The next building blocks for Google's mobile empire

@CNNMoneyTech August 16, 2011: 3:54 PM ET

NEW YORK (CNNMoney) -- Google is best known as a search company. But with Monday's deal to buy Motorola Mobility, the company made a cannonball dive into a field it's long been edging toward: the mobile communications market.

Pending regulatory approval, Google's arsenal now includes Motorola (MMI), Android, Google Voice, a fiber optic cable infrastructure, an Internet phone service and experience in the mobile retail markets. It's also got more than $26 billion in cash left over, in case it wants to go buy another arrow for its mobile quiver.

Google (GOOG, Fortune 500) has bought itself a set of endless possibilities. But each potential next step comes with a serious set of drawbacks.

Keep Motorola at arm's length: Google CEO Larry Page said he plans to run Motorola as a wholly separate company. Handset manufacturing is not part of the search giant's core competency, he told analysts Monday on a conference call after the deal's announcement.

Google's other handset partners claim -- publicly, at least -- that they're not worried that Motorola will get preferential treatment. Executives at Samsung, LG, HTC, and Sony Ericsson all said they supported the move as a way for Google to stave off patent lawsuits from its rivals. Any manufacturer hitching its wagon to the Android star needs that patent protection just as much as Google does.

But $12.5 billion is a lot to pay just for patents. And Android has a critical fragmentation problem that Motorola could help solve. Which opens up Option #2 ...

Get a crash course in hardware 101: Google has been unable to create a consistent user experience across the dozens of manufacturers that license Android, but using Motorola to learn more about Android from a manufacturer's point of view could help fix some of those issues.

Google's lack of understanding of hardware has often been at the root of its missteps with Android. Thinking like a handset maker could help drive better customer satisfaction -- a metric that doesn't quite compare to that of Apple's (AAPL, Fortune 500) iPhone customers.

"With Motorola, Google will get a better understanding of how hardware works," said Ramon Llamas, mobile device analyst at IDC. "They can then offer better help to guide their partners about how to develop hardware for future Android products."

Set the bar for other partners: Google may decide to use Motorola to create "showcase" smartphones that it thinks best embody the vision it has for Android and the mobile market. The company could attempt to spark innovation among its other partners by challenging them to match Motorola's flagship devices.

Google said Monday it wouldn't do that -- though it's hard to believe that, as Motorola's parent company, Google will allow Motorola to continue on forever without any input.

But analysts say that kind of intervention could make Google's partners run away.

"If all of the sudden, Motorola gets to be the halo product and no one else gets software updates for two to three months, the other partners are going to start looking seriously at Windows Phone," said Ken Dulaney, analyst with Gartner. "They're all going to be nervous that Motorola will do something to anger them."

Close Android's gates: Some have suggested that Google could try to go head-to-head with Apple by shutting out its other partners and making Motorola the exclusive Android smartphone manufacturer.

But Google's open-source strategy is a key part of both its business model and its corporate philosophy. Because Android carries an open-source license, it can't be "taken back": Outside manufacturers will always be able to use, adapt and update all the Android code Google has released so far.

Google gives Android away for free because its goal is to put smartphones in as many hands a possible. The company makes its money on the back end, from ads served on its e-mail, search, maps and other apps on those devices. That strategy has been wildly successful so far -- meaning Google isn't likely to suddenly change course.

Plus, there's another catch: Motorola is small potatoes compared to much larger Android partners like Samsung, LG, and HTC. Each of those commands a smartphone market share that dwarfs Motorola's.

Buy Sprint: Sprint's market cap has fallen to just $10 billion -- down 15% so far this year. Google could probably afford to buy the struggling carrier with cash, even after the Motorola deal closes.

Google relies on the established carriers to sell and support its devices. But if Google could have the ability to deal directly with its customers,why not cut out the middleman?

Though analysts widely believe Google's mobile ambitions are strong, few think Google would actually try to become a wireless carrier anytime in the near future. The infrastructure needed to carry signals around the globe is incredibly expensive, reducing the profit margins of wireless companies like Sprint (S, Fortune 500) to next-to-nothing.

"If you look at the margins Google enjoys compared to the margins carriers enjoy, why would you ever want to trade one for another?" asked Charles Golvin, analyst with Forrester Research. "Also, you can't be a carrier with just one device. It would create questionable competitive dynamics."

Then again, no one thought Google would want to buy up a handset manufacturer -- or launch a head-to-head assault on Facebook, as it did with Google+. Four months into Larry Page's tenure as CEO, he's already proven he's not afraid to make high-stakes bets.

Forget "don't be evil." Google's new motto seems to be "expect the unexpected." To top of page

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