LG to Sideline Tablet Development to Focus on Smartphones

Bloomberg reports that South Korea's LG Electronics has decided to "to put all new tablet development on the back burner for the time being in order to focus on smartphones,” according to company spokesperson Ken Hong. LG denied that Microsoft's announcement of its new Surface tablets was a factor in the company's decision. LG sells Android tablets, but their sales have been poor, so it's not a surprise that the company is pulling back until it becomes clear if, and how, other companies can successfully (and profitably) compete with the iPad.

Google buys Motorola Mobility: More questions than answers?

This morning opened with a bang, when Google announced that it had made a friendly offer to acquire Motorola Mobility for $12.5 billion. The offer caught a lot of people in the industry flat-footed (although not Ben Bajarin, who wrote an amazingly prescient post last week on why Google should buy Motorola Mobility.)

$12.5 billion is a 63% premium over the price that Motorola Mobility's stock closed at last Friday, so why would Google pay so much to purchase the company? The one thing that everyone agrees upon is that Google wanted Motorola's patents, a pool nearly four times larger than the one that the company bid on from Nortel. The question is how valuable those patents will be in protecting Google's Android licensees from patent challenges by Microsoft, Apple and others. Microsoft was suing Motorola Mobility for patent infringement before today's announcement, so the Motorola patent library might not provide all the protection that Google needs. In addition, acquiring Motorola Mobility for $12.5 billion to get the patents prompts the question, in hindsight, whether Google would have been better off staying in the Nortel bidding and perhaps winning exclusive ownership of the patents for $5 or $6 billion. It also begs the question as to why Google didn't simply buy Motorola's patents, not the entire company; the consensus opinion is that Motorola's management refused to sell the patents by themselves.

Google got most of its top hardware partners to sign onto a press release endorsing the acquisition, but you have to wonder what the leaders of companies such as HTC, Samsung and LG Electronics are really thinking. In one move, Google went from being a supplier of perhaps their most critical smartphone technology to one of their biggest competitors. As Henry Blodget points out, hardware is a low-margin, semi-commodity business (for everyone except Apple). It's radically different from the software business, and the Motorola acquisition will increase Google's headcount by 60% overnight.

Google has declared that it will run Motorola Mobility as a separate business, and won't change the way that it runs its Android business. That's what Motorola's hardware partners (and possibly regulators) want to hear, but it creates a dilemma for Google. If the company wants to maximize the value of Motorola, it has to much more tightly integrate Android and Motorola, enabling Motorola to get new features and new versions of Android before other licensees. That, however, would violate its pledge to run the two businesses independently. The second option is to run Motorola so that it doesn't compete with other licensees, but that would cause the company to lose all its good developers, designers and hardware engineers. No one wants to work for a crippled company. The third option is that Google could sell off Motorola's hardware businesses, but to whom? The fate of Motorola's hardware businesses will be up in the air until the acquisition is completed, if not substantially after that.

In addition, despite some analysts' opinions that antitrust regulators won't stop the acquisition, there's substantial reason to doubt that the acquisition will occur without significant concessions by Google. There are so many antitrust investigations of Google underway, from the U.S. Federal Trade Commission to U.S. State investigations, to European Union investigations, that this acquisition can't help but be looked at in the context of Google's overall behavior. At the very least, Google will have to make its "hands-off" approach to running Motorola Mobility a guarantee, and will have to agree to make Android and related products available to all licensees on an equal, non-discriminatory basis. Regulatory agencies may also use approval of this acquisition as a lever to get Google to agree to restrictions on how it runs its search engine, how it integrates its products, and how its services work on mobile platforms.

One final note: Most reports have noted only in passing that, in addition to mobile phones and patents, Google is also getting Motorola's set-top box business. In fact, depending on who's doing the measurement, Motorola is either the world's #1 or #2 vendor of set-top boxes. Historically, customers such as cable and IPTV operators have had enormous control over the design of the set-top boxes they buy, so Google can't arbitrarily add Google TV or the Google search engine to all of its devices. However, this acquisition gets Google's foot in the door with established multichannel video providers in a very big way. At the very least, we're likely to see the next generation of Motorola's set-top boxes and home gateways run Android, even if Google's customers hide the Android layer from end users.

Google's proposed acquisition of Motorola Mobility poses more questions than it answers. We may be waiting for the answers for quite some time.

Consumer electronics' U.S. renaissance

There was a time, before World War II, when the U.S. was the undisputed world leader in consumer electronics. U.S. manufacturers, led by RCA, dominated world markets. However, U.S. manufacturers' operations in Japan and most of Europe were nationalized at the start of WWII. More importantly, RCA discounted the value of transistors in consumer electronic design after the war. Japanese manufacturers licensed transistor technology from Bell Labs and used it to build smaller, less expensive and more reliable products. That spelled the beginning of the end for the U.S. consumer electronics business.

At one time, companies like RCA, Westinghouse, Zenith, Philco, Magnavox, Sylvania and Motorola were household names. Now, only Motorola is still in consumer electronics, with its mobile phones. RCA, Westinghouse and Sylvania are nothing more than trademarks licensed to other companies, Zenith was acquired by South Korea's LG Electronics, and Philco & Magnavox were acquired by Philips. Until the late 1990s, the U.S. consumer electronics business was effectively dead. Today, however, there's a resurgence in U.S. consumer electronics.

