Why Its Motorola Purchase Really Shows Google's Market Weakness

When Google (GOOG) first offered to acquire Motorola Mobility (MMI), its bid was significantly lower than the final $12.5 billion. But over a few days, Motorola CEO Sanjay Jha got Google to up its offer by a third, even though the company had no other suitors.

According to patent analyst Florian Mueller, fear was the motivator. Because its phones were so important to the success of Google's Android, Motorola had some logical options that would have done heavy damage to the operating system. Combine this with some other market factors, and you might start wondering if Google's free product strategy will really buy it the lasting brand and business advantage the company thought it would.

Four problems for Google
According to Mueller, it comes down to the patent litigation that Apple (AAPL) and Microsoft (MSFT) have brought against Motorola, as well as other Android hardware vendors. Motorola probably had a better defense than any other vendor except Samsung. Given that Motorola needs to do business and continues to lose money (making litigation even more painful), the company might have taken any of the four following tactics:

• Motorola could have paid a royalty to Microsoft and possibly even settled with Apple. That would have telegraphed to everyone else using Android that they should all expect to pay for using the free software.
• Motorola could have pulled back on using Android and pushed ahead with Windows Phone -- a defection that could have taken some of the better selling Android phones to an enemy camp.
• Motorola could have sued other Android handset vendors to make it more expensive for them to manufacture and sell, thus reducing or eliminating any cost advantage they enjoyed.
• Motorola could have auctioned off its patents, which Apple or Microsoft might then have snatched up (even though there is some question about how much protection the patents might afford).

What makes it possible is ubiquity, just as Microsoft managed on the PC front. However, Google doesn't charge for the software and focused on the smartphone market, which doesn't have the same monolithic underlying product design as PCs have had. That has some major ramifications:

• Google doesn't get the money to fund full indemnification from lawsuits for its hardware partners.
• Vendors need the ability to customize how the operating system works to help distinguish themselves from competitors.
• In going open source, Google has allowed the vendors more flexibility and freedom in making changes.

You can already see some results. HTC is considering acquiring an operating system of its own -- and given that it already pays royalties to Microsoft for Android handsets, could move to Windows Phone.

Amazon (AMZN) and Baidu (BIDU) are non-traditional hardware vendors creating their own tablets using Android and fairly customized user interfaces. If Android just becomes a base, what would keep them from using another operating system, like RIM's (RIMM) QNX, as the foundation for their products?

As the saying goes, you get what you pay for. But you also get what you charge for. Google has effectively undercut the brand importance of Android among most of the buying public and has watched its licensees become the primary face to customers, which limits the power that Google might otherwise gain in the market.

Related:

• HTC Wants an Operating System? Another Sign of the Unhappy Android Family
• Schmidt's Moto-Mouth Puts Google in a Tricky Position
• What Google Gets From Motorola: A Tax Dodge, Not Just Patents
• Memo to Google: Buying Motorola May Not Protect Android
• Google Makes $1.4 B a Year, and Probably a Lot More, on "Free" Android