It's a circuitous path to revenue, something akin to an oil company offering carmakers free engines in order to stimulate demand for gas. Still, this strategy made sense as long as Google's investment in Android remained small. The Motorola purchase changes that rationale; it's as if Exxon Mobil bought General Motors. Now Google has to find a way to recoup at least $12.5 billion from Android (on top of whatever else it was investing to build the OS). That looks very difficult. Earlier this year, Gene Munster, an analyst at Piper Jaffray, estimated that Google makes just $6 in ad revenue per Android user per year. By 2012, that number could be $10 per Android user per year. Across all users, that would mean about $1 billion in annual revenue. Even if that figure grows over time, it will take a long time for Google to make back the money it spent on Motorola, let alone to turn a profit.
As it sits around waiting for Android-fueled ad revenue to pour in, Google would be stupid not to notice a much more direct way to extract money from the mobile device business—by selling the devices themselves at high margins. This, of course, is how Apple makes money; according to some estimates, it makes as much as $370 for every iPhone it sells. Apple is a singularly masterful company, and there are many reasons it can book such high revenues from its devices. But there are two main factors behind Apple's mobile success, and the Motorola purchase gives Google a chance to match each one.
The first is tight integration between hardware and software: The iPhone's operating system is designed for a very specific set of hardware components, and as a result, every iPhone brings an identical user experience. This means that customers don't have to relearn how to use an Apple-branded phone each time they get a new one, and apps and hardware add-ons are compatible across all devices. Apple's other secret is exclusivity: There's only one iPhone every year, which guarantees waves of interest from the press and cultists. That translates into lots of free marketing.
Google can't replicate this sort of success with its current Android strategy. All of those cheap Android devices are dissimilar and incompatible, creating a confused image for the OS. But the terrific Nexus line of Android phones that Google has built suggests that it knows how to make great phones. With the Motorola acquisition, it will have the opportunity to push out such high-end phones to the mainstream market. I suspect it will also begin to use Motorola as a way to block other Android manufacturers from releasing subpar phones—if they do, it could threaten to give its own phone division early access to Android code, for instance.
It's true that cracking down on Android device makers could push some of them to flee (they could go with Windows instead). Also, pushing up the prices of Android phones will reduce Android's market share growth. But it's hard to imagine that Google will be able to resist the allure of making real money—$50, $100, maybe more—from the sale of each phone. After spending billions on Motorola's patents, Google might not be able to afford to turn down that kind of cash.