Microsoft CEO Steve Ballmer has a knack for making completely boneheaded predictions about his competitors' products, so when he took to blasting Google's Android strategy last year, many observers—myself included—dismissed him. It was obvious back then that Android was eating Microsoft's lunch and that it was beginning to nibble at Apple's heels, too. (As of March of this year, Android had actually inched ahead of Apple in mobile OS market share.) Microsoft and Google play similar roles in the phone business—they make the software that runs on phones, but they don't manufacture the phones themselves. In order to get their software out to the public, both companies must partner with handset manufacturers. But while Microsoft wanted phone makers to pay for the Windows Phone OS, Google was giving Android away. How could Ballmer ever compete with free? That's simple, he explained in several interviews: "There's nothing free about Android."
Ballmer argued that Android infringed on several companies' patents, and as a result, any firm that made Android phones would be forced to pay licensing fees to Microsoft and other patent holders. Patent-infringement cases aren't unusual in the tech business; pretty much any complex new technology is sure to run afoul of lots and lots of patents. Tech giants often work these problems out by "cross-licensing"—firms trade rights to their patents in exchange for other people's patents. But Google is a tech newbie, and it doesn't have many patents to trade. In June, it tried to purchase a cache of telecom-related patents from Nortel, but it lost that effort to a coalition of rivals (including Apple, Microsoft, and Research in Motion). Google's scrambling to get a load of patents with which to defend Android led to Monday's surprise announcement that it's spending $12.5 billion to purchase Motorola's former phone division. Motorola Mobility makes many popular Android smartphones, but it doesn't make much money doing so. (It has reported a net loss in recent quarters.) Consequently, its hardware business is an afterthought in this deal. What Google really wanted was Motorola's 17,000 patents.
In other words—and I never thought I'd say this—Steve Ballmer was right. Android isn't free. In fact, it's not even cheap. As Daring Fireball's John Gruber points out, the $12.5 billion that Google is spending for Motorola amounts to almost two years' worth of the search company's profits. No company—not even Google—can throw around that kind of cash without envisioning a direct return on its investment.
That's why I'm betting that this deal will represent a turning point in how Google operates Android. Today, the platform is "open" but chaotic—because phone-makers get the software for free and can do whatever they want with it, Android is available on some good phones as well as lots and lots of cheap, bad ones. In the aftermath of this deal, Google will seek to exert greater influence over hardware companies. Eventually, the deal will help reduce the number of new Android devices that are released every year, and the few that are released will be of generally higher quality—and sell for higher prices—than what we see in the Android device market today.
This won't happen overnight. Indeed, in a conference call announcing the deal, Google executives argued that the huge purchase won't change anything about Android. The Motorola division will run as a separate entity within Google. This arrangement is meant to reduce Motorola's ability to get preferential access to Android over other handset makers that use the OS. This is a signal that at Google, "openness" is still the ideal.
But that plan is untenable. To see why, it helps to understand how Google runs Android today. When you buy an Android phone, none of your money goes to the search company—remember, the phone manufacturer got the OS for free. Instead of taking a cut of the sale of phones, Google says, its main goal with Android is to keep a foothold for its websites in the emerging smartphone market. The theory is that every Android user will spend a lot of time using Google services and thus seeing Google ads.
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