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News Analysis: What the Google–Motorola Deal Means for TV

Google's announcement that it would buy Motorola Mobility for $12.5 billion is already sending shock waves through the TV and wireless industries, with opinions ranging from suggesting it could revolutionize the TV industry all the way to some rousing memories of AOL-Time Warner.

Neither outcome seems likely, but there is little doubt that the deal -- if it passes regulatory scrutiny at a time when the Federal Trade Commission is already investigating Google -- would certainly realize Google's longstanding ambition of becoming a much bigger player in the TV industry.

The acquisition also highlights the growing importance of web and mobile players in the TV industry, and in some sense might be considered the first big deal of the tablet revolution that is transforming the way viewers access and watch TV programming.

As part of the deal, Google will acquire the set-top box and cable equipment operations of Motorola Mobility, one of two dominant suppliers of set-top boxes and equipment to the U.S. pay-TV industry.

Stephen Froehlich, senior analyst of consumer electronics at IMS Research, estimates in a report that as of the end of last year, "28% of digital pay-TV households in North America are on Motorola cable systems -- i.e. used Motorola's Mediacipher conditional access system."

At minimum, Google could use that market clout to strengthen its ties with major operators looking to deliver more content to more devices, including phones and tablets using the Android operating system.

That might allow Google to build on the popularity of YouTube to expand its over-the-top video services or even deploy its Android platform on set-top boxes, which would help Google get a chunk of the $70 billion TV advertising business.

A closer look at the deal indicates, however, that its impact on the TV industry is likely to be much more muted, at least in the near term, and that any attempt by Google to widely deploy Android-enabled set-top boxes or get a significantly larger foothold in the TV ad business would face very significant challenges.

Those challenges can be seen by taking a close look at five of the key issues TV executives need to watch as the deal unfolds.

1. Why is Google buying Motorola Mobility?

Any assessment of the Google–Motorola deal needs to start with the fact that Google is buying Motorola Mobility primarily for Motorola's wireless patents, not the set-top box and pay TV equipment business.

"Motorola Mobility comes with a treasure trove of patents that can be used in this new era of aggressive patent litigation to defend Google's Android partners [and device makers] who need protection from companies that are going after them on mass," argues Sharon Armbrust, senior analyst with SNL Kagan.

"The set-top box division has little to do with the acquisition itself," adds IMS's Froehlich. "It is icing on the cake, a cash cow that Motorola tried to sell but didn't because it couldn't get the price it wanted for it."

Analysts at Jeffries & Co. have estimated that Google was paying about $9 billion for the patents and about $3.5 billion for Motorola's consumer electronics, set-top box and equipment and device making assets.

Motorola Mobile has some 17,000 patents and another 7,500 patents pending and those rights should help Google fight off a wave of litigation from Apple, Microsoft and others who have been aggressively suing Android device makers.

In the last two years, Oracle has sued Google, contending Android violates some of its patents; Apple has sued several Android manufacturers, including HTC; and Microsoft has sued Motorola, contending its patents are violated by Android.

The rampant litigation "is really a sad commentary on the trial law in this area," notes Froehlich, who calls all the lawsuits "a value destroying development."

During the conference call announcing the deal, David Drummond, Google senior VP and chief legal officer noted that "we've said for some time that we need to build our patent portfolio to make sure that Android and other businesses can be successful" and to "protect the Android ecosystem" which he described as "under threat from some companies" who have been using patent litigation against it.

In addition to the Motorola patents, Google also recently acquired about 1,000 patents from IBM.

As a result this bulked up patent library, a number of Android device manufacturers -- including LG, Samsung, Sony Ericsson and HTC -- have issued statements praising the deal. That's unusual because rivals usually oppose mergers that would create a larger, more heavily capitalized competitor.

"We welcome today's news, which demonstrates Google's deep commitment to defending Android, its partners, and the ecosystem," J.K. Shin, president of Samsung, Mobile Communications Division was quoted as saying on Google's website.

2. What does the deal mean for the future of Android devices?

While the deal will certainly help Google defend Android against legal challenges, its impact on Android's overall market position or the willingness of device manufacturers to adopt Android isn't as clear as it might seem.

Prior to the deal, Android was already a very popular operating system in the mobile phone and tablet world, largely because it has offered an open platform that device makers like Motorola, Samsung and LG could use to compete against Apple's iOS operating system for the iPhone and iPad.

In the conference call announcing the deal, Google CEO Larry Page noted that "more than 150 million Android devices have been activated worldwide through a network of 39 manufacturers, 231 carriers in 123 countries. And there's more than 550,000 Android devices are lit up every day. That's just amazing progress."

In the U.S., comScore data shows that Android had 40.1% market share in the second quarter of this year among smartphones, versus 26.6% for Apple.

While Apple continues to dominate the tablet market, Strategy Analytics data indicates that Android tablets grabbed 30% of the tablet marketplace in the second quarter of 2011.

The spread of Android devices has, however, created some challenges for app developers that have hurt Android's appeal.

Because Android is an open platform, different device makers and wireless carriers have adapted it to their own needs, forcing app developers to develop many different flavors of the Android apps.

Some cable programmers note that they have to test hundreds of different devices if they want to reach consumers using all the different Apple, Android, RIM, Microsoft and other operating systems.

In contrast, Apple keeps tight control over its proprietary iOS operating system, which reduces development costs.

As a result, there are many more apps for Apple's devices than Android devices and developers generally create an app for Apple's iOS operating system before starting the laborious process of creating an Android version.

