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What Google can do with Motorola

CNET looks at the options for Google now that it’s in the hardware business.

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All eyes will be on Google as it takes a sudden plunge into the hardware business courtesy of Motorola.

The $12.5 billion deal, which closed today, netted Google a healthy stockpile of patents for legal defense and offense. Oh, and they came with an historic technology brand and multi-billion dollar handset and television set-top box on the side too.

It’s pretty obvious what Google will do with the patents, given the increasingly litigious environment that the technology world finds itself in. Motorola’s last few years of losses also bring a clear tax benefit to Google in the near term. But what’s less clear is just how the company will proceed with the actual business of Motorola.

“There are so many different things they can do, and I don’t think Google quite knows yet,” said Michael Gartnerberg, an analyst at Gartner.

Google and Motorola declined to make an executive available to comment on their plans.

Well, that’s what CNET is for. The following are some of the options available to Google, as well as their likelihood and implications.

An independent Motorola. This is a certainty for now, but could fade as time goes on and plans change. For now, expect Google to keep Motorola running as an independent business. The company wants to tread lightly and stick to its promise of staying neutral. The best way to do this is to run the company at arm’s length.

Not that Google and CEO Larry Page don’t want to leave their mark on the newly bought company. Page installed “longtime Googler” Dennis Woodside as the new CEO, as well as several executives from an array of different companies from Amazon to Visa.

These executives, including Woodside and fellow former Googler and marketing lead Gary Briggs, will get Motorola email addresses, not Google ones, so the brand will remain alive from top to bottom.

Analysts, however, warn that there is little business advantage to running Motorola independently. Google can’t give Motorola early access to Android, since it would anger its handset partners. But the business by itself isn’t so great.

The company was losing money before it was scooped up, having posted a wider first-quarter loss in its last report as an independent company. That’s despite a successful flagship phone at Verizon Wireless with theDroid Razr. If left alone, it’s tough to see the company doing much better given its already prominent position at Verizon.

The other carriers have largely given up on Motorola, but perhaps the new executive can turn things around. Still, even in the best conditions, the margins are much lower than its own core advertising business.

Showcase for Android. Google could also use Motorola as a way to ensure there is a healthy supply of stock Android experience devices in the market.

Android is getting fragmented, with every handset maker opting to customize their phones with skins or other unique features, all in an effort to stand out in the market. It’s highly likely Google could go this route.

“(Motorola) gives them the vehicle to deliver the Android experience that they see fit,” Gartnerberg said.

Garternberg said Motorola could be used as a showcase for stock Android software, but not try to dominate the market.

Still, that’s a tough line for Google to walk, and the other handset vendors will likely scrutinize how these products come to market.

When Android is made available to everyone will be the key. Google is reportedly planning togrant early access to the latest releases of its platform to multiple vendor partners, creating multiple “Nexus” devices at once. That would do a lot to assuage industry concerns.

Vertical integration. Google could take it a step further and work with Motorola directly to build its own flagship Android phone with the latest release. The company could take the Apple route and create a full end-to-end product with Google hardware and software.

Google could finally have a line of product that it has complete control over. Previously, it had to rely on the designs and manufacturing chops of its vendor partner. It has that expertise in-house with Motorola.

This is an unlikely scenario, as it puts Google directly in competition with a phone that has software advantages over their products.

“If they become a competitor, the other guys will walk,” said Matthew Thornton, an analyst at Avian Securities. “They will flee very quickly.”

Despite Android’s dominance now, it isn’t the only game in town. Windows Phone flopped early for most of the vendors, but that’s largely because they were focused on Android. Thornton said Windows Phone could thrive if a company like Samsung put its full weight behind the operating system.

A slightly more plausible vertical integration scenario would be with Motorola’s set-top business. The little-mentioned business was actually the more consistently performing unit of the two. The company actually unveiled a new interface that makes it better to search for TV programs without searching. It’s not a great leap to see Google TV and the set-top box business getting integrated.

Still, that could also face its own obstacles, since it’s the cable and telecom companies that purchase the boxes, and it’s unclear whether they want Google’s capabilities in those boxes (rather than their own services).

Shed the business. Google could also throw its hands up and just get rid of the business. There’s a 50-50 chance this could happen.

“It’s a silly place to be in,” Thorton said. “You know they’re nervous despite what you tell them.”

The best way to ease their concern: sell the business and keep the patents.

Thornton said he wouldn’t be surprised if the company wasn’t already entertaining discussions with potential acquirers.

Despite Motorola’s struggles to get back atop the smartphone perch, the business still has value. Its brand would be a boon to an Asian vendor looking to break into the U.S. market in a big way. In particular, the company has strong ties to Verizon, which continues to back it with major marketing support.

The set-top box business could be sold in a separate deal to another set-top box maker or venture capital fund. That’s highly likely despite the potential of a Google TV-Motorola box combination.

Google could take its time with a sale though. Motorola’s past years of losses mean Google can apply those net operating losses to its own profits for a tax gain. The company would likely prefer to use that tax benefit before moving forward with any deal.

There has been a growing camp of believers who feel Google should — and will — sell the business.

“Ultimately, I don’t think Google wants to go the hardware route,” Thornton said.

What Google can do with Motorola

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