Google's deal to buy Motorola Mobility could shake up the smartphone market

Google already makes the Android software that powers the country's most commonly owned type of smartphone. The announcement that it plans to buy Motorola Mobility, a leading U.S. handset developer, sets the stage for a head-to-head contest with Apple, which makes the Android's more profitable and highly touted competitor, the iPhone.

The $12.5 billion deal, approved by both companies' boards, still must clear an antitrust review. But industry analysts and other observers of the exploding smartphone market quickly portrayed the purchase as a potential game-changer.

Before the deal, Android's open-source smartphone software was available to any handset-maker on an equal footing. That was the heart of Google's strategy in late 2007 when it partnered with a group of handset-makers to introduce the Android less than a year after iPhone's buzz-heavy launch virtually reinvented the smartphone product niche. More than three dozen handset-makers now make Android phones.

After the deal, Motorola will clearly be first among equals - even if Google chief executive officer Larry Page hastened to promise that Android would remain open-source, available to other handset-makers and that Google planned to "run Motorola as a separate business."

"Many hardware partners have contributed to Android's success, and we look forward to continuing to work with all of them to deliver outstanding user experiences," Page wrote early Monday on Google's official blog.

Analysts and other smartphone watchers said two crucial elements to the deal helped explain why Google would pay a premium for Motorola Mobility, one of the corporate heirs of Motorola Inc., the Schaumburg, Ill., company that split itself in two earlier this year.

One key element was patents - Motorola Mobility owns about 17,000 of them, including some that analysts say could prove crucial for Google in any intellectual-property battle that challenges aspects of the functionality of Android phones.

The other is positioning - the chance to shift Google's product strategy and go head to head with Apple by gaining more control over some of the phones - the ones made by Motorola Mobility - that bear the Android name.

"They were always getting beaten up by Apple because Apple could control the whole experience - hardware, software, packaging," said Carl Howe, research director at Yankee Group. "Now Google can play that game, too."

With the addition of Motorola Mobility, Google will be able to exert end-to-end control over at least one manufacturer's versions of the Android. That would give it more equal footing with Apple, which has built a highly profitable, vertically integrated business by refusing to license its software to outside manufacturers.

"With this deal, Google comes closer to being vertically integrated, so it has the ability to compete on a equal level with Apple," said Kartik Hosanagar, an associate professor at the University of Pennsylvania's Wharton School.

"That has been Apple's strategy: You keep it all integrated, and by doing so you deliver the best user experience - and by doing that, you can keep your margins high," Hosanagar said.

Hosanagar, Howe, and other observers said there were significant risks for Google and Motorola Mobility, whose properties also include a Horsham manufacturing facility it acquired when Motorola Inc. bought the former General Instruments.

One challenge is the reaction of other Android manufacturers, which might put more of their energies toward competing non-Android platforms, such as Microsoft's Windows Phone 7.

"Does this mean all handset manufacturers are equal, but some are more equal?" asked analyst Roger Entner, of Recon Analytics, who suggested that the deal could prove an unintended boost to Microsoft's platform, currently in fourth place behind the BlackBerry as well as Android and iPhone.

Hosanagar said the vast increase in Google's patent holdings should reassure some of its Android partners, since Google has faced repeated patent-infringement lawsuits over Android. With a large arsenal of important patents, Google would be better able to persuade other companies to sign reciprocal cross-licensing deals.

"Firms like Motorola have some of the most fundamental patents in the mobile space," Hosanagar said. "If you have these kinds of patents, Google can now assure a lot of its partners that they don't need to worry about a patent suit. That could be a big part of encouraging other hardware makers to adopt Android."

Howe said gaining end-to-end control over some Androids would create "a gold standard" for the open-source phones, making them more attractive to app developers who complain about the difficulty of writing software for different companies' handsets. But at the same time, even a small tilt in the playing field could complicate Google's Android business model, if other manufacturers believe Google is favoring Motorola products.

"Nobody has ever succeeded at managing an open platform and manufacturing for that platform," Howe said. "You have an unfair advantage. It works great for the manufacturer. It works very poorly for everyone else in the eco-system."

Also unclear is how the deal could affect the fledgling market for Android-based tablet computers designed to compete with the hot-selling Apple iPad - though it plainly should boost Motorola's Android-based Xoom. While some tablet-makers could be scared away, the entire market could be spurred if iPad faces a suddenly very visible Android-based alternative.

"Nobody else has a really successful tablet other than Apple," Howe said.