The business world was surprised this week when Google announced it was acquiring Motorola Mobility for $12.5B – a 63% premium to its trading price (Crain’s Chicago Business).  Surprised for 3 reasons:

1. because few software companies move into hardware
2. effectively Google will now compete with its customers like Samsung and HTC that offer Android-based phones and tablets,  and
3. because Motorola Mobility had pretty much been written off as a viable long-term competitor in the mobile marketplace.  With less than 9% share, Motorola is the last place finisher – behind even crashing RIM.

Truth is, Google had a hard choice.  Android doesn’t make much money.  Android was launched, and priced for free, as a way for Google to try holding onto search revenues as people migrated from PCs to cloud devices.  Android was envisioned as a way to defend the search business, rather than as a profitable growth opportunity.  Unfortunately, Google didn’t really think through the ramifications of the product, or its business model, before taking it to market.  Sort of like Sun Microsystems giving away Java as a way to defend its Unix server business. Oops.

In early August, Google was slammed when the German courts held that the Samsung Galaxy Tab 10.1 could not be sold – putting a stop to all sales in Europe (Phandroid.com “Samsung Galaxy Tab 10.1 Sales Now Blocked in Europe Thanks to Apple.”) Clearly, Android’s future in Europe was now in serious jeapardy – and the same could be true in the USA.

This wasn’t really a surprise.  The legal battles had been on for some time, and Tab had already been blocked in Australia.  Apple has a well established patent thicket, and after losing its initial Macintosh Graphical User Interface lead to Windows 25 years ago Apple plans on better defending its busiensses these days.  It was also well known that Microsoft was on the prowl to buy a set of patents, or licenses, to protect its new Windows Phone O/S planned for launch soon. 

Google had to either acquire some patents, or licenses, or serously consider dropping Android (as it did Wave, Google PowerMeter and a number of other products.)  It was clear Google had severe intellectual property problems, and would incur big legal expenses trying to keep Android in the market.  And it still might well fail if it did not come up with a patent portfolio – and before Microsoft!

So, Google leadership clearly decided “in for penny, in for a pound” and bought Motorola. The acquisition now gives Google some 16-17,000 patents.  With that kind of I.P. war chest, it is able to defend Android in the internicine wars of intellectual property courts – where license trading dominates resolutions between behemoth competitors.

Only, what is Google going to do with Motorola (and Android) now?  This acquisition doesn’t really fix the business model problem.  Android still isn’t making any money for Google.  And Motorola’s flat Android product sales don’t make any money either. 

Source: Business Insider.com

In fact, the Android manufacturers as a group don’t make much money – especially compared to industry leader Apple:

Source: Business Insider.com

There was a lot of speculation that Google would sell the manufacturing business and keep the patents.  Only – who would want it?  Nobody needs to buy the industry laggard.  Regardless of what the McKinsey-styled strategists might like to offer as options, Google really has no choice but to try running Motorola, and figuring out how to make both Android and Motorola profitable.

And that’s where the big problem happens for Google.  Already locked into battles to maintain search revenue against Bing and others, Google recently launched Google+ in an all-out war to take on the market-leading Facebook.  In cloud computing it has to support Chrome, where it is up against Microsoft, and again Apple.  Oh my, but Google is now in some enormously large competitive situations, on multiple fronts, against very well-heeled competitors.

As mentioned before, what will Samsung and HTC do now that Google is making its own phones?  Will this push them toward Microsoft’s Windows offering?  That would dampen enthusiasm for Android, while breathing life into a currently non-competitor in Microsoft.  Late to the game, Microsoft has ample resources to pour into the market, making competition very, very expensive for Google.  It shows all the signs of two gladiators willing to fight to the loss-amassing death.

And Google will be going into this battle with less-than-stellar resources.  Motorola is the market also ran.  Its products are not as good as competitors, and its years of turmoil – and near failure – leading to the split-up of Motorola has left its talent ranks decimated – even though it still has 19,000 employees Google must figure out how to manage (“Motorola Bought a Dysfunctional Company and the Worst Android Handset Maker, says Insider“).  

Acquisitions that “work” are  ones where the acquirer buys a leader (technology, products, market) usually in a high growth area – then gives that acquisition the permission and resources to keep adapting and growing – what I call White Space.  That’s what went right in Google’s acquisitions of YouTube and DoubleClick, for example.  With Motorola, the business is so bad that simply giving it permssion and resources will lead to greater losses.  It’s hard to disaagree with 24/7 Wall Street.com when divulging “S&P Gives Big Downgrade on Google-Moto Deal.”

Some would like to think of Google as creating some transformative future for mobility and copmuting.  Sort of like Apple. 

Yea, right.

Google is now stuck defending & extending its old businesses – search, Chrome O/S for laptops, Google+ for mail and social media, and Android for mobility products.  And, as is true with all D&E management, its costs are escalating dramatically.  In every market except search Google has entered into gladiator battles late against very well resourced competitors with products that are, at best, very similar – lacking game-changing characteristics. Despite Mr. Page’s potentially grand vision, he has mis-positioned Google in almost all markets, taken on market-leading and well funded competition, and set Google up for a diasaster as it burns through resources flailing in efforts to find success.

If you weren’t convinced of selling Google before, strongly consider it now.  The upcoming battles will be very, very expensive.  This acquisition is just so much chum in the water – confusing but not beneficial.

And if you still don’t own Apple – why not?  Nothing in this move threatens the technology, product and market leader which continues bringing game-changers to market every few months.