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It's Official: Google Is Now a Hardware Company


It's Official: Google Is Now a Hardware Company

Illustration by Nick Edwards

(Replaced with magazine version.)

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; Google had persuaded him to stay, in part by promising him a bigger job, according to two people with knowledge of the matter, but 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 K. Ram Shriram when Page asked him to run Motorola Mobility, the company Google had just announced it was acquiring 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 84 years ago, invented the cell phone in the 1980s, made it ubiquitous in the ’90s with the StarTAC, and with the RAZR ushered in the era of stylish devices. Then it lost its way in the age of 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. Woodside says Google also plans to use its new hardware division to produce smartphones and tablets that 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 company 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 Gmail or YouTube.) The deal could even slow the remarkable rise of Android. One reason Google’s mobile operating system powers more than half the world’s smartphones is device makers such as Samsung and HTC have felt safe licensing it. Until now, Google was a beneficent software provider with no dog in the hardware hunt. If Woodside does his job well and makes Motorola’s phones superior, Android’s other device makers might look elsewhere for an OS.

Woodside vows there will be a “firewall” inside Google and that he will not ask for or receive special treatment from Andy Rubin, 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 the Massachusetts Institute of Technology Sloan School of Management. “Suspicions of Google will be there until there’s evidence that they don’t need to be.”

Internet usage over smartphones is exploding, and nearly every technology company is trying to figure out how to extend its business into 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 Google’s Android profits were around $600 million in 2011. Compare that with Apple’s earnings of $33 billion, which mostly came from iPhone and iPad sales.

Woodside says he has three goals for Motorola: He wants to make the division profitable; use Google’s ample engineering resources to pursue ambitious technical goals such as extending battery life; and get those innovations into Motorola devices as fast as possible. Eventually, producing hardware could even allow for Apple-like control over the Android ecosystem—although that’s not an explicit goal for now. “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.”
 
 
Even though the appointment was kept private, Woodside didn’t get a honeymoon in the new role. He was busy dealing with prolonged antitrust reviews. 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. So he quietly assembled a 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 executive who helped promote the Chrome browser, will take over marketing. Vanessa Wittman, formerly chief financial officer of Marsh & McLennan (MMC), will become CFO. A few Motorola veterans such as Iqbal Arshad, senior vice president in charge of hardware development, and lead designer Jim Wicks will stick around. Many other senior Moto executives, including former CEO Sanjay Jha, will leave the company.

Eric Schmidt, Google’s chairman, also helped recruit some new talent: Regina Dugan, former head of the 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—it will try to identify, invest in, and develop technologies that can be integrated into Motorola products. “We are going to build a small, lean, skunk works-like group that is not afraid of failure,” says Dugan, an expert at developing technologies to detect land mines.

Motorola, which has been reducing head count since 2008, now has about 20,000 employees compared with Google’s 32,000. Woodside won’t comment as to whether he’s planning job cuts at Motorola, though they appear inevitable. He does say he’ll focus first on cutting products, not people. Motorola released some 20 smartphones last year, which Woodside argues is too many. The new plan: Concentrate on fewer models. “Can they build a ‘let’s call a press conference’ product that blows away Apple?” asks former Motorola CEO Edward Zander. “That’s got to be the play.”

Woodside increased Google's U.S. sales 62 percent in three yearsWerther Santana/Agencia Estado/Zuma PressWoodside increased Google's U.S. sales 62 percent in three years

Woodside, 43, is an Ironman triathlete with a law degree from Stanford but little experience building hardware or software. He admits to catching up only recently on such 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 to $17.5 billion from $10.8 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.

None of those accomplishments had the degree of difficulty that comes with Woodside’s new mandate. In 2008, when Jha took the CEO job at Motorola, its handset business had just lost $1.2 billion. In one of his first reviews of product plans, Jha says he was surprised to see more than two dozen feature phones, industry jargon for no-frills flip phones and such. “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 the BlackBerry and later the iPhone. Under intense pressure from shareholder activist Carl Icahn, Jha placed a series of high-risk bets, canceling numerous projects and spinning out the phone business as a separate entity called Motorola Mobility. (Motorola Solutions (MSI), which makes business products—barcode scanners, police radios, headphones worn by National Football League 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 Motorola’s 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 market share in 2010. As Samsung in particular came out with popular Android devices, Motorola’s share fell 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. 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 outbid at the auction for the patent portfolio of telecom equipment maker Nortel by a consortium of rivals that included Apple, Microsoft, Research In Motion (RIMM), and Sony (SNE). Less than a month later, Google’s Rubin, the Android division chief, called Motorola to inquire about its patents. Jha said they weren’t for sale. The next day, Jha called Page and suggested that Google acquire Motorola Mobility outright, according to a person familiar with the details of the negotiations who is 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 forays into hardware. It teamed with device makers to create three Nexus phones—the Nexus One, Nexus S, and Galaxy Nexus—meant to showcase the slickest features of each upgrade of Android. None has 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, 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 Internet-connected glasses and self-driving cars and God knows what else. Google also recently acquired a San Francisco-based industrial design firm, Mike and Maaike, which worked on the first Google Nexus phone. “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 his most closely watched moves will be what he does in the tablet market, aka the iPad market. Motorola has sold nearly a million Android-running Xoom tablets yet has 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.” He adds that he has yet to figure out what to do with Motorola Mobility’s many other gadgets, such as the set-top boxes it sells to cable companies and performance monitors for golfers.

In the near term, Motorola is unlikely to affect Google’s bottom line much. Even if Woodside can’t improve on Motorola Mobility’s $250 million loss in 2011, that amount pales next to Google’s $14 billion in profits. But Google’s new hardware division could have an outsize impact on the future of the company 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 Google can’t transfer its awesome profit-generating abilities to mobile devices, it 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.”

Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.
Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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