DealBook Column: Is Google Turning Into a Mobile Phone Company? No, It Says

Matthew Staver/Bloomberg NewsLarry Page, a Google co-founder, left, and Eric Schmidt, the former chief executive, in Sun Valley, Idaho, in 2009.

Back in 2004, Eric E. Schmidt, then Google’s chief executive, proclaimed, “We’re not going into the phone business, but we’re going to make sure Google is on those phones.”

Less than a year later, however, Google did the opposite.

As Steven Levy described in his book “In the Plex,” Google soon acquired Android, the mobile phone operating system, and began building a phone business that it has since developed into a juggernaut.

Even after Google acquired Android in 2005, it continued to play down plans to enter the phone business for several more years. It wasn’t until the summer of 2008 that Steven P. Jobs at Apple actually took notice and went to Google’s headquarters to inspect one of its prototype handsets.

Google’s diversionary tactics made sense: by 2006, Mr. Schmidt, now Google’s chairman, was an Apple board member and Google was considered an important partner to Apple. But when Mr. Jobs finally saw Google’s phone he was “furious” and “concluded he was a victim of deceit,” according to Mr. Levy’s account. (Mr. Schmidt has said he never misguided Mr. Jobs.)

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That history may be instructive to consider when judging Google’s $12.5 billion deal for Motorola Mobility, which makes Android phone handsets and TV set-top boxes.

Google is actively positioning the deal not as a means to buy its way into the handset market, but as an opportunity to buy Motorola’s portfolio of patents — some 17,000 of them.

During the company’s conference call with analysts and the news media, Google executives peppered the call with talk about the enormous value of Motorola’s patents (it mentioned this 24 times); yet they talked about its handset business almost as an afterthought.

Google’s focus on the patents rather than the handset business makes almost too much sense: Google’s Android operating system has long been “open” and is used by a large ecosystem of handset makers, including Samsung and HTC.

These companies have invested billions of dollars in its Android-based operations and helped make Android more popular than Apple’s mobile operating system. Those handset makers will now have to compete against Google.

“Google can’t admit in public that what they intend to do is eventually make Android proprietary,” said Tavis McCourt, an analyst at Morgan Keegan Equity Research. Despite Google’s protestations, Mr. McCourt says he believes that in two to three years — after Motorola increases its distribution channels in Europe, where it is weak compared to Samsung and others — Google will seek to start closing Android’s platform or begin building special features on its own phones that are not available to its “partners.”

And even though Google could keep Android as an “open” platform, a special phone with bells and whistles could still infuriate its current manufacturing partners. For consumers, however, a proprietary phone would finally make Google’s Android system vertically integrated, creating an end-to-end system that may allow it to better compete against the iPhone, which has long been heralded because Apple has been able to control all aspects of the phone, from software to hardware.

Indeed, Google’s main P.R. message in its takeover of Motorola Mobility may follow that playbook of Research in Motion, the maker of BlackBerry, when it acquired QNX Software Systems, a software unit of Harmon International, a little more than a year ago. At the time of the deal, RIM said it was buying QNX to enter the automobile and infotainment business, which was a strength of QNX. RIM played down any talk that QNX might be used as RIM’s next-generation operating system. Of course, the messaging was a bit disingenuous: QNX is now building RIM’s operating system.

“They couldn’t say it because RIM’s developers would have stopped developing for BlackBerry’s current operating system,” Mr. McCourt said.

Google’s message may also be needed to win approval from regulators who could seek to block the acquisition if any number of handset makers came out against the deal. On Monday, all of Android’s handset makers came out in support of the deal on the basis that it would protect Android from potential patent litigation.

None of this is meant to suggest that Google’s stated desire to own Motorola Mobility, in part, for its patents is untrue. Google clearly has been involved in an effort to buy mobile phone-related patents for the last year: it lost a bidding war last month to buy about 6,000 patents from the bankrupt telecommunications maker Nortel Networks. (Apple and Microsoft led a group that outbid it.)

But it is undeniable that Google’s new chief executive, Larry Page, has long had a hankering for the mobile phone business, and this acquisition may be the culmination of his ambitions. Mr. Page, after all, was the executive who personally pursued the acquisition of Android and has been its biggest proponent. And he pressed Google to compete in federal auctions for wireless spectrum in recent years at a time when others were more hesitant — and in some cases was willing to overpay for spectrum.

“He was the guy behind Android,” Mr. Levy said in an interview. “Larry is a big ambitious guy; he will roll big dice.”

If there’s any question about Google’s motivation to own a handset maker rather than just a portfolio of patents, consider this: InterDigital, a licensing company that owns some 8,000 wireless patents and has another 10,000 patent applications being processed, has been up for auction. Many industry insiders were sure that if Google were serious about acquiring a portfolio of patents, InterDigital would be its target. The company’s market value is only about $3 billion and it doesn’t come with all the baggage of Motorola’s handset business.

“If this deal was just about patents, Google would have bought IDCC,” Mr. McCourt said, referring to InterDigital’s stock ticker.

Guess what happened to shares of InterDigital on Monday? They fell 14 percent now that Google is unlikely to be a buyer.

Article source: http://dealbook.nytimes.com/2011/08/15/google-turning-into-a-mobile-phone-company-no-it-says/?partner=rss&emc=rss