Steve or the new Larry: the smartest guy in the room ?

With the Google acquisition of Motorola Mobility,  has Larry Page just out-witted Steve Jobs ?   My theory on what happened follows….

When Steve Jobs introduced the Apple iPhone in January 2007,  he noted: “Today,  Apple is going to re-invent the phone”.  Steve further observed “We’ve filed for over 200 patents for all the inventions in iPhone and we intend to protect them”.

The iPhone was indeed a revolution in the mobile phone industry,  introducing a relatively large touch-screen, keyboard-free, combined phone, music player and internet browser. Steve also made a strong point of his co-operation with Google, announcing that the iPhone would be shipped with optimized versions of both Google Maps and Youtube. He invited Eric Schmidt, then the Google CEO, on to stage at the iPhone launch. Schmidt joked that the two companies should join. “If we merge the companies we can call it AppleGoo,” said Schmidt according to In the Plex. “But we can merge without merging.”

As reported in the book, Steve appears at that time to have considered himself a friend, and even a personal coach and mentor, of the Google cofounders, Larry Page and Sergei Brin. Steve had invited Schmidt onto the Apple board of directors the previous April, and the informal contacts between the two companies were obviously strong.

However, in November 2007, cracks started appearing. Way back in 2004, Schmidt had stated that Google was not going into the mobile phone business. However I suspect that Larry Page disagreed, fervently believing that mobile computing was becoming increasingly important, and would be a growing source of Google search requests. The average smart phone user might run say 50 searches a day from their phone, and click-through on a few ads each day. Each click could earn Google on average about 25 cents. For every 100 million smartphone users clicking away,  advertising revenues could easily approach US$30B in revenues/year. There was a threat to Google that Microsoft might capture the mobile phone operating system market and so drive mobile phone searches and click-throughs away from Google. I believe that probably to keep Larry happy, Schmidt authorized Google’s August 2005 acquisition for an undisclosed sum of a little known 22-person start-up called Android.

With the iPhone announcement, the mobile phone industry had to try and respond, since Apple does not license its iPhone software to others.  I suspect that Larry was almost certainly concerned that Microsoft was being too slow to respond to the iPhone threat. It might therefore only be a matter of time until Apple and not Microsoft captured the smartphone market, and also until Apple rather than Microsoft started to benefit from smartphone originating searches and click-throughs. I would think that at that time Larry did not want to be seen to confront Apple directly, and so convinced Schmidt that the time was opportune to disrupt Microsoft’s plans. And so in November 2007,  Google released its Android smartphone software via its open handset alliance. Google was apparently making a platform play for mobile handsets, trumping Microsoft’s attempt to do so from the latter’s platform play for PCs. But I suspect that perhaps Larry quietly understood that Android was also a counter to the iPhone threat.

In the following summer (2008), Steve visited Google and was shown the Android for the first time. It was suddenly obvious to Steve that Google’s new phone software would not simply be a competitor to Microsoft’s Windows Mobile, as Steve had both thought and been led to believe, but potentially a direct competitor to the iPhone. The Android version shown to Steve apparently had multi-touch frameworks and pinch-to-zoom. Steve went ballistic. He apparently felt betrayed by the two young men whom he had been mentoring. Under pressure from Steve, Schmidt ensured that certain features were then removed from Android, and these did not reappear until two years later, in February 2010.

Schmidt’s position on the board of Apple probably became tenuous as Steve’s mistrust and sense of betrayal intensified,  and as the book suggests. As Google followed Android with the Chrome browser and lite operating system, Schmidt had to recuse himself from certain discussions at the Apple board. Subsequently it transpired that Steve, and the remainder of the Apple board, had kept the development of the iPad secret from Schmidt. Schmidt resigned from the Apple board in August 2009.

In January 2010, Apple launched the iPad. Shortly afterwards an Apple townhall for employees, Steve said: “We did not enter the search business. They entered the phone business. Make no mistake they want to kill the iPhone. We won’t let them.”

