August 16, 2011 6:36 pm

Google deal opens consolidation possibilities

Google’s $12.5bn purchase of Motorola Mobility has the potential to reshape the smartphone industry, triggering further consolidation among hardware manufacturers or the rationalisation of competing smartphone and tablet PC operating systems.

One of the biggest questions is whether the deal will force hardware makers such as Samsung, HTC, LG Electronics, Sony Ericsson and the two Chinese smartphone manufacturers, ZTE and Huawei, to reassess their dependence on Google’s Android operating system and consider alternatives such as Microsoft’s Windows Phone 7 or Hewlett-Packard’s Web OS.

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But, like HP’s purchase of Palm just over a year ago, the Google/Motorola Mobility deal could also spur further vertical integration between hardware makers and operating system vendors.

Of the six main smartphone operating systems available today – Android, Apple iOS, Research in Motion’s BlackBerry OS, Nokia’s Symbian, Microsoft’s Windows Phone 7 and HP’s Web OS – four now form their own tightly integrated ecosystems.

This model, pioneered by RIM and then perfected by Apple, has some key advantages and some disadvantages. Tight integration between hardware and software enabled RIM to build perhaps the most secure and robust wireless messaging and e-mail-centric devices; it has enabled Apple to produce the clean, simple and seamless interface of the iPhone and to attract huge numbers of software developers to the App Store – now a key strategic advantage for Apple in both the smartphone and tablet PC markets.

However, as both RIM and later Nokia with Symbian discovered, tight integration is fine until the operating system is no longer able to keep pace with advances in component hardware, including processors and interfaces, especially touch screens. These limitations dramatically forced Nokia to abandon Symbian this year in favour of Microsoft’s Windows Phone 7, and RIM to buy in a new operating system called QNX to power its recently launched PlayBook tablet PC and its next generation of smartphones.

Nokia and RIM are both in transition, making them vulnerable to knock-on effects of Monday’s deal. While RIM has been mentioned as a potential takeover target, most speculation is now focused on Nokia and Microsoft.

The acquisition greatly increases the chance that Microsoft will seek to buy Nokia, which is now valued well below where it was, said Ben Wood, an analyst at CCS Insight.

While Google’s need for a stronger patent arsenal has widely been seen as the main motivation for the deal, making it a defensive move, one of its biggest rivals warned that the acquisition is an aggressive gambit that will see Google take control over the hardware, software and services in its devices.

Some analysts warned that a Nokia acquisition did not necessarily follow. Microsoft, the most likely acquirer, has a very strong patent portfolio and can get most of the benefits of putting its Windows software on the Finnish company’s handsets through its current partnership without needing to resort to a full acquisition, said Richard Windsor, a mobile industry specialist at Nomura in London.

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