Consumers may be the big winners when the dust settles over Google's announcement that it plans to buy Motorola Mobility for $12.5 billion.
Motorola's enviable patent portfolio was likely the driver in Google's decision to buy the handset maker. But the deal also gives Google its own hardware, which could pave the way for the company to create an end-to end mobile experience akin to what Apple has done with its iOS devices.
Google has taken an open approach to the mobile market. Its Android software is free and available to any hardware maker. This strategy has helped make Google the No. 1 mobile operating platform in the world in just three years. The company says more than 550,000 Android devices are activated each day.
But there is also value in Apple's strategy, which is a more closed approach. Apple controls the operating system, but it also builds the mobile hardware. Apple's approach to products has created nearly $300 billion in incremental valuation for Apple shareholders in the past six years, said Sandeep Aggarwal, an analyst with Digital Route.
"One of the hallmarks of Apple's product strategy is vertical integration, where Apple is providing an end-to-end experience vs. just focusing on hardware or software," he wrote in a research note. "Motorola Mobility has potential to take Google into that direction."
Right now Google isn't saying much about what it plans to do with Motorola's handset business. During the conference call this morning investors, Google's CEO Larry Page emphasized that Google will operate Motorola as a separate business within Google. And he reiterated Google's commitment to keeping the Android mobile operating system an open platform for a variety of hardware partners.
"Many hardware partners have contributed to Android's success and we look forward to continuing our work with all of them on an equal basis to deliver outstanding user experiences," Page said during the conference call. "We built Android as an open-source platform and it will stay that way. We've committed to that since the formation of the Open Handset Alliance nearly four years ago. Our plan is that Motorola will remain a licensee of Android."
But Google could choose to integrate its software and services more tightly with the Motorola hardware, making it the first truly Google-centric phones. Just like it has done with the Nexus One built by HTC and the Nexus S by Samsung, Google could add advanced technologies and provide tighter integration to its services in new Motorola devices. The Moto Blur software that Motorola has layered on top of its devices may fade away.
"What I would expect over time is that Motorola devices would have more of a stock-Android feel to them," said Michael Gartenberg, an analyst with the analyst firm Gartner.
Apple has already shown the benefit of controlling the mobile experience end-to-end from the underlying software to the hardware to the services that those devices use. Apple has used the sale of its iPhones and iPads to drive sales of its iTunes music and App store. And now it will soon launch its iCloud service.
Google is already on a similar path with its own cloud-based services. It already launched its Google Music Beta service. It has also recently launched its social-networking platform Google+. And a Google focused Android-device could further push subscribers to these services.
Ultimately it's these services from which Google makes money. While Microsoft is estimated to make $3 to $5 per handset for its software licenses from handset makers, Google gives Android away and is able to earn about $4 to $6 per Android handset per year, said DigitalRoute's Aggarwal. This is because Android phones set Google services, like YouTube, Google Maps, Google Navigation and Gmail as their default settings.
"Google will likely promote the Google brand beyond search and maps on these mobile devices," said Gartner's Gartenberg. "Google will become the digital hub for consumers vying with Apple and even Amazon and Facebook for consumers attention online."
Having its own hardware could help Google itself innovate and develop new services. For example, Google's Nexus S device built by Samsung is the first device to have an embedded near field communications, or NFC, chip in it, which allows the device to make mobile payments using Google's soon-to-be-launched Google Wallet service. With access to Motorola's hardware team, Google could innovate to create other new products using cutting edge mobile technologies.
Of course, tightly integrating Google services into Motorola devices could hurt Google's relationship with its other handset partners. For example, if Motorola is given access to Android upgrades before other hardware partners or is given access to special versions of the software, HTC and Samsung may feel slighted.
Right now, the other Android partners are putting on a happy face regarding the merger, perhaps because Motorola's patent portfolio will also help protect these phone makers from litigation as well. But there is a concern that the other handset makers will be upset by the fact that Google will soon be a competitor.
Even if they aren't happy about the merger, they may not have much choice. There simply aren't that many alternatives in terms of mobile operating systems. Still, it could make HTC and Samsung look more closely at Microsoft's Window's Phone platform.
That could still benefit consumers. The Windows Phone software has gotten high marks from reviewers, and the more handset makers develop products for the software, the easier it will be for Microsoft to build out its ecosystem. Ultimately, a stronger Windows Phone ecosystem would drive innovation and provide more choices for consumers across the mobile market.
That said, handset makers will face the same issue with Microsoft as they do with Google. Earlier this year, Microsoft announced a similarly cozy relationship with Nokia.
What is likely to happen is that HTC, LG, Sony Ericsson, and Samsung will remain Android partners, but they may have to find new ways to differentiate their products from Motorola's more Google-centric hardware. This may mean that HTC offers more advancements for its Sense software, which rides on top of the Android software. And Samsung may develop more TouchWiz customizations.
For consumers this could either be a good thing or a bad thing. If executed well, it will offer consumers a more variety in device capabilities as well as look and feel. But if it's not executed well, it could just mean more fragmentation in the Android ecosystem.
Ultimately, it will likely lead to more advanced devices from Google. And that is a good thing for consumers.
"Google has been frustrated that there are a lot of mediocre Android devices on the market," Gartenberg said. "And with Motorola they can build the devices they want that meets their vision. The stock-Android phone is still very important to Google."