I think that Steve had clearly decided Google were an enormous threat to Apple. A counter-strategy was needed. This probably became even more evident as he learnt of Larry’s increasing power and Board support in Google, culminating in Schmidt handing over the CEO role to Larry in April this year. While Schmidt had provided the “adult supervision” at Google, Larry would want to make a big statement and a huge play in the industry, asserting to the world that Larry was a dynamic re-energizing force for Google after Schmidt’s reign. Larry would want to do something big.

Steve had already had key patents relating to iPhone smartphone usage and ergonomics. He had already made it clear to the industry at large at the iPhone launch,  and again to Google after he was given a personal demonstration of the Android, that he intended to go after anyone who infringed them.  I think that he suspected that Larry wanted to morph Google into a smartphone leader as well as web leader. He could go head to head with Larry in patent wars, but that would be time consuming and wouldn’t have an immediate impact on Google.  Maybe there was a better way..

I personally suspect that Steve thought it through. What better way to slow down Larry and immunize the Google threat to iPhone than to encourage Larry to have exactly what Larry wants now that the “adult supervision” was out of the way:  make Google a smartphone player? If Steve re-enforced the patent threat to Android by augmenting the Apple patents for iPhone ergonomics with wireless technology patents, then Larry would be lured into absolutely having to make a response to the growing Apple threat. Larry would therefore want to acquire a handset manufacturer, and would want to beat Steve at Steve’s own game.  Steve was a nice mentor to Larry,  but Larry would want to show the world he could be a better Steve.   Larry would want a handset manufacturer with a patent portfolio to counter Steve’s patent war-chest. And after Larry pulled the acquisition trigger, Google would be saddled with a sudden deep realization that they were no longer in the web game, but now dragged down into the tough business of physical goods and manufacturing.

I believe it was brilliant. I think that Steve went after wireless and other patents from Nortel and Novell.  Steve started going after HTC and Samsung,  alleging that their Android offerings infringed certain Apple patents.  Larry then more than stepped up to the mark to respond,  just as I suspect that Steve had fully expected him to do so.  I wonder did Steve bait Larry to buy a handset manufacturer…  And after all this has transpired,  perhaps Steve has done a far far better job mentoring Larry than Steve actually thought he had when he visited Google in the summer of 2008 and saw Android for the first time..

Larry is paying Motorola Mobility shareholders at 63% premium on their stock. Larry’s headcount is going to jump from 29,000 to 48,000 staff. Larry is going to have to understand manufacturing, supply chain and component sourcing, and physical distribution.  Larry is going to have to (and I believe he fervently aspires to..) transpose Google from a virtual presence on pixel screens to a real physical consumer brand on the high streets of the world.  Anti-trust regulators are going to distract him.  Larry is going to have to work hard to keep other Android handset manufacturers such as HTC and Samsung on-side, even as they now worry about Larry’s intentions and re-consider other mobile operating systems. The re-emergence of Windows Mobile and possibly HP’s webOS can only weaken Android, creating a divide-and-conquer for the iPhone. Larry might try and simplify his new hand by spinning-out the Motorola tough stuff, keeping the Motorola patents but selling the handset business to another Android player like HTC or Samsung: but if Larry does do this, he’ll just strengthen one Android handset player over the others, so driving the others away to Windows Mobile or HP WebOS – yet again divide-and-conquer.

Meanwhile Steve knows that Larry’s investors are trying to understand precisely why Larry just paid over 12.3B$ for patents and a manufacturing operation to support a phone operating system which Larry already gives away for free. If Larry wants to be the new Steve, then Larry’s investors are going to have high expectations that Larry can generate iPhone-like fat margins from his new Android handset business.

I think Larry has an awful lot of explaining to do, and an awful lot of proof to provide.


About chrisjhorn
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3 Responses to Steve or the new Larry: the smartest guy in the room ?

  1. Nick Carr offers a perspective in a Douglas Edwards book review here.

  2. cpuguy says:

    Excellent analysis of the players and the psychology Chris.

    Another consequence of the acquisition will probably be massive layoffs in Motorola in my opinion.

    There will be a lot of worried people in Moto scrambling to show Google management they can design killer products, something they have failed to do since Razr in 2006, probably the last major non-smartphone.

    5 years is a long time, but in the mobile market it equates to aeons!

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