Google today announced that it plans to acquire Motorola Mobility – the Motorola’s cellphone and set-top box division – for about $12.5 billion. This is obviously a major deal and suddenly turns Google from a company mostly focused on software into a hardware manufacturer as well. While Google aims to run both businesses separately – and stressed that even Motorola will have to compete for Google’s business – the fact that Google’s headcount just grew by about 60% shows that this acquisition will have a massive impact on the company in the long run.

The deal, it should be noted, still has to receive regulatory approval from the appropriate agencies in the U.S., Europe and other countries, so it could take a while before this deal goes into effect and the full ramifications of it become clear.

What Did Google Just Buy?

Motorola Mobility: the focus of Motorola’s Mobility unit is the mobile phone business. Until January 2011, this unit was known as Motorola’s Mobile Devices division, but at that point, it was split off from the parent company and became its own business. Once upon a time (in the 1990s), Motorola was among the top manufacturers in the mobile phone business. Since then, though, its competitors like Nokia and Samsung leaped ahead – both with regards to technology as well as sales. Motorola is now the seventh largest handset manufacturer and focuses exclusively on Android-based devices.

With regards to financials, Motorola Mobility’s revenue for 2010 was $11.4 billion with an operating income of $76 million. The company has 19,000 employees (Google itself had about 29,000 until now).

Why?

The obvious question to ask here is why Google would be interested in this deal. Motorola itself decided to split its mobility unit from the rest of its business so it could shop it around. This sale itself then doesn’t come as a real surprise – the surprise is that Google bought it.

  • Patents: the current state of the patent system keeps big companies in a constant cold war-like state where the mutual threat of patent litigation keeps all sides from attacking each other. Google, however, doesn’t have many mobile-related patents, so it’s hard for the company to defend Android from attacks (specifically from Microsoft and Apple). Google CEO Larry Page: “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”
    Interestingly, Motorola itself was also planning to sue a few of the other Android manufacturers before this acquisition. In a way, Google is protecting its own ecosystem from Motorola by this acquisition, too.
  • Integrating hardware and software to rival Apple: Apple’s success in controlling both the hardware and software side of its business has shown that this is really the way for the mobile industry and that customers – for the most part – prefer this model. While Google regularly releases its “Nexus” reference phones to show vendors what it expects an Android phone to look like, the Android market has suffered badly from the fragmentation of the market – especially when it comes to providing software updates. By controlling both sides of the business, Google can force the other manufacturers to keep up.
  • A foothold in the living room: this has gone relatively under-reported, but as Larry Dignan rightly notes, Motorola Mobility is also one of the world’s largest suppliers of cable boxes. This isn’t a business that moves very fast (how often does your provider update your cable box?), but in the long run, this could allow Google to bring its technology into more living rooms (the GoogleTV project, after all, wasn’t exactly a huge success).

Potential Problems

  • Motorola is no Apple: while integrating the software and hardware business makes for larger margins and hopefully for better products, Motorola hasn’t exactly shown the kind of design finesse we’ve come to expect from Apple. It’ll be interesting to see if Google can turn this around.
  • What will the other Android smartphone makers say? Henry Blodget rightly asks how HTC, LG, Samsung and the other handset makers will react to this. Officially, they all say that they love this deal, but there is surely an undercurrent of anxiety there as well. Are these companies going to feel as if Google is “stabbing them in the back,” as Blodget says?
  • Google is not a hardware company: The hardware business is fiercely competitive and includes far more moving parts than any other business Google has ever entered. Despite its size, Google has never been very good at marketing – something that is essential in the consumer electronics business.
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