To figure that out, we need to look back at the state of Motorola some 19 months ago and apply some mathematical magic.

The thought experiment

When the Nexus One was introduced, Motorola sported a market cap of about $10.6 billion. That's for the entire Motorola beast, including the infrastructure and enterprise operations that later became Motorola Solutions. At the time, mobile devices represented 31 percent of Motorola's sales and did not generate profits. The only fair division available is to split the company along revenue lines.

Thirty-one percent of $10.6 billion is $3.3 billion, and Google is paying 3.8 times that amount. If the deal falls apart for some reason, like failing regulatory approval or due to Motorola's shareholder vote, Google will pay a $2.5 billion breakup fee that nearly equals our hypothetical early-2010 market cap.

In slightly more realistic terms, Google would probably have needed a similar-sized buyout premium back then. This would put the theoretical buyout price at $6.2 billion, or about half of the final price tag.

When Motorola separated last December, the final value of Mobility was one-ninth of the total company—Motorola shareholders received one Mobility share per eight regular shares. Using that ratio instead, you'd get a fair price of $1.9 billion including the buyout boost.

The road not taken

Any way you slice it, Google could have saved a truckload of cash by getting into the hardware game much earlier. Its bold plan to revolutionize the way cell phones are sold fizzled early on, and the Nexus One became nothing but a developer phone in less than six months' time. We don't know what that failed experiment ended up costing Google, but most of the pain was probably passed to Nexus-maker HTC.

Since then, Android's reference models have jumped from one manufacturer to another, including the Samsung-designed Nexus S and Motorola's Xoom tablet. With this acquisition safely under its vest from an early date, Google could have kept that zig-zagging firmly under control and in-house, while also clamping down on the much-maligned Android fragmentation issues.

On the other hand, Google would also have lost a chance to build the diverse support system that Android now enjoys. Some call it fragmentation and others call it choice or diversity; from that perspective, Mountain View would be probably better off leaving Motorola alone altogether, though it did manage to round up quotes from handset manufacturers saying they support the buyout.

What's new?

Ironically, buying Motorola Mobility makes Google a truer copy of the Apple business model. No longer a hands-off software provider with no financial interest in handset sales, Google now needs to worry about hardware implementation and direct profits. This two-headed beast will deliver the purest Android experience on the market, and will be held up as a role model or pariah when things go right or very wrong for the platform.

And let's not forget that Motorola Mobility might not go home with Google after all. Perhaps the biggest reason to pick up Motorola rather than just buying another basket of protective patents is that regulators might block a pure patent deal but could let this agreement pass because Google is buying hardware operations where it holds no monopoly whatsoever. That doesn't make it a slam-dunk, however.

All told, leaving Motorola on the table for a year and a half added at least $6 billion to the dollar cost but also brought about a slew of less obvious costs—and benefits.

For better or worse, Android just changed in a big way. And if Google had made this move a year ago, the market would look very different today in that unpredictable way that makes hurricanes out of fluttering butterfly wings.

80 Reader Comments

I think you should address the issue of the number of patents Moto had back then, compared to the number they have now, when Google announced they wanted to buy them. Would it still have been worth while back then?

If Google really wants to change the mobile phone business (in the US at least) they don't need to buy a handset maker; they need to buy a bunch of Congresspeople and get carrier-locked phones outlawed.

Hopefully *crosses fingers* this will help them make more phones that are unlocked off the shelf with a more pure Android Exp. I know a lot of people have some hate for Moto, but damn if I don't love my Droid2 Global. I love me some slideout keyboards.

Why is there no mention of Motorola's Set-Top Boxes and Cable Modems in any of the Google buying Motorola Mobility? Motorola Mobility includes both of those along with the mobile handset portion of Motorola.

If Google really wants to change the mobile phone business (in the US at least) they don't need to buy a handset maker; they need to buy a bunch of Congresspeople and get carrier-locked phones outlawed.

They could theoretically buy T-Mobile once that merger is disapproved, but I don't think Google would want in on it anyways, although it could be a better deal than "buying" a few congresscritters

If Google really wants to change the mobile phone business (in the US at least) they don't need to buy a handset maker; they need to buy a bunch of Congresspeople and get carrier-locked phones outlawed.

