Why Google Should Keep Motorola’s Hardware Business

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When Google (Nasdaq: GOOG) first made the move to acquire Motorola Mobility (NYSE: MMI), most people – including us here at Wall Street Daily – believed that the hardware manufacturer’s 17,000 patents had a lot to do with it.

That’s because Google can use the intellectual property to defend its Android partners as patent litigation in the mobile industry escalates to new heights.

Now, with the purchase on track to close sometime in the first half of the year, many are wondering what Google’s planning to do with Motorola’s hardware business.

Rumors have been circulating today that it plans to sell it to Huawei (002502.SZ), while other reports indicate that Google’s planning to use it to develop new mobile devices.

Wall Street Daily readers know that I’m all for the latter.

You see, while I’m a huge fan of Google’s latest Android operating system, Ice Cream Sandwich, phones running the software still lack some of the intuitiveness of Apple’s (Nasdaq: AAPL) iPhone. That’s because Apple’s vertical business model gives the company total control over its products from start to finish.

Working directly with Motorola’s hardware would certainly help Google on this front.

Not to mention that other Motorola products like modems, routers and remote controls could help get Google’s Android@Home project off the ground faster.

Others aren’t too keen on this idea, however.

Keeping Android Partners on Board

Take Dennis K. Berman of The Wall Street Journal, for instance, who says that “the scariest part of all for Google’s investors [is that] the company really believes it can be all things to all people.”

Needless to say, he’s not a big fan of Google taking on its own hardware business.

One big reason he points out: If Google develops its own hardware, the company could lose support from its Android partners. Alienating Android phone manufacturers would certainly be devastating to the company.

As Berman points out, “Research firm Bernstein says mobile search grew by 144% last year… The gross margins on mobile search are estimated to be around 70%, with excellent operating margins, says Bernstein analyst Carlos Kirjner… [And] by 2016, it could be a $10 billion business for Google.”

However, Google has made a point of denying that would be the case. As CEO, Larry Page, said in August, “We look forward to continuing our work with all of them on an equal basis.” And there’s no reason the company can’t stand by this conviction while still building its own hardware.

You see, if Google implemented an Apple-like vertical model – and its partners see consumers reacting positively to the result – what’s the point of ditching Android and trying to make hay with a new, untested operating system?

Instead, it should convince Android device makers to improve their designs to try to mirror Google’s new model. In turn, that would deliver a more unified Android experience for consumers across the board. At the same time, since fewer companies would be straying from the current version of Android, fragmentation issues should become a thing of the past. Meaning we get faster updates and crucial security patches.

Scaring off Android partners isn’t the only concern Berman raises, though…

Only Apple Can Profit from Mobile Hardware?

Even if Google manages to build devices and keep its partners on board, its efforts are apparently pointless.

As Berman says, “Making devices – however cool they may be – is at best a barely profitable undertaking for companies not named Apple.”

While VentureBeat’s Devindra Hardawar calls this insight “wise,” I can only think of it as insanely myopic.

If he’s correct, then we’re in for a painfully depressing tech environment in the coming years. After all, if Apple’s the only one that can deliver profits in the mobile hardware space, then any other company hoping for considerable profits shouldn’t even bother.

In other words, competition – with any hope for profits – is futile. And since the biggest winners of a competitive landscape are consumers, we better hope he’s wrong.

Luckily, Samsung (SEO: 005930), which recently estimated record quarterly profits of $5.15 billion thanks in large part to smartphone and tablet sales, proves that he is.

So don’t worry. The future of mobile technology doesn’t hinge on the success of one profitable company.

And while I agree with Berman that Google’s undertaking a lot for a company that makes the majority of its profits from search and ad sales, here’s hoping it doesn’t lose its innovative spirit anytime soon.

Because who else can and is engineering groundbreaking technology like self-driving cars – and actually putting them on the road?