Source: Android Economics, Asymco, Apr 2, 2012

        “Regardless, this industry like many others requires that companies re-invent themselves and often that means major strategic thinking of their business (think Big Blue and getting out of hardware). The next 5 years will be fascinating to watch how competitors to Apple look to try get chunks of the market.”-benbajarin

        Agree completely.

        “One thing I have been thinking quite a bit about is whether the period we are in right now with Apple is reflective of the period of the late 80’s and 90’s when the Microsoft platform / ecosystem was so dominant. If that is true and this cycle looks the same then where Microsoft was dominant when computing was maturing in business, Apple will be dominant as computing ala smart phones, tablets, etc., mature in pure consumer markets and even emerging markets.” -benbajarin

        I was just thinking (and writing) the same thing myself. I don’t want to take anything away from Microsoft. Their victory over Apple in the nineties was well-earned and well-deserved. But their victory and their subsequent operating system monopoly threw computing into a new middle ages where innovation was stifled for 15 to 20 years.

        Now we’ll get to see how things go when Apple is in charge. I think it will be (and already is) a computing Renaissance. Look at how much growth and innovation has occurred in just the five years since the iPhone debuted! 300 million phones. 50 million tablets. 585 million Apps. And growing. And growing rapidly. And that’s not even counting the phones and the tablets and the Apps on competing platforms! All in the teeth of one of the worst recessions on record.

        Contrary to common wisdom, I do not think that Apple needs competitors to drive them forward. (Note that whenever Microsoft conquered a market, innovation came to a grinding halt.) Apple is self-motivated. They rush forward as if the rope-bridge they were traversing was set on fire.

        No, Apple needs competition more as guard rails than as motivators. Sometimes Apple’s “purity” or “vision” can cause them to be completely myopic. Competition often forces them – sometimes quite reluctantly – to provide features that Apple would never deem helpful or even necessary. This might have been a Steve Jobs thing. Then again, it might continue to be an Apple thing.

        The future is uncertain but the present is not and at this point – with Apple dominating profit share and consolidating market share – it’s pretty hard for any objective observer not to declare Apple the “winner” of the mobile wars. The only question? Where does Apple go from here?

        1. I did see Horace’s post on that and his one in the past few days on overall revenue for Goog and MSFT was good also. Android is a hard one to peg because we don’t know for sure but I think it is reasonable based on what I have heard that they get 7-10 dollars per year per device. So if there are 200 million plus and growing that is not unhealthy revenue. It certainly is not as big as their overall search business revenue but my point is that Google needs people using Google search and other services on all devices possible. I assume they will continue to make healthy search revenue continuing down this path being platform agnostic as they should.

          If you do publish something on the topic of Apple dominating now like Microsoft did let me know I’d like to read it. I do think this is true and happening, all the signs point this way. What is still open in my mind is perhaps how long the dominance could potentially last. Of course it could always remain but I do think this market will mature faster than the enterprise one did so that would mean it could fragment or segment quicker opening the door for more specific use products, again similar to cars.

          I also agree they don’t need competition. I have many friends who work at Apple and its amazing to see how hard they work to make products better for the sole reason that they themselves demand and want better products. Its like their human drive to make each product better so its makes their lives better / easier is all the competition they need. There again would make a good subject for a column 🙂

          That is why I love these conversations!

          1. “If you do publish something on the topic of Apple dominating now like Microsoft did let me know I’d like to read it.”

            If I do publish something it will probably be as a response to your article on the topic!

            I’d prefer to hear your thoughts first. You often say what I’m thinking but you do it more eloquently, more coherently, more grammatically and more intelligently. And you redact that whole “doesn’t suffer fools gladly” thing I have going on. Other than those five things, my writing is pretty much on a par with yours. 🙂

            “That is why I love these conversations!”

            You know that I love them too.

  2. No. 1 principle Apple learned in the 90s–Don’t let anyone else control a strategic part of your ecosystem.

    Remember the Mac, it was awesome (albeit overpriced) but was completely dependent on the good graces of Microsoft, Adobe and the likes of Sears, Circuit City & CompUSA. That’s why Apple nixed Flash on iOS. That’s why Apple created or bought: Final Cut, iTunes, Apple retail, Aperture, iWork, iLife and Logic. Some call this a walled garden, but I’m sure Apple looks at it like a sustainable nature preserve which can only thrive if Apple protects it from outside poachers, oil drillers and illegal lumber harvesters. Amazingly, many third parties can profit from the preserve in spite of its highly regulated status, yet Apple makes a profit on every aspect of the preserve.

    In the 90s, Apple had an integrated solution but actually did not control or profit off of strategic parts of the solution.

    Now it does.

    BTW, neither MS nor Google have anything significant happening in mobile if you look at their revenue/profit figures. Check out the latest Asymco. It is quite astonishing.

