If Google were to make Android proprietary, with devices built exclusively by Motorola, it could earn $10.5 billion in profits by 2015, yet that still may not be worth it, says Piper Jaffray. Meanwhile, Google's Motorola acquisition should bolster Google TV, other analysts say.

Google could build as much as $10.5 billion in operating profit by following in Apple's footsteps by closing its Android operating system for exclusive use by Motorola Mobility. That's the back-of-the-envelope math from Piper Jaffray analyst Gene Munster, who calculated the success Google could have if it acquires Motorola and transitions Android from an open-source model to a proprietary model.

Google Aug. 15 agreed to purchase Motorola Mobility for $12.5 billion, a deal that many — but not all — industry watchers agree is primarily a bid to gain the company's 17,000-plus patents (with over 7,500 more pending). Google needs the intellectual property to defend itself against lawsuits from Apple and Microsoft and against potential future suits.

A Bloomberg report had identified a group of 18 of those patents that could be particularly helpful in countering Apple's many Android lawsuits. The circa-1994 patents are said to cover location services, antenna designs, email transmission, touchscreen motions, software-application management, and 3G wireless technologies.

Google has stated that Android will continue as an open ecosystem, and that other OEM vendors will be treated equitably. It is unclear, however, whether Motorola will be given preferential status in launching devices provided with the latest Android builds. Previously, this favored-vendor practice has been passed around from HTC to Samsung to Motorola (with the Xoom tablet).

An alternative theory is that Google could remove Android from open source and make it the primary, proprietary platform for Motorola. Munster holds the opinion that Google wants Motorola purely for the patents, and will likely sell Motorola's hardware and set-top box assets. However, he also outlined how Google could enjoy success with Motorola and Android if it follows Apple's model.

In other words Google and Motorola would together construct and control all of the latest Android devices — just as Apple controls the iOS software on its own iPhone and iPad devices. (In a Register analysis, Matt Asay calls this scenario Googlola's closed source Android temptation.)

 $12 billion in profits by 2015…

Munster sees the following scenario unfolding if Google makes Android exclusive to Motorola by 2013, cutting the platform off from Samsung, HTC, Huawei, and the legion of other hardware OEMs all over the world. First, looking solely at smartphones, where Motorola competes with numerous Android models such as the Photon 4G (pictured), Android would quickly lose market share, he says.

Due to the loss of distribution from other Android partners, Android would drop to 15 percent market share in 2013 from 43 percent smartphone share in 2012, projects Munster. As Google's Motorola builds more products to make up for phone distribution lost by going proprietary, Munster believes Android could get back to 20 percent market share by 2015. This would total about 172.5 million handsets, at an average selling price of $350.

With all of these stars aligning, Munster believes a proprietary, exclusive Android could result in $60.3 billion in smartphone revenue and $12 billion in operating profit in 2015. This compares to Munster's estimates for Apple, which are $54.4 billion in iPhone revenue and $26.8 billion in operating profit.

But Google would have a ways to go to get there. "We believe it could take Google close to five years to catch Apple, pursuing the same integrated hardware/software strategy with a proprietary OS," writes Munster. "If you assume a 22 percent tax rate (average over past two years) and 326 million shares (current count as of Q2), the rebuilt Motorola business would contribute $28.89."

…but loss of market share and ad revenue would sink the deal

Following the proprietary route, however, Google would lose ad revenue generated from Android phones, says Munster. By 2015, Google could lose $4.5 billion in Android ad revenue at $10 per user, and $1.6 billion in Android ad operating profit, projects Munster. This correction would knock revenue down to $56 billion and reduce operating profit to $10.5 billion, leaving it at $25.16 per share in earnings.

Google would likely not be comfortable with this scenario, the analyst concludes. "We do not believe Google is willing to weaken its position as the likely ultimate leader in mobile search and advertising to try to aggressively monetize Android through an Apple-like model, even though it could be extremely lucrative," writes Munster.

Moreover, as noted, disrupting the Android ecosystem would impact market share, and Motorola is unlikely to win back the 43 percent smartphone share Android is estimated to enjoy now. Microsoft may well move in to reap the rewards for its Windows Phone 7 (WP7) platform. Windows Phone could pick up the bulk of the 20 percent-plus share Android would lose, assuming Apple's iPhone doesn't gobble the lion's share, adds Munster.

While Google could fork a proprietary Android platform, it does not own the open source Android code that exists now. By comparison, Apple has owned iOS from the start.

