Google has agreed to acquire Motorola Mobility for $12.5 billion in cash-a deal that could reshape the booming smartphone market for years to come. The first thought is why would Google want to enter the super competitive world of smartphones and compete with its partners, instead of staying on the sidelines and letting others compete?
There are Several Very Good Reasons
1) It’s a bit about control.
Initially, there is no question that Google considered going the Apple route in the smartphone business, producing the hardware and the software, but Google ultimately went the software-only route, and kept it open-source to achieve maximum penetration.

The plan worked, and Android will be the number one smartphone OS this year, with over 40% of the market, certainly no small feat. But with this success came some problems. Many smartphone manufacturers produce Android smartphones, and as tough competitors will do, each has tried to make its Android phones stand out from the crowd with unique tweaks. While differentiation is one of the key benefits behind Android, it also has led to fragmentation. Thus, one of the Android’s biggest benefits is becoming a drawback. With the many versions of Android currently being shipped in phones, each with different hardware capabilities, you have a bit of a mess.

By purchasing Motorola Mobility, Google can take control of the Android platform in a way that just wasn’t possible before. Sure there was the Nexus One, but that was just an experiment, and one that didn’t end well. No, the Motorola purchase is more about Google enabling its vision in the way that Apple enables its vision with its products. This way other manufacturers will be free to go in the directions they see fit, while Google sets the bar for the Android standard.

With any luck, Google can keep its other hardware partners happy while it competes with them. Generally, competing with your partners is not thought to be a desirable course of action, but in Android’s case, with the market so well populated and the prize so large, it’s not likely that Google’s partners will leave the playing field, and if they did, where would they go? Windows Phone 7? No, they have little choice but to stay.
2) It’s a bit about patents.
Although the core of Android is open-source, Android also contains many proprietary software additions supplied by Google. With software comes patent infringement lawsuits, and Android, open-source or not, certainly hasn’t been immune to this. But since Google hasn’t been the one selling smartphones, those claiming patent rights have gone after the hardware manufacturers because that is where the money is. Lawsuits against Samsung, Motorola, and HTC have been rampant, including the recent one brought by Apple. In most of these lawsuits, the best Google can do is watch while its hardware partners get sued for infringements of all types, many of which originate in Google-supplied software. By purchasing Motorola Mobility, and becoming a hardware manufacturer itself, Google is putting itself in the sights of those filing lawsuits, which will not only allow it to defend against these lawsuits directly, but will also likely reduce the number of lawsuits over time, since rivals may be less inclined to sue well-financed Google than some of its hardware partners. Microsoft, for one, has rarely gone after Google and instead sues Google’s hardware partners.Then there are Motorola Mobility’s patents. For Google, Motorola’s patent library is the icing on the cake, as Motorola Mobility’s mobile patent portfolio is quite rich. Larry Page publicly stated that acquiring patents was a large part of the Motorola Mobility acquisition.
3) It’s a bit about battling the competition.
Google’s biggest smartphone competitor to date has been Apple, and Google hopes to better compete with Apple with this acquisition. When Apple’s iPhone was growing in the ranks, Google could do little more than watch with envy at the way Apple combined its hardware expertise with its software skills and ecosystem to develop the whole package. Google has the software skills, and some ecosystem pieces, but the hardware aspect was the missing piece. The Google acquisition should allow Google to change that.
With Benefits, Also Come Some Risks
1) Google could alienate its hardware partners.
Now that Google is a hardware manufacturer, the relationship that it has with its other hardware-manufacturing partners is sure to change. Will Google add tweaks to Android to give it a strategic advantage over its partners? Even if the answer is no, the suspicions might be present.
2) Wireless operators could reject Google smartphones
While Google’s business and that of the wireless operators are generally complementary, their paths are starting to cross more than ever. Mapping, navigation, mobile payments, and mobile advertising are all areas in which both Google and mobile operators are starting to compete, and should conflicts exist, mobile operators will win because they control the smartphones for most customers. You need to look no further than the Nexus One to see that Google is going to have a tough time in the US without wireless operator buy-in.
3) Google handsets may fail to gain market share.
Even with the support of Google, Motorola Mobility has had a difficult time competing with the likes of HTC and Samsung in the Android market, and there are indications that Google might not have any better luck.
Let’s Not Forget Set Top Boxes
Most of the discussion surrounding Google’s proposed acquisition of Motorola Mobility has focused on the Android cellular handset connection. However, we are also being asked about the potential benefits of combining Google with Motorola’s Home business unit, a business that supplies video network infrastructure and CPE to some of the world’s largest pay-TV service providers.

In our opinion, this part of the deal will have minimal impact over the next 12 to 24 months, even with Google’s increasing emphasis on video products.
Why Do We Believe This?
 » The business of supplying pay-TV and broadband infrastructure is largely based on the relationship between the service provider and the equipment supplier. Service providers, such as Comcast and Verizon, rely on Motorola’s products because they expect the company to function both as a systems integrator and as a trusted advisor about product and service development. In this type of relationship, rapid shifts or changes in software platforms or basic business models are relatively rare. In other words, the prospect that Comcast will offer an Android-based set top box in the next year seems extremely remote.
 » Most engineers and key executives in the pay-TV industry seem to be quite skeptical of the Google TV platform. While there was a great deal of concern about the platform a year ago, once it was released, that concern evaporated. In discussions with industry executives, we repeatedly hear something like, « Google TV is not ready for prime time. » So while there is an opportunity for cross-fertilization between Google TV and Motorola’s home business, we believe it is an opportunity that will take time to bear fruit.
Not Without Relevance Though
On the more positive side of the ledger, Motorola’s Home business will provide Google with a team that has an excellent relationship with not only the pay-TV service provider community, but also with the content development community. One of the key developmental challenges for Google’s video service plans has been a certain level of mistrust between the Hollywood content developers and Google. By using Motorola’s Home business unit as a point of entry, Google improves the odds of successfully partnering with members of the content development community.

What Does This All Mean?
There is an old fable about when two tigers fight. In the end, one tiger leaves the fight badly injured; one tiger does not leave. As the handset OS wars escalate, it is clear that there is a huge battle ahead with great rewards to be gained. Clearly, none of the combatants will remain unscathed. Motorola Mobility is a key piece that Google needed to do battle going forward.

It is hard for In-Stat to imagine that Motorola Mobility will look similar five years from now. Manufacturing video infrastructure equipment hardly seems appropriate for the search giant. Given Google’s experience with the Nexus One, manufacturing handsets hardly seems appropriate either. The crown jewel was the intellectual property. It would not be surprising to see other transactions down the road.