They could theoretically buy T-Mobile once that merger is disapproved, but I don't think Google would want in on it anyways, although it could be a better deal than "buying" a few congresscritters

I think you should address the issue of the number of patents Moto had back then, compared to the number they have now, when Google announced they wanted to buy them. Would it still have been worth while back then?

I don't think it would've been a major factor, especially if Google kept to the same hands off management promises they're making now. In that case the patent generation rate would be mostly unchanged.

I love my original Droid, but I was not going to buy another Motorola product because I didn't want to buy a phone that would brick itself if it thought I was unlocking it (even though I have no plans to actually unlock it, all it takes is one malicious virus to blow them up). This makes me happy, since I hope that Google will get rid of those brick circuits, and I can buy a Droid4 or Droid X5 or whatever it is in a year or so.

If Google really wants to change the mobile phone business (in the US at least) they don't need to buy a handset maker; they need to buy a bunch of Congresspeople and get carrier-locked phones outlawed.

Locked phones (and the subsidies that come with them) is the only thing keeping Android afloat.

Eh, hindsight is 20/20. It might have been a good deal then but it also would have been a good deal to buy Apple shares before the ipod/iphone hit. Not that it's not fun to speculate, but I think the more exciting conversation is what does this mean for the industry going forward. Personally I don’t think we’ll see a significant change. Google just wanted the patents so I don’t see them folding Motorola into the Google fold. They probably won’t rebrand or do anything else drastic. They’ll just keep Motorola running as a separate business. Of course, if they start to lose money on it we could see them trying something drastic just because they can.

Why is there no mention of Motorola's Set-Top Boxes and Cable Modems in any of the Google buying Motorola Mobility? Motorola Mobility includes both of those along with the mobile handset portion of Motorola.

There've been a few mentions; but Google TV has largely been a no-show and the cable modem business is completely separate from any of Google's logical reasons for buying the company. If Google changes plans and ends up integrating moto more thoroughly I suspect the cable box business will end up being sold or spun off.

Why is there no mention of Motorola's Set-Top Boxes and Cable Modems in any of the Google buying Motorola Mobility? Motorola Mobility includes both of those along with the mobile handset portion of Motorola.

These types of devices aren't made to Moto's specifications, they're made to the cable provider's specs. They're not remotely keen on Google TV so I can't see how this acquisition would do anything other than kill that part of Moto's business.

Having been on the other side of the fence (Enterprise Mobility), I have mixed feelings about it. Our side wanted to get rid of Mobile Devices for a while because they were taking all the resources, and we mused about the possibility of Google buying it. I have some trepidation about the merge, as if they're not interested in hardware a lot of good hardware engineers will be out of a job. Mot's never been known for their software, but I've always been impressed by the hardware design.

Why is there no mention of Motorola's Set-Top Boxes and Cable Modems in any of the Google buying Motorola Mobility? Motorola Mobility includes both of those along with the mobile handset portion of Motorola.

These types of devices aren't made to Moto's specifications, they're made to the cable provider's specs. They're not remotely keen on Google TV so I can't see how this acquisition would do anything other than kill that part of Moto's business.

That's how it works now, but Google is entirely different than Moto. They have a ton of cash, even by cable company standards, AND the ability to revolutionize tv advertising, which has become borderline fraudulent (we sell you tv, with ads, for a fee you can skip the ads, we sell ads to companies, who think you're watching ads that you pay extra to avoid). I'm sure cable companies will resist change, they have become very adept at that, however, when Google shows up at your doorstep with a briefcase of cash and a new advertising model, there isn't a cable exec in the world that wouldn't listen.

Eventually the players will be turned, they need a new ad model. They see the writing on the wall, anyway: live tv is dying and horrible set top boxes are killing their business.

If Google had a acquired Motorola in 2010, Samsung, HTC and others might have been less keen on pushing Android, knowing they are using the OS of a direct competitor in the hardware space.

Google had to make a relatively weak showing in the hardware space (Nexus One) to bluff and show they are only in it for the software, not the hardware.

