|It's Official: Google Is Now a Hardware Company |
By Brad Stone and Peter Burrows
on May 22, 2012
Last August, Google ( GOOG) Chief Executive Officer Larry Page fulfilled a pledge made to one of his senior executives, a square-jawed former attorney named Dennis Woodside. Apple ( AAPL) CEO Tim Cook had been trying to poach Woodside to make him Apple’s head of sales, but Google had convinced Woodside to stay, in part by promising him greater responsibility at the search company, according to two people with knowledge of the matter, who asked not to be named because the discussions were private. Now it was time to make good. Woodside says he was speaking with board member Ram Shriram when Page asked him to run Motorola Mobility, the company Google had just acquired for $12.5 billion. “He said, ‘I know you’ve been looking for a challenge,’” Woodside recalls. “’I want you to run Motorola. I think you’d be great at it. Can you let me know by tonight?’”
Woodside agreed and is now the leader of one of the most storied names in technology. Motorola, founded 85 years ago, invented the cell phone in the 1980s, made it ubiquitous in the ‘90s with the StarTAC, and ushered in the era of stylish feature phones in 2004 with the RAZR. Then it utterly lost its way in the age of versatile touch-screen devices like the iPhone. When Google first came calling, it was mostly interested in getting Motorola’s trove of 17,000-plus patents to help defend the Android operating system against lawsuits by Oracle ( ORCL), Microsoft ( MSFT), Apple, and others. Woodside’s mission has since become more ambitious. In an interview with Bloomberg Businessweek before the deal formally closed on May 22, Woodside said Google also plans to use the Motorola division to produce smartphones and tablet computers that can help Google set the pace of innovation in the mobile business. “This is a huge opportunity to really show what Android can do in a well-designed, well-packaged, and well-marketed product,” he says.
It’s also a huge gamble, certainly the biggest since Page retook the title of CEO at Google a year ago. The search giant became a household name and one of the most profitable businesses ever by sticking to online services and software. Now it will have to figure out the cutthroat, low-margin world of hardware. That means production lines, supply chains, and 1-800 customer help numbers. (Try finding one of those for Google search, Gmail, or Youtube.) The deal could even slow the remarkable rise of Android. One reason that this mobile operating system powers more than half the world’s smart phones is that device makers such as Samsung ( 005930:KS) and HTC ( 2498:TT) have felt safe licensing it because Google had no dog in the hardware hunt. If Google helps Woodside make Motorola’s phones superior, Android’s other licensees might seek additional OS options.
Woodside vows that there will be a “firewall” inside Google and that he will not ask for or receive special treatment from Andy Rubin, the senior vice president who runs Google’s Android division. “Andy’s job is to maximize the number of devices running Android,” he says. “My job is to make Motorola as successful as possible and deliver innovative hardware as a licensee of Android.” Big licensees with billions of dollars in Android device sales will be watching carefully, says Michael Cusumano, a professor at MIT’s Sloan School of Management. “Suspicions of Google will be there until there’s evidence that they don’t need to be,” he says.
Internet usage over smartphones is exploding, and nearly every technology company from Google to Facebook ( FB) is trying to figure out how to extend its business onto the next wave of devices. Google’s decision to give Android away for free has won it market share, if not much in the way of profits. Horace Dediu, founder of equity research firm Asymco, figures that Google’s Android profits were around $600 million in 2011. Compare that to Apple’s earnings of $33 billion, mostly on iPhones and iPads.
Producing devices—Google says it will keep Motorola’s iconic “M” logo—may allow some Apple-like control over Android hardware. Woodside says he has three goals for Motorola. He wants to get the division to profitability, use Google’s ample engineering resources to pursue ambitious technical goals such as extending battery life and improving digital photography, and then get those innovations into Motorola devices as fast as possible. “It’s actually easier to make tremendous progress sometimes the more ambitious you are,” Larry Page told Motorola employees in a town hall meeting last August. “If you’re trying to do something kind of incremental, like a little bit similar to what you did before, it’s actually hard to get people excited about it.”
Prolonged antitrust review hasn’t made Woodside’s job any easier. Regulators in China approved the deal on May 19 only after eliciting a promise from Google that Android would remain open and free for the next five years. During the wait, Woodside couldn’t legally coordinate with Motorola executives or share plans with his soon-to-be employees at Motorola.
During the review process, Woodside quietly assembled a new senior team, which will be primarily based at Motorola’s offices in Sunnyvale, Calif., a few miles from the Googleplex. Mark Randall, who worked at Amazon.com ( AMZN) on the Kindle, will lead supply chain and logistics. Gary Briggs, the Google exec who helped promote the Chrome browser, will take over marketing at Motorola. And Vanessa Wittman, formerly chief financial officer of Marsh & McLennan ( MMC), will become its CFO. Such old Motorola names as Iqbal Arshad, Motorola’s senior vice president in charge of hardware development, and lead designer Jim Wicks will stick around, while Sanjay Jha, Motorola’s former CEO, and many other senior executives will leave the company.
Eric Schmidt, Google’s chairman, also helped to recruit some new firepower: Regina Dugan, former head of Defense Advanced Research Projects Agency, will run a new Motorola research and development lab called the Advanced Technology and Projects Group. ATAP will be modeled on DARPA and will seek to identify, invest in, and develop breakthrough mobile technologies that can be quickly integrated into Motorola products. “We are going to build a small, lean, Skunkworks-like group that is not afraid of failure,” says Dugan, an expert at developing technologies to detect land mines.