The leader of this renaissance is Apple, which has dominated the personal media player market for almost a decade with its iPods. Foreign manufacturers have tried to wrestle market share away from Apple's iPods, without success. As of last quarter, Apple became the world's largest seller of smartphones, and it's been the leader in tablets since the launch of the iPad. Apple also dominates music sales through iTunes. Apple TV is Apple's only consumer electronics product that's struggling in the marketplace (although no one in the over-the-top set-top box market has yet found a winning formula.)

Apple doesn't manufacture any of its hardware products; it designs the products and farms out manufacture to Chinese and Taiwanese manufacturers. Vizio has applied the same formula to HDTVs, and either leads the market for LCD HDTVs or is close to the top every quarter. Vizio's aggressive pricing strategy has helped to force Sony out of the TV manufacturing business, and is pushing other Japanese and South Korean manufacturers to rethink their HDTV market strategies.

Sonos came from nowhere to become the leader in wireless networked home audio systems. Sonos applies an Apple-like design philosophy to its products, and has steadily expanded its product line both up and down to cover a variety of price points. Roku licensed a streaming media player originally developed in-house at Netflix and has become the leader in the market for those devices, at very aggressive price points: When Logitech launched its Google TV-based Revue set-top box at $299, the least expensive Roku player was $59.99. Now, the price of the Revue has been cut to $99 (the same price as Roku's top-of-the-line model) in order to clear out an apparently massive inventory of the devices.

It's true that U.S. companies are nowhere near recapturing the share of the consumer electronics market that they had before the 1970s, but if anyone had predicted any resurgence of U.S. consumer electronics companies even ten years ago, they'd have been laughed out of the room. The ability to anticipate (and drive) consumer desires, together with leveraging Chinese and Taiwanese manufacturing resources, is allowing U.S. companies to compete on equal footing with companies that could have crushed them only a few years ago.

3D at CES: Better solutions, but more confusion?

Consumers interested in buying 3D HDTVs have had to contend with the limitations of existing sets: They require expensive (typically $100 (U.S.) or more), powered, "active-shutter" glasses that are incompatible from vendor to vendor--for example, Sony's 3D glasses won't work with Samsung's 3D HDTVs, and vice versa. (One company, Xpand, has developed "universal" 3D glasses that work with a variety of manufacturers' sets.) At this week's CES, a number of companies have announced new approaches that might make active-shutter glasses obsolete.

The first innovation is passive 3D glasses. They require no power, and depending on the vendor, will cost between $10 and $20 each. Vizio was the first out of the gate with passive glasses. The company claims that it will work with virtually any modern passive 3D glasses, including the ones given out at movie theaters. The biggest limitation of the Vizio approach is that it results in "half-resolution" 3D images, because the images for both eyes are displayed simultaneously in the same frame. That means that a 1920 x 1080 image becomes 960 x 540.

Next, LG Electronics announced its Cinema 3D technology, which it claims has been certified to be flicker-free by two commercial standards organizations, Intertek and TUV. There's no word yet on whether the LG technology provides a full- or half-resolution image.

Samsung has teamed with RealD, the largest supplier of 3D technology to movie theaters, to offer a 3D system that uses the same passive glasses as theaters. The active switching layer is in the LCD display, not the glasses, and changes the polarization of the light coming through the LCD from the backlight. This enables the system to display a full-resolution image. In 2D mode, the polarization switching system is disabled. Although Samsung is displaying the system at CES, it hasn't announced any ship dates, while both the Vizio and LG Electronics systems should begin shipping in Q1 2011.

Finally, Toshiba is displaying 3D HDTVs that require no glasses whatsoever. The Toshiba system uses passive filters to split the image for each eye, and results in a half-resolution image. In addition, viewing position and angle are critical in order to get the maximum 3D effect. Toshiba plans to ship 3D HDTVs of 40 inches and larger, and is showing 56 and 65 inch prototypes at CES. Bloomberg Business Week reports that the company plans to start shipping sets in April.

This new collection of 3D technologies opens up a number of questions:

• We know the cost of the passive 3D glasses, but how much will the 3D HDTVs cost? So far, the price of only one of the new sets has been released. How will the prices compare with existing sets that use active 3D glasses?
• Will the performance of the sets vary depending on the type of passive glasses used? Vizio, for one, claims that its new sets can use passive glasses from just about anyone, including the ones given away at the movies. Samsung and RealD, on the other hand, claim that their system will only work with glasses from RealD.
• Will consumers be satisfied with "half-resolution" systems? In a crowded Best Buy, Walmart or Costco, where they're most likely to see the sets, will they even be able to tell the difference?
• How will consumers choose between all these different approaches, or will they wait until manufacturers settle on a standard approach?

LCD prices were fixed...did you notice?

According to CNBC, the U.S. Justice Department just announced a $585 million dollar settlement of a price-fixing case against LG Electronics, Sharp and Chunghwa Picture Tubes. By far the biggest portion of the fine, $400 million, will be paid by LG. Price-fixing is illegal, of course, but the price of LCD displays has been on a downward spiral for years. I haven't heard anyone complain that LCDs are too expensive recently; if anything, the problem has been whether the prices would stay high enough to keep some of the manufacturers in business.

I can't imagine that resolving this collusion is going to make LCD prices drop any faster than they've already been going down, but it will put a half-billion dollars into the U.S. Treasury. More bailouts, perhaps?