Even now, they have to make relatively weak moves in the hardware space to bluff and suggest that the buyout is all about the patents and not so much the hardware. To make this convincing, they would have needed to try to buy patents in 2009/2010 and fail.

So, the timing is just about right. They first needed to see that Android would be successful, that the other hardware players would make a good push for Android, then try to acquire a bunch of patents and fail, then purchase one of the successful hardware manufacturers for their patents, then get your new competition to praise the move, then slowly become the dominant hardware player.

This was the next logical step of verticalization that's taking place in mobile computing business.

To be a meaningful player, one has to actively drive development of hardware, components, software, media content, and data services, as well as to have a clout with carriers and attention from apps developers. A couple of entities with all these competences are emerging to duke it out: Apple and Google + handset makers.

It's unclear how much room and/or opportunity there is left for other weaker entities: Microsoft + Nokia, RIM, Samsung (with Bada), HP (webOS), or Intel (Meego).

At least Google has come to a realization of what it takes to be a player and a decision to be one. This cannot be said of other contenders; they all seem to want to continue doing what they know (or unable to do otherwise), and somehow success will come if they just tried harder.

There've been a few mentions; but Google TV has largely been a no-show and the cable modem business is completely separate from any of Google's logical reasons for buying the company. If Google changes plans and ends up integrating moto more thoroughly I suspect the cable box business will end up being sold or spun off.

OTOH, a cable box running some version of Android would beat the pants off of any of the shitty options out there now. Cable boxes have terrible interface and software design, almost as bad as phones were before Apple/Google/MS. Still, cable box choice is a very "back room deal" kind of thing, so having the only decent one wouldn't necessarily mean anything.

A lot of hand-wringing, retrospective cloudy crystal ball gazing and generally just a really bad piece of "journalism"... I think it's time Ars introduces a dedicated opinion section, because reporting this ain't.

To be a meaningful player, one has to actively drive development of hardware, components, software, media content, and data services, as well as to have a clout with carriers and attention from apps developers. A couple of entities with all these competences are emerging to duke it out: Apple and Google + handset makers.

It's amazing that Apple realised this and were actually able to execute such a long time ago and yet the rest of the industry (HP, RIM, Microsoft and now Google) is only just catching on.

The phone portion of this is definitely only part of the equation. MotoMobile has agreements with cable companies for their set top boxes. Google now has their foot in the door to the cable market and can start pushing their GoogleTV / DVR combo (remember Google bought SageTV just last year). This is way more than phones. Oh and they will likely "license" out the GoogleTV OS for free and Moto will make money on the hardware. Chances are it will come with a touch screenish remote control so you can actually navigate without having a coronary.

This was the next logical step of verticalization that's taking place in mobile computing business.

To be a meaningful player, one has to actively drive development of hardware, components, software, media content, and data services, as well as to have a clout with carriers and attention from apps developers. A couple of entities with all these competences are emerging to duke it out: Apple and Google + handset makers.

It's unclear how much room and/or opportunity there is left for other weaker entities: Microsoft + Nokia, RIM, Samsung (with Bada), HP (webOS), or Intel (Meego).

Medium term at least I think this is going to give WP7 a boost. While Samsung, HTC, etc are probably still leery about what the MS+Nokia partnership will mean in the long term they can hope to suck thier way into sweetheart deals of their own, and in any case it's less tight integration than Google+Motorola. And at $23bn Nokia's market cap is still probably too big for MS to buy; and if WP7.5 is successful it will probably go up again because Symbian's perceived lack of future has been a large part of what's hammered it down by ~6x over the last few years. If WP7.5 fails to gain an appreciable amount of market share Nokia will probably fall to something MS could buy; but in that case there'd be little reason for them to do so.

A lot of hand-wringing, retrospective cloudy crystal ball gazing and generally just a really bad piece of "journalism"... I think it's time Ars introduces a dedicated opinion section, because reporting this ain't.

thought the author added a few nice bits that conceded that this was guesswork with some humility. much better than the dan lyons piece that is being trashed left and right for good reason.

For better or worse, Android just changed in a big way. And if Google had made this move a year ago, the market would look very different today in that unpredictable way that makes hurricanes out of fluttering butterfly wings.

