What happens if Google keeps MMI? Macquarie Research,

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What happens if Google keeps MMI?
Event
 We follow up on our previous report on Google-MMI after our US analyst Ben
Schachter hosted an NDR for Google (GOOG US, US$520, Outperform). The
key takeaway is that the CFO is adamant Google will (contrary to some
market expectations) keep MMI’s hardware business in-house rather than
spin it off, while also stating that MMI will get no special treatment. We don’t
doubt Google wants to keep a level playing field for everyone. But the fact that
it confirmed it would keep the MMI business in-house raises potential conflictof-
interest issues for the rest of the Android camp (players such as Samsung,
HTC and LGE), especially as smartphones shift to a ‘volume’ cycle.
Furthermore, ongoing IP wars mean potentially higher cost at a time when
end-product ASP is likely to fall in 2012.
Impact
 Google to keep MMI hardware? The key takeaway from our NDR with the
CFO is that Google will (contrary to some earlier expectations) keep MMI’s
hardware business in-house rather than spin it off. The CFO also emphasized
that MMI will get no special treatment, and we believe it will want to keep a
level playing field. That said, keeping MMI’s hardware business could lead to
some wariness or unease over potential conflict-of-interest issues for other
Android players, in our view.
 Mobile patent wars just beginning. Our US telecom analyst Kevin Smithen
hosted a call with Samsung's Wireless Terminal Strategy head, and the key
takeaway is that it is not entirely clear if Google can sufficiently protect its
other OHA partners with MMI’s patents or whether Samsung, HTC and others
will have to build their own IP portfolios to seek protection. Thus, the mobile
patent wars are closer to the beginning rather than the end (early innings, so
to speak), in our view, and more M&A could occur or be needed.
 Smartphone cycle is shifting. The potential for conflict of interest with MMI
in Android and ongoing IP battles are occurring at a time when smartphones
are moving from the ‘premium’ to the ‘volume’ cycle in 2012. This implies a
greater need for cost-cutting at a time when input costs might be rising due to
the need for IP protection, and end-products’ ASPs come under competitive
pressure. Thus, IP and product portfolio could be the key, and we note HTC is
still mostly focused on the high end, while Samsung has a more balanced
smartphone portfolio to encompass high as well as mid-to-low end.
 Carriers the ultimate winners? As smartphones move to volume cycle and
ASPs start to come down, carriers could benefit on the volume side, while also
gaining better leverage versus brands due to the increasing competition. Note
that Verizon (largest US carrier at 34% share) has upgraded the MMI Droid
Bionic to tier-one launch and is not choosing to carry Samsung’s Galaxy S II.
Outlook
 The fact that Samsung (which of late has been more aggressive in pushing its
own Bada O/S recently) and HTC (focusing on the WP7 platform as well)
seem to have stepped up their non-Android efforts in the wake of Google/MMI
deal shows, despite public statements of confidence, some uncertainty or
wariness of potential conflict of interest and need for a ‘back-up plan’, in our
view. We remain very selective on the Android camp and retain our Neutral
recommendation on HTC, as we think it could face many challenges (IP,
competition, product portfolio) in the structural shift to a volume cycle, and
think this is also a potential issue to watch out for OP-rated Samsung.