Munster did not speculate on whether another vendor might attempt to fork its own Android version. Google dominates Android development resources, not to mention the highly popular Android apps and services like Google Maps. Therefore, it would be a major — and risky — investment indeed for another vendor to go off on its own with a new version of Android. 

Already, smaller Android vendors, including INQ Mobile, are actively considering Windows Phone, as a result of the Motorola acquisition announcement, reports GigaOM. INQ sells Android devices including two Facebook-oriented phones in the Cloud Touch (pictured) and Cloud Q.

The story quotes INQ CEO Frank Meehan as saying, "We see a number of major vendors very seriously considering Windows Phone as a core platform and therefore we are following their lead and examining it as well to complement our work in Android to date."

Meanwhile, despite Google reportedly agreeing to pay Motorola an unprecedented $2.5 billion in breakup fees if Google pulls out of the acquisition or if regulators deny it, Microsoft could soon make Motorola too hot to handle for Google.

A Wall Street Journalreport says the International Trade Commission (ITC) has scheduled a Sept. 22 hearing to review Microsoft's Android-related patent-infringement charges against Motorola. If the ITC rules in Microsoft's favor, it could bar imports of Motorola smartphones running Android, says the story.

Google TV could find new life with Motorola integration

Once Google acquires Motorola later this year or in early 2012, it could sell off Motorola's ancillary hardware businesses, including its set-top box (STB) division. However, if it does hold on to the STBs, an ancillary benefits would be an opportunity to fortify the search engine's web-based television service, Google TV.

While the Google+ social networking service is thriving, thanks to Google pouring its heart and soul into the project, Google TV is still struggling to gain significant traction. The service uses Android software and the Chrome Web browser to let users surf TV channels and websites and access web applications in the same context. 

Google TV is integrated in TVs and Blu-ray players from Sony, as well as in the Logitech Revue companion boxes (pictured at left). However, those devices are failing to sell at a healthy clip, and Logitech recently discounted them to $99, or a third of what they cost at launch last fall.

Google TV could use a spark, and Motorola may be able to provide it. In addition to building Android phones, Motorola has a large STB business, selling cable boxes to TV providers such as AT&T U-Verse, which uses them to deliver its services to users. Just as Motorola puts Android in its phones, the company could insert the Google TV package in its STBs, or at least build new STBs with Android and sell them.

"Motorola is one of the two big set-top box players in the U.S. market, the other being Cisco's Scientific Atlanta division," Current Analysis analyst Avi Greengart told eWEEK. "Getting into set-top boxes was not the purpose of the Google-Motorola Mobility acquisition, but it could have some of the most interesting results, as it could significantly advance Google's position in the digital living room."

ABI Research analyst Kevin Burden agreed, noting in a research brief that while Google TV has been viewed by many industry watchers as experimental, Motorola has long had a "TV everywhere" solution.

"Google, in contrast, had its foray into this space with Google TV seen widely as an experiment," writes Burden. "A tie-up between Google and Motorola could give Google the expertise it needs to be taken seriously and gain an eventual foothold in content delivery to the home."

Google's "arrogance" comes home to roost

Credibility, intellectual property, and engineering talent in digital TV will go a long way, but that isn't the only thing Google will gain for its fledgling TV service. Motorola has tight relationships with cable companies, managed service operators (MSOs) and broadcasters, Gartner analyst Michael Gartenberg told eWEEK.

"Google showed a lot of arrogance with Google TV with a sense of 'We're going to co-opt that business and take control,'" Gartenberg said. "Now they have another story to tell about how they can go after this market together. How they can deal with MSOs the same way they've dealt with carriers in the past. It's not necessarily about co-opting their business, but about partnering with their business."

Still, we might do well to curb our enthusiasm, said Greengart. "Google TV today answers a question that few consumers seem to be asking," he said. "The bigger challenge may actually be getting this to consumers. Even if Google can come up with a compelling consumer value proposition, it may not be able to get it into the living room."

Google's problem with the IPTV business is that it was trying to sell directly to customers, bypassing the established TV ecosystem, according to Greengart. "The set-top box customer is not the consumer but the MSO," said Greengart. "Cable companies have not always been looking to add OTT (over the top) options to the hardware that they buy and rent to their subscribers. Google will also have to provide a separate value proposition to MSOs that compels them to order Google TV enhanced set-top boxes rather than regular ones."

Clint Boulton is a writer for eWEEK. Eric Brown also contributed to this report.

---

This article was originally published on LinuxDevices.com and has been donated to the open source community by QuinStreet Inc. Please visit LinuxToday.com for up-to-date news and articles about Linux and open source.