    1. I agree with you in general, but I don’t think Apple kept flash off iOS because of control issues. After all, it doesn’t control h.264 or HTML 5 either. The problem is that Flash is an awful technology, as even Adobe now seems to be conceding. It works really badly on mobile devices and it is both an awful resource drain and a constant security problem.

      1. Flash was controlled by a competitor with a horrible record of supporting Apple.
        And yes, it was awful, especially on mobile.
        Allowing Flash apps on iOS would have been a huge, strategic mistake because Adobe would have always been behind the iOS update curve but Apple would have been blamed for the problems or lack of features with apps using Flash.

        h.264 & HTML 5 are controlled by standards groups of which Apple is a part. A competitor couldn’t use those standards to hijack the iOS user experience.

  3. One thought to add to FalKirk’s. One area where Apple will have a huge advantage over either Google or Microsoft for some time to come is the brilliant supply chain management machine that Tim Cook has built. Apple wasn’t always good at this. I remember the bad old days when every model introduction found Apple short of stock on new models, with lots of distressed inventory of old models, or, all too often, both. Apple’s products are immensely popular, but managing the supply chain from the lowliest capacitor to the retail stock in Apple Stores is what has made Apple immensely profitable.

    Microsoft has a little bit of experience with the Xbox (although a business where you only introduce major new products once every five years or so is pretty easy). Google has whatever it inherited from Moto. But neither can hope to rival the Apple organization for a long time.

    The scary thing about Apple is that if it ever really feels threatened, its low cost of production and fat margins give it a lot of room to undercut the competition. This would, of course, hurt the stock price and Apple won’t do it unless it has to, but it’s nice to have this sort of weapon in reserve.

    1. “The scary thing about Apple is that if it ever really feels threatened, its low cost of production and fat margins give it a lot of room to undercut the competition.” -steve_wildstrom

      Totally agree. But I think that you can reverse that statement as well. “The scary thing about Apple is that no matter how much it feels threatened, it never feels that it has to resort to lowering its price in order to compete.”

      Both statements equally true. Both statements equally terrifying to Apple’s competitors.

  4. Google doesn’t know how to go vertical. That would require both an understanding and a vision of how many parts should work together, neither of which have they demonstrated any degree of competence. So far, the only thing they’ve been able to pool together is the location of their user data.

    Microsoft could, but they’ve clearly shown their inability to carry the process through to a touchdown (beyond Xbox). The decision makers get too easily distracted by perceived competition.

    I think both companies operate too much within the gravity of the mean, when it comes to pushing any kind of boundaries.

    Amazon is Android’s only hope.


  5. If Google goes vertical they will be in trouble and the chief beneficiary will be Microsoft as hardware companies move off Android since they will expect Google’s phones to get the best choice of software.

  6. Tim may be right that this is the ultimate goal of Google, but I believe that they will fail at execution of this strategy. The management at Google has NO clue what it means to manufacture hardware in volume, distribute it through retail and/or carrier channels, market the products, etc. It is possible that Motorola management will stay in tact, but that is highly unlikely. The first time that Motorola management goes to Google management asking for funds to do something, Google management will need to understand Motorola’s business enough to decide whether or not this is the right use of their investment. Won’t work because Google management is not capable of making that decision. There is a major mess in the Android market place with code forking, inability for users to upgrade OS’s on their handsets and stay current, developers getting many customer complaints due to incompatibilities across devices, etc., etc.
    Microsoft, IMHO, has a much better chance of success. But they benefitted greatly in the early PC market by having IBM set the standards on everything until they abdicated to Intel/Microsoft. By the time they lost control of their market, Intel/Microsoft were in huge market control positions. This is not the case in either Tablets or mobile phones. But Microsoft knows how to cajole/bully their hardware partners and may have a better chance than Google.
    The carriers are going to be seeking a strong alternative to Apple on a perpetual basis. For this reason they will work with Microsoft and/or Android in the handset market to do what they can to make them succeed.
    But what I didn’t get, Tim, do you expect Samsung to acquire its own OS? If so, my bet is that HP would be willing to sell its Palm OS unit for a small amount of change.

  7. 1. Samsung already has a good OS strategy with their Bada OS 2.0. From the last numbers I saw, it has more mobile market share than Windows Phone.

    2. If Goog wants to truly become vertical, I’d like to see them buy TI’s OMAP division.

    3. I doubt it will ever happen, but I’d like to see QCOM also go vertical and buy out HTC.

  8. I’m amazed, I must say. Rarely do I come across a blog that’s both equally educative and interesting, and let me tell you, you’ve hit the nail on the head. The problem is something that too few folks are speaking intelligently about. I’m very happy that I came across this in my search for something regarding this.

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