The same will be true a year or two from now. Google is making a big bet changing the Android ecosystem and I think it's an uncertain one. These large technology mergers seldom work, especially when you have two completely different corporate cultures. A year from now it will probably be more interesting to ask what Google lost and gained by buying Motorola at all.

The sort of reasoning we see in this article is almost never useful, as it seems to assume that this possibility actually made sense to Google in that time frame. By buying a hardware vendor then Google could easily have alienated the other big Android OEM's, before they were so deeply into Android to make it difficult to extricate themselves. I'm sure they're now considering how Google's direct competition leads to increased business risk for them. Had this happened 19 months ago, Meego, a future WP7, or another alternative might have seemed significantly more attractive and that would have been bad for Google.

People use the same sort of reasoning with Apple: If only Apple didn't have such a long iPhone exclusive with sucky old AT&T, they could have blunted Android's advance. Again, that is completely fallacious because it assumes that that path was open to Apple--it was not. If Apple wanted to retain the sort of control over the user experience and platform that they like, they had to give up something--they went exclusive with AT&T to get that control. Otherwise, they would have been in the same boat as every other vendor--forced to relent to unique carrier-branded iPhone variations that users despise, except that Apple was new to the cell phone market and they weren't in as strong a position vis-a-vis their competitors. If Apple had gone carrier agnostic in that timeframe the iPhone would not look like it does today--the experience would be greatly degraded.

I think in hindsight both Google and Apple made the right decisions in the right timeframes, even if it did cost Google a lot more cash and gave Android an opening vis-a-vis iPhone.

This article doesn't address the over $2 Billion tax credit or over $3 Billion in cash Google is acquiring in this deal. The true price will turn out to be around $7 to $8 Billion when all is said and done.

In 2010, Apple wasn't trying to sue Android off the market using bullshit patents. Acquiring a patent defense was Google's primary reason for acquiring Motorola. I don't foresee the two companies integrated for a long time, if ever. The corporate cultures are significantly different; Google's flat, pseduo-independent management structure won't mesh well with Motorola's more traditional corporate structure.

In regards to the set-top boxes. If you haven't seen the writing on the wall as of yet, set-top cable boxes will be a thing of the past in the near future.

Granted I'm probably a little ahead of the majority here, but I don't have a cable connection in my house. I've been using consoles to stream media for the last 3 years. This year I bought a Samsung TV that speaks DLNA. It doesn't communicate perfectly but its a sign. The LAN connection on your TV will supersede the necessity for a set top box in the near future.

I think Googorola could certainly play a part in revolutionizing the television experience, but given the fact that we can put an i5/i7 in a laptop less than an inch thick. I think its more of a certainty that TV makers could very well place CPU's inside your TV that will allow for any number of interactions sans cable/set-top box. They don't need Google to do any of that either (but they could, certainly do so - that would be grand!).

As for the buyout I do believe that the Motorola Mobility CEO Sanjay Jha played Google like a fiddle. It was quite amazing to read the maneuvering of last week and see how it played out for them on Monday. Kudos to that man, brilliant play.

I see this playing out several ways, I don't see many of them helping Android save face in light of recent litigation, given that Motorola is already a defendant in several cases and Microsoft and Apple may already license a fair number of patents from Motorola via various channels or through exhaustion with chip makers. Google still hasn't come to the aid of HTC or Samsung and still has an uphill battle with Oracle.

As others have pointed out. Android is fast becoming a large expense for Google. The Motorola purchase costs them 1/3 of their capital and may quicken the departure of other vendors towards WP7, it doesn't weigh well on any current litigation and they paid a huge premium for a company that is falling down.

Yes, this has only to do with patents. Google tried to get hold of Nortel's patents and Apple and Microsoft paid way to much to keep Google from getting them. So Google did a surprise move and bought even more applicable patents with the Motorola purchase.

As for the fact that Motorola makes phones and set top boxes, that is irrelevant.

The worse thing that could happen is if Google's well known arrogance rears its head and they think they can run the phone and set top business. Google should spin those units off, and let them, as well as Samsung and HTC, and other Android vendors, have a free license to the patents.