For all its claims to transparency, the world of Internet media is so layered with mystery that figuring out something as straightforward as a big corporate takeover, where strategies are usually clear, is like trying to break a code written in an obscure foreign language.
Case in point is the Google-Motorola deal. Google, the reigning online colossus, is buying Motorola Mobility, the legendary consumer electronics company that now makes mobile phones and TV set-top boxes.
At $12.5 billion, it’s a sizable purchase, even for a lushly cash-rich company like Google, which has $39 billion in its sock drawer. It will double Google’s workforce. But what’s impressive isn’t the size of the deal. It’s the purpose behind it, which seems, at first glance, inscrutable.
Google, after all, makes its money from search. Mainly, it auctions off search words to corporate clients that want to advertise alongside the responses Google delivers to online queries related to things they peddle. It’s a sweet business. Google made $3 billion last quarter on revenue of $9 billion.
Motorola Mobility, on the other hand, sells handsets and is the No. 2 provider—after Cisco—of the set-top boxes that cable operators rent to subscribers to carry TV channels into their homes.
So, what does one thing have to do with the other? Why is an extravagantly successful service company, the darling of Internet users worldwide, buying into the hardware business, where competition is fierce and margins are low? Why does a search-based behemoth want to spend billions on cell phones and cable boxes?
There are several answers, which together provide a glimpse of the swirling changes in the new media economy, and some disquieting clues as to how some of the world’s most advanced companies make money from you.
Key to the story is Android, Google’s operating system for mobile devices. While Apple Inc.’s iPhones and iPads are pop icons, Google’s Android has overtaken Apple and Nokia in worldwide smart-phone sales and is used by 39 manufacturers, including Samsung, LG Electronics and Sony Ericcson, as well as Motorola. They get Android for free.
So Google is already chin deep in the mobile business. (We’ll get to why in a moment.) And mobile is a rat’s nest of litigation, with Android facing lawsuits over alleged patent infringement from the likes of Microsoft, Apple and Oracle. Motorola has 17,000 patents, and analysts say buying Motorola not only eliminates it as a potential litigant, but gives Google title to capabilities that rivals might otherwise claim were filched—and arms Google to launch suits of its own.
Beyond litigation defense, other analysts reckon Google’s long-term model is Apple, with its dazzling success in vertically integrating services, software and hardware into a shimmering, closed universe of apps and cash flow. That’s possible, though that’s a very different business from the one Google has mastered. And it would put Google into competition with its own partners—the phone-makers that use Android—and might push them into the arms of rival Microsoft, with a platform of its own.
A third explanation has to do with the TV business. Google will now be a major player in the cable industry, since it will control the manufacture—and software–of Motorola set-top boxes, used by 28 percent of pay-TV households. Google could become a major supplier of Internet-borne TV to Android-equipped mobile devices, either collaborating with cable operators, or undermining the subscription model of giants like Comcast and Time Warner Cable. And there’s $70 billion in TV advertising revenue up for grabs.
And that reminds us what Google’s business really is—selling and delivering its users (that’s us) to advertisers, with ever-growing selectivity and precision. So, back to the question posed earlier: Why did Google, the supreme monetizer of online search, develop an operating system for mobile devices in the first place?
Why? Because it needs to know where you are. Increasingly, people don’t go online from their homes or offices. They’re on the move. That means the future of search lies in personalizing and localizing queries. Looking for lunch? Google wants to know who you are, what you like, and where you want to eat. (It might offer recommendations from pals, hence Google+.)
All that makes it more likely that the ads Google then zaps you with will work, and advertisers will be eager to pay top dollar for them.
Handset location data is indispensable. Google’s capacity to extend and sustain its dominance over the most lucrative franchise in Internet history depends on it.
We’ll see. Meantime, this deal is an eloquent reminder that in the shadows of the glee surrounding social media, universal connectivity and the like are businesses, whose objectives of money and power haven’t changed, even in the new millennium.