Apple, the biggest loser in the Google-Motorola-Lenovo deal

The iPhone maker will now face a more focused Google, as well as a stronger Lenovo. Both could cause problems for Apple down the line.

Lenovo executives show off several of the company's new smartphones during an event in June in India. Getty Images
Things are about to get tougher for Apple.

Google late Wednesday made an unexpected announcement that it's selling Motorola Mobility to Chinese PC giant Lenovo for $2.91 billion, or less than a quarter of what it paid for the handset vendor just a couple of years ago. During the years Google owned it, Motorola lost money and market share, and the relationship caused tension between Google and the other Android vendors, particularly Samsung. It also led those other phone makers to develop their own software and services, rather than push those from Google. That amplified Android's fragmentation in the market.

Overall, Google's purchase of Motorola turned out much better for iPhone maker Apple than for Google. That's now going to change.

Google, sans Motorola, can go back to focusing on what it does best -- making a really great operating system and apps. It can mend its relationship with Android leader Samsung and the other vendors. And it can concentrate on unifying and streamlining the Android experience, rather than worry about bolstering its own hardware operations. All of those factors mean that Apple may not be able to win over customers as easily as it has in the past.

"Getting rid of Motorola helps Google, and anything that Google can do to create a more cohesive user experience across vendors is competitive to Apple," Current Analysis analyst Avi Greengart said.

But Google isn't all Apple should be worried about. Up to this point, only Samsung has posed a real threat to Apple in smartphones. A combined Lenovo and Motorola, however, has the potential to take a large chunk of the market. It won't be easy or quick, but Lenovo has a strong track record for dominating markets it enters. Less than a decade after buying IBM's PC operations, Lenovo became the world's biggest PC maker.

Already, Lenovo is one of the fastest-growing smartphone makers in China, a market that's also getting a lot of attention from Apple. Last year, Lenovo was the second largest smartphone vendor in mainland China by volume, up from eighth place in 2011, according to Strategy Analytics. That boosted its position in the global market in 2013 to fifth place behind Samsung, Apple, Huawei, and LG.

At the same time Lenovo's market share has risen in China, Apple's has fallen. In 2011, Apple was the third largest smartphone vendor in the country. By last year, it had dropped to sixth place, according to Strategy Analytics.

"Apple's lack of presence in the lower end of the smartphone market has cost it sizable volumes in China in recent years," said Neil Mawston, executive director of Strategy Analytics.

Apple, predictably, has offered no public reaction to the Lenovo-Motorola news. We've contacted the company for comment and will update the report when we have more information.

The iPhone maker doesn't have device pricing that touches the lower end of the market. So far, it hasn't needed or wanted to, but that will need to change if it doesn't want to be relegated to niche status. Already, the low end of the smartphone market is growing much faster than the high end. Strategy Analytics expects Apple's deal with China Mobile to boost it to fifth place in the Chinese market this year, but that's nowhere near the position of Samsung or Lenovo.

And Apple's less expensive, more colorful iPhone 5C has failed to catch on with users. Apple positioned the device as more of a mainstream product, but it's still too pricey for developing countries. And it turns out that most people are buying the higher-end iPhone 5S that includes a fingerprint sensor, Apple CEO Tim Cook acknowledged during the company's earnings conference call earlier this week.

Apple won't just face Lenovo in China. The company also will use Motorola to break into the US market. Lenovo gains not only a well-known brand with Motorola but also closer relationships with US carriers and retailers. The company wants to become the world's biggest seller of smart devices -- which includes PCs, tablets, smartphones, and smart TVs -- and it won't be able to do that without addressing the US market.

Lenovo won't become Apple's biggest threat overnight. It will take awhile for the Chinese company to figure out its strategy with Motorola, and Lenovo also will have to invest heavily to get Motorola back on its feet. In the meantime, Apple and Samsung won't be slowing down in their efforts to dominate the market. But a few years down the line, it may be Samsung and Lenovo jockeying for the top mobile spot, not Samsung and Apple.

 

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