Motorola, which has been reducing headcount since 2008, now has about 20,000 employees, compared to Google’s 32,000. Woodside won’t comment as to whether he’s planning further job cuts at Motorola, though they seem inevitable. He does say he’ll focus first on cutting products, not people. Motorola released around 20 smartphones last year, which Woodside argues is too many. He plans to focus on trying to make a few great devices and then concentrate on marketing resources to sell as many of them as possible. “Can they build a ‘let’s call a press conference’ product that blows away Apple?” asks former Motorola CEO Edward J. Zander. “That’s got to be the play.”
Woodside, 43, is an Iron Man triathlete with a law degree from Stanford and little experience at building hardware or software. He admits to catching up only recently on such underlying technologies as mobile-phone processors. He started his career clerking for a federal judge in New York, helping decide cases that stemmed from the terrorist bombing of Pan Am Flight 103 and the first attack on the World Trade Center. After a five-year stint as a management consultant at McKinsey, he joined Google as a director of business operations in 2003. His new employer sent him overseas to open offices in Russia, Turkey, and the Middle East. In 2009, Woodside returned home to take over the U.S. sales operation, whose revenue rose from $10.8 billion to $17.5 billion on his watch. “He’s had Google’s ad business running as smoothly and tightly as I’ve ever seen that kind of media business run,” says Penry Price, a former Google colleague who is now at M6D, a marketing company in New York.
For all those accomplishments, none compares to Woodside’s task at Motorola.
In 2008, when Jha left Qualcomm ( QCOM) to take the CEO job at Motorola, the company’s handset business had just lost $1.2 billion. In one of his first reviews of the company’s product plans, Jha says he was surprised to see more than two-dozen feature phones. “There was not a single smartphone, at least not the way we define it now,” he says.
Motorola had little expertise with the seamless software and services that were drawing users to phones like the BlackBerry and later the iPhone. Under intense pressure from shareholder activist Carl Icahn, Jha placed a series of risky bets, canceling numerous projects and spinning out the phone business as a separate entity called Motorola Mobility. (Motorola Solutions ( MOT), which makes business products—barcode scanners, police radios, the headphones worn by NFL coaches—remains independent.) Jha had to persuade his board of directors not to shut down the phone unit altogether, an internal battle he calls “the darkest hour for our business.” Without the in-house talent to build its own operating system, or the money to support more than one, he bet big on Android. In 2009, Motorola introduced its Droid line of smartphones and rode it to a 4.8 percent share of the market in 2010. As Samsung in particular came out with popular Android devices, Moto’s share then fell back to 3.3 percent in 2011.
Jha knew he had an ace in the hole: that stockpile of 17,000 patents. With few patents of its own, Google’s Android success was vulnerable to legal challenges from Apple, Microsoft, and others. Through early 2011, Jha hoped to persuade Google to license Motorola’s patents in exchange for access to the latest Android updates ahead of other licensees, according to a former Motorola board member.
Google wouldn’t bite. In July, though, the company was badly outbid in the auction for the patent portfolio of telecom equipment maker Nortel (NRTLQ) by a consortium of rivals that included Apple, Microsoft, Research in Motion ( RIM), and Sony ( SNE). Less than a month later, Google’s Andy Rubin called Motorola to inquire about its patents, but Jha said they weren’t for sale. The next day, Jha called Larry Page and suggested Google acquire Motorola outright, according to a person familiar with the details of the negotiations, who was not authorized to speak on the record. Famed investment banker Frank Quattrone was hired and given a day to come up to speed. The $12.5 billion deal, says the person, was done in five days.
Google has little to show for its previous halfway forays into the difficult business of making hardware. It teamed with hardware companies to create three Nexus phones—the Nexus Prime, Nexus S, and Galaxy Nexus—meant to showcase the slickest features of each upgrade of Android. None have sold nearly as well as the iPhone. The company’s Chrome laptops have drawn scant attention since they first went on sale last year. Its Google TV set-top boxes and HDTVs, produced in partnership with Sony and LG Electronics ( 066570:KS), have received lackluster reviews and an even cooler reception from customers.
That the company keeps trying is a natural response to the runaway success of Apple, whose revenue growth alone in 2011 exceeded Google’s total for the year—$43 billion to $38 billion. The secretive Google X lab, run by co-founder Sergey Brin, is working on products such as Internet-connected glasses and self-driving cars. Google also recently acquired a San Francisco-based industrial design firm, Mike and Maaike, which worked on the first Google Nexus phone, Bloomberg Businessweek has learned. “Google has always been interested in hardware,” Woodside says. “The natural next step is for us to get even more serious and to really go for it.”
One of Woodside’s most closely watched decisions will be what he does in the tablet market, aka the iPad market. Motorola has sold nearly a million Android-running Xoom tablets, yet barely cracked Apple’s dominance. Unless Google comes up with some hits, Android will have only about a 9 percent market share in tablets three years from now, says Asymco’s Dediu. “It’s hard to believe this market will only go to one player, as much as it might appear that way right now,” Woodside says. “Motorola is going to be there and it’s going to be a player.” He also says Google has yet to figure out what to do with other pieces of Motorola Mobility, such as the set-top boxes it sells to cable companies and other gadgets like baby monitors.
In the near term, Motorola is unlikely to significantly affect Google’s bottom line. Even if he can’t improve on Motorola Mobility’s $250 million loss in 2011, that’s tiny next to Google’s $14 billion in profits. But Motorola could have an outsized impact on the future of Google—and on Larry Page’s legacy. “It may not be make-or-break in a financial sense,” Woodside says, “but clearly it’s very important for us to make this successful.” If it can’t make a major shift into the mobile devices that are an increasing part of people’s lives, Google could one day find itself as reliant on an aging desktop-centric business as another once-feared power. “They could end up like Microsoft,” says Zander. “Just milking the cow.”