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The big news of the week is the acquisition of Motorola by Google. It’s a rich topic to delve into because of the implications not just for smartphone manufacturing and operating systems, but for the TV industry and digital advertising as well. There are dozens of angles from which to view the planned acquisition and even more questions and uncertainties to ponder. Will Google keep the manufacturing branch or are they only interested in the IP? Will Google leverage Motorola’s position as a prime manufacturer of cable set-top boxes to re-invigorate their Google TV business? I particularly recommend Ben Par’s analysis of some of the key issues facing the merger, though I don’t agree with all his assertions. Nevertheless, what I’m left wondering about, and I’m surprised people don’t seem to be talking about, is whether this acquisition represents a quintessential shift in Google’s strategy in the mobile marketplace?

To date, Google’s only true revenue success has been selling paid search and digital advertising. This focus on ad revenues continued to be centric to Google’s strategy when they looked toward the mobile industry. The Android ecosystem was designed to be completely open and accessible, even writing the code as open-source. The purpose of an open system was to capture as much of the mobile OS market share as possible in a very short amount of time. An open ecosystem encourages not just manufacturers but also App developers to work within the ecosystem. And the more people develop within the ecosystem, the more valuable it is to the consumer. Similarly, the more consumers in the ecosystem, the more valuable it is to developers. It’s a classic example of network effects. This is why Google offers use of the Android OS free-of-charge to OEMs (original equipment manufacturers) like Samsung and HTC. Basically, Google’s strategy involved making a land grab for market share in the Mobile OS space and then using this share to capture the mobile search market. If Google controls the mobile search market, which is growing at an astronomical rate, they will own a lot of the revenue potential from paid search on mobile devices.

Now, however, Google risks alienating their OEM parters. The purchase of Motorola (who was one of Google’s most important OEM partners, with their enviable Droid phone) represents a move to forward integrate into the manufacturing space, and thus directly compete with their other OEMs. These other OEMs have offered luke-warm support in favor of Google’s move, hoping the additional IP from Motorola will give Google leverage in the ongoing IP wars with Apple. Particularly, HTC has been entrenched in vicious IP suits with Apple, who name Google as a co-defendent, over functionality in HTC’s adroid smartphones. Such IP disputes are dragging down the profitability of many competitors in the smart phone market and this merger may give Google some leverage to help broker a peace treaty.

But don’t assume that Samsung and HTC aren’t worried about Google’s move into their market space. This move into manufacturing–assuming Google doesn’t spin off the manufacturing branch–could represent a very real shift in Google’s strategy for the Mobile marketplace. For years, Google have cited their dependence on paid search for their revenue health as one of their biggest risks. [Nevermind that investors tend to prefer companies that aren’t diversified.] The management has long believed they needed to build other reliable revenue streams beyond advertising. To this end, perhaps Google believes Motorola is the answer to their prayers. Perhaps they will use this acquisition as a turning point in their mobile strategy, opting to eventually own the Android ecosystem as a more closed environment, similar to Apple. They already started making Android more closed last year by putting more restrictive rules on how OEMs could use and alter Android’s open-source code. What if Google will now seek to control the full value chain for their smart phones?

Well, who knows, but you can bet Android OEMs are afraid of that very thing. I almost guarantee that Samsung et al. will be working on new defensive strategies and contingency plans. In fact, this merger may be just the opportunity Microsoft needs to lure away Android OEMs. I know if I were at Microsoft I’d be dancing a jig right about now. And, given the market’s luke-warm response to Google’s purchase of Motorola, I’d forget all about acquiring Nokia and focus on partnering with all Google’s scared Android OEMs.

As for Google, if this acquisition does represent a fundamental alteration in their mobile strategy, from focusing on winning market share of paid search, to owning their full value chain in an attempt to out-Apple Apple… well best of luck! They’re really going to need it.

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