Nelson Almeida/Agence France-Presse — Getty ImagesDennis Woodside, chief executive of Motorola Mobility, introducing a smartphone aimed at emerging markets in November.
Larry Page, Google’s co-founder and chief executive, likes to talk about “big bets” and “moonshots.” But the thing about moonshots is that they can crash into earth.
That appears to be what happened to Motorola Mobility, the cellphone maker owned by Google. The Internet giant announced Wednesday that it would sell Motorola to Lenovo for $2.91 billion, less than two years after paying $12.5 billion to acquire it.
Motorola was Google’s biggest acquisition by far and was hailed by the company as an example of the big bets Mr. Page was unafraid to make. Yet Motorola has continued to bleed money, aggravating shareholders and stock analysts, and its new flagship phone, the Moto X, did not sell as well as expected.
The deal is not a total financial loss for the extremely wealthy Google. In addition to keeping billions of dollars’ worth of patents, it essentially turned Lenovo into a factory for its Android operating system, and also picked up some cash. Still, it is a sign of the fits and starts the company is experiencing as it navigates business in the mobile age, which has upended technology companies of all types.
In addition to using Motorola’s patents to defend itself in the mobile patent wars, Google pledged to reinvent mobile hardware with Motorola’s new phones, and directly compete with Apple by owning both mobile hardware and software.
Yet while Google’s business depends on phones getting into the hands of more people around the world, it benefits from selling the ads on those phones, not the phones themselves. Selling Motorola is an acknowledgment that Google is better off focusing on its core competencies — making software and selling ads — particularly as the profit margins for phones are shrinking over all.
“They make their money from people watching YouTube ads and doing searches,” said Colin Gillis, an analyst at BGC Partners. “They don’t necessarily need to be the hardware maker.”
Still, Google will retain about 15,000 of the 17,000 patents it acquired as part of its original deal for Motorola, and will grant Lenovo a license to use certain ones. Analysts have described the patents as the most valuable part of the acquisition, worth several billion dollars alone because they are firepower for Google to defend its Android mobile operating system.
Though the patents have not proved to be very helpful to Google in patent litigation, they have helped in cross-licensing agreements with other companies, including one Google and Samsung announced on Monday.
Google’s share price climbed 2 percent in after-hours trading after the announcement, a day before the company was set to announce its fourth-quarter earnings. “Motorola’s been a millstone and a drag on results,” Mr. Gillis said. “You’re slipping the millstone off your neck.”
Lenovo, already the world’s biggest PC company, is buying itself a toehold in the fast-growing smartphone business during a worldwide slowdown in PC sales, and overnight brand recognition in the West. In an interview, Wai Ming Wong, Lenovo’s chief financial officer, said the deal would feed the company’s “PC-plus” strategy.
“The Motorola handset business comes in very nicely to expand our business further,” Mr. Wong said.
Motorola, which has a storied history as the maker of the first commercial cellphone, more recently fell behind rivals like Apple and Samsung. Mr. Page announced the deal to acquire Motorola just months after he reclaimed his position as chief executive of Google, and appointed Dennis Woodside, who previously ran Google’s sales and operations, as chief executive of Motorola Mobility.
Mr. Woodside said he would focus on just a few new phones instead of the old lineup of dozens. Yet the phones did not sell as well as expected, and Motorola continued to lose money despite drastic cost-cutting.
The decision to buy Motorola was “the extravagance of being a company with over $350 billion in market cap,” said Jordan Rohan, an analyst at Stifel Nicolaus. “I’m not sure Motorola was fixable, and growth is much easier to come by on a company that’s not a fixer-upper.”
Still, Mr. Page said Google remained committed to hardware, a business that it has been entering over the last couple years, most notably with Motorola but also with products like Google Glass and companies like Nest Labs, the maker of smart thermostats and smoke alarms that Google acquired this month for $3.2 billion.
“This does not signal a larger shift for our other hardware efforts,” Mr. Page wrote in a blog post. “The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry.”
He also played up the benefits of the sale for Google’s Android system, saying that getting rid of Motorola would enable it to focus more on Android and that Lenovo would use Motorola to expand Android globally.
“Lenovo has the expertise and track record to scale Motorola into a major player within the Android ecosystem,” Mr. Page said.
It is unclear exactly how much money Google lost on the Motorola deal over all. In addition to the patents Google is keeping, Google sold Motorola Home, the portion of the business that made set-top boxes, to Arris in 2012 for $2.35 billion. Motorola also had $2.9 billion cash on hand when Google bought it.
Google is also retaining a small division working on cutting-edge technologies, led by Regina Dugan, who was hired from the government’s Defense Advanced Research Projects Agency.
“On the heels of buying Nest and buying all these robotics companies, it makes you worry that they’re destroying capital,” Mr. Gillis said. “But that’s what big bets are — some things you lose and this is a losing bet.”
Lenovo appears to be building a comprehensive business in computers. Once known primarily as a maker of personal computers, last week Lenovo paid $2.3 billion for a big part of the computer server business of IBM.
Lenovo’s shopping spree may be driven by the necessity of moving into other markets. Last year, the world PC market contracted by 10 percent, to 314.5 million units, according to the International Data Corporation.
In the smartphone market, Apple and Samsung have taken share from almost all other suppliers. In its home country of China, Lenovo may be concerned about the rise of local smartphone manufacturers.
“It makes strategic sense for both Google and Lenovo,” said Andrew Costello, a principal at IBB Consulting. “It will give Lenovo a strong brand in the mobile space outside of China that they don’t have today, and it gives them deep operator relationships with AT&T and Verizon. And for Google, they’re able to focus on the services side, which is what they’re best at, and retain the patent holdings.”
Quentin Hardy contributed reporting from San Francisco, Michael J. de la Merced from New York and Eric Pfanner from Tokyo.
This post has been revised to reflect the following correction:
Correction: January 29, 2014
An earlier version of this article misspelled the name of a market research firm. It is NPD Group, not NDP Group.
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