Google to Buy Motorola Mobility Holdings for $12.5 BillionGoogle to Buy Motorola Mobility Holdings for $12.5 Billion

Getting a handset company that can help them build a flagship Android implementation that ties into everything Google has (along with giving them some ammunition in the patent wars), can only be good for Google.

Google has decided to increase its presence in the mobility market and announced its intention to buy Motorola Mobility Holdings, Motorola's cellular handset business, for $12.5 billion. Motorola Mobility was created this past January when the company split into two entities, one for the consumer-focused handset business and a second, Motorola Solutions Inc., that makes the police radios, wireless LANs, barcode scanners, and mobile computers targeted at government agencies and businesses.

Under CEO Sanjay Jha, Motorola Mobility has essentially come back from the grave. The company had enormous success with the iconic Razr flip phone, but stumbled badly as the industry switched to smart phones. However, Mr. Jha recognized the importance of Android as their best option in the battle against Apple and the beleaguered BlackBerry line. Back in 2009, I suggested that RIM should buy Motorola as a hedge against the decline in the BlackBerry brand.

The Android bet has paid off handsomely for Motorola Mobility, and they have had a string of successful products. According to Gartner's most recent accounting of mobile device sales, Motorola ranks eighth with 2.4% of the worldwide market, and is focused primarily on Android smartphones. Android accounts for 43.3% of all smartphones sold. That's almost twice the share of number two Symbian and Apple that comes in third at 18.2%. The bigger players in the device market divide their attention among Android, Phone 7 and basic handsets, but Motorola has steadfastly stuck with Android. Motorola has said they would consider a Phone 7 offering, but I don't think we'll see that now.

Google is going through some changes of its own. Founder Larry Page took over as Google's CEO from Eric Schmidt back in April. Of course, Google is a much different company than the one he and Sergey Brin entrusted to Mr. Schmidt back in 2001. In 2001 Google was privately held and was generating annual revenues of $86.4 million. When they went public in 2004 revenues had reached $3.2 billion, and were $29.3 billion in 2010--that's a big company and a CEO who’s untested in those waters.

While we instinctively think of Google as a "tech company", 97% of revenues come from advertising. In a rather unflattering article in CIO magazine, Neil McAllister asks if Google's best days are behind it. He catalogues the company's failures when they get out of their core business and questions whether they can or even should continue funding these gambits. With regard to protecting that core he quotes a former Google engineer, Dhanji Prasanna, who describes the company's software infrastructure as "10 years old, aging and designed for building search engines and crawlers"; for other purposes, he says, it is "well and truly obsolete."

Other than the fact that Google probably found the $12.5 billion to buy Motorola rolling around in the sofa cushions, why would they want to buy a handset company? The move will certainly unsettle HTC, LG, Samsung, Sony Ericsson, and the other Android handset manufacturers. My take is that Google recognizes those companies need Google more than Google needs them. Google has given them their best chance to go up against Apple, so they’re not running off the reservation. Even if they did, where would they go, Microsoft Phone 7? HTC, Samsung, and LG already have Phone 7 offerings, and Nokia has staked out that market in its bid to regain relevance in the smartphone space. In the meantime, Phone 7's market share "rounds to zero", so you're not dropping number one to go for that--unless, like Nokia’s CEO Stephen Elop, you used to work for Microsoft.

The other issue that comes up repeatedly is patents. Google and its developers have been hit with numerous patent infringement suits from Apple, Microsoft, and various non-practicing entities (NPEs) like Lodsys. NPEs are often identified by the less flattering term "patent troll." Google recently lost out to a consortium that included Apple, Microsoft, Research in Motion, and Sony Ericsson in a $4.5 billion bid for the 6,000 patent assets owned by Nortel Networks.

Billions of dollars are exchanged among device manufacturers for intellectual property rights each year, and being rather late to the mobile device market, Google’s patent holdings are relatively thin. As a result, Google typically is on the "giving" rather than "receiving" end of those transactions, and they and their partners will likely be paying more into the pool as these suits are settled. While Motorola's patent portfolio won't free them of those obligations, at least it should put them in a stronger negotiating position.

Getting control of a handset manufacturer may also help Google get a grip on the burgeoning fragmentation problem. The downside of Google's open approach to Android has been a glut of Android variations that threaten to make application compatibility across all devices a nightmare. According to Google, there are now 8 different releases of Android in circulation (Table 1). Add to that the fact that each handset manufacturer can add its own "wrapper" to customize the user experience with its implementation of Android; Motorola's Motoblur is a good example of that.

Google might be trying to establish Motorola's implementation as the one that best integrates with Google’s other services. How well that plays with other manufacturers, whose goal it is to differentiate their products, remains to be seen. Google had tried this approach with the Nexus 1 (manufactured by HTC) in January of 2010, but the product failed to gain traction. However, as Dave Michels points out in his recent blog on Google Voice, the company has not done a good job at bringing the various pieces of the Google ecosystem together. Dave writes, "It turns out that Google isn't a UC company. It's an advertising company only dabbling in voice." Are they now "dabbling in mobility"?

So the mobile world has thrown us yet another surprise, and my best advice to Google would be "Do no evil". That is, leave Motorola alone as much as possible. In terms of developing that tighter coupling with the other Google offerings, that should be driven by Motorola, not Google. Motorola is a mobility company--Google does advertising!

Strange as it may seem, dictatorship works in mobility. Apple, who has the most closed and controlling environment, continues to deliver the best user experience. RIM does pretty well too (at least in the qwerty segment) by controlling all the elements of the product experience. While it continues to grow like kudzu, Android is still rough around the edges. Getting a handset company that can help them build a flagship Android implementation that ties into everything Google has (along with giving them some ammunition in the patent wars), can only be good for Google. Their biggest threat is that those super smart folks at Google actually think they know more about mobility than the experts they just acquired.