SNL Kagan's Armbrust notes that Google hopes to replicate Apple's success in refining the iPhone and iPad user interface and functionality at Motorola.

"By controlling everything [hardware and software] Apple has been able to create very appealing products" with intuitive interfaces and a reputation among consumers that "the products will be easy to use," Armbrust says.

If Google could replicate that success at Motorola, the improved Android devices would be important for the spread of the systems in mobile phones and tablets.

These improvements could also help overcome some of the problems with the struggling Google TV initiative. The initial user interface for its Google TV products drew poor reviews and both Sony and Logitech have had to slash prices on their Google TV related projects because of poor sales.

Tighter control over how the Android operating system is deployed at Motorola would also be good news for app developers, because it might encourage other device manufacturers to produce more compatible devices.

But analysts caution that it will be a while before the fragmented Android landscape consolidates.

They also note that Google risks a backlash against Android if it shows too much favoritism to Motorola. Handset makers worried about playing second fiddle to Motorola in the Android landscape might look to develop closer ties with rival operating systems such as RIM and Microsoft.

To allay those fears, Google executives have stressed that they remain committed to Android as an open system and that Motorola will continue to operate as a separate entity under existing management.

3. What are the prospects for Android moving onto Motorola's set-top boxes?

At first glance, adding Android or some of Google's search and display technologies to Motorola set-top boxes would be appealing on a number of levels to operators.

All the major operators are looking to deliver more content to more devices through their TV Everywhere initiatives and Android-enabled boxes would certainly make it easier to deliver multichannel TV to the growing number of Android smart phones and tablets.

"There is great convergence between the mobile world and content that comes to the home through set-top boxes," creating opportunities to work with operators to "accelerate that trend," noted Sanjay Jha, Motorola Mobility chairman and CEO in the conference call announcing the deal.

Moreover, Android's open platform would seem to dovetail nicely with the operators' move towards IP architecture and their efforts to use more open Internet-based standards that allow for faster deployments of new services and the delivery of content to IP connected tablets, PCs, and smartphones.

In theory, it wouldn't be terribly difficult to switch from the Linux based software currently used by Motorola boxes to Android, Froehlich notes.

Motorola is also the largest supplier of hybrid set-top boxes for the delivery of video over both broadband connections and the traditional QAM cable plant, which would seem to fit in well with the push for TV Everywhere by operators and Google's interest in spreading the Android operating system onto new platforms.

But bandwidth remains a problem for multiplatform delivery and MPEG-4 boxes that offer better compression aren't widely deployed.

"It will be four years before you have enough MPEG-4 boxes to really take advantage" of some of the opportunities offered by hybrid boxes, Froehlich cautions.

Even when that happens, it isn't clear why operators would chose to deploy Android-based set-top boxes over other open systems, such as the OpenCable Applications Platform (OCAP), which Comcast has been championing and deploying, Froehlich adds.

"The set-top box people gave Android a good hard look 18 months ago and shrugged" because it didn't offer much over some of the other alternatives, notes Froehlich. "Other than search, what value does it offer?"

As a result, Paul Erickson, senior analyst, consumer electronics at IMS Research doubts that Android-based set-top boxes will get much traction in the next "couple of years."

"Operators are going to be justifiably cautious about adopting it," he adds.

4. What does the deal mean for Google's involvement in the TV advertising business?

None of this bodes well for Google's longstanding plan to expand their success in online advertising to other media.

"Google has clearly been looking for ways to expand their advertising business across all media," Erickson notes.

But Google has yes to make little headway in the TV industry and Erickson cautions that the Motorola Mobility deal is unlikely to immediately jump start those efforts.

One obvious problem is not technology but entrenched business models. "Google would like to control ad inventory and so to the operators," he notes. "I don't think you are going to see them give up too much control to Google."

Such problems have already plagued Google TV with content providers.

Some broadcast networks that have made their content available via apps to Internet connected TVs from Samsung have blocked online access to their shows on Google TV sets. Like other sets, the shows are still available via a multichannel subscription or over-the air on Google TVs.

5. So why is this deal important?

Given all scale of these problems, will Google simply sell off Motorola's handset and cable equipment operations as some analysts have advised?

"While the deal is primarily driven by the patents, I don't think they will divest the set-top box operation," Erickson says.

And, if some of the big shiny opportunities that the business press has held up as a rational for the deal will be difficult to achieve, that doesn't mean the Google–Motorola Mobility acquisition has little relevance to the TV industry.

Erickson stresses that the deal could produce a number of "significant effects" but that these "will not be immediately visible to the naked eye."

While Google is unlikely to get much traction for Android set-top boxes, it could easily use Motorola to develop closer ties to operators and work with them to develop apps or systems that would more closely integrate Android mobile devices into their TV Everywhere efforts.

Up to now, Comcast and other operators have launched Apple-based apps first, but "Apple has to be a little concerned that Google's Android will be able to leapfrog TV Everywhere apps and [convince] operators to launch Android apps first," Erickson says.

Tighter integration with Motorola's set-top boxes could also allow Android device makers to offer features that would significantly different their offerings from Apple, he adds.

Working with operators and Motorola, Google might also be able to improve the interface for its Google TVs, which still needs much work, and begin to provide additional over-the-top content to operators.

Such limited alliances could also strengthen operators and broadcasters by giving them access to Google expertise in the online and IP world and help them more quickly deploy new services and technologies, notes SNL Kagan's Armbrust.

Google's acquisition of Motorola Mobility also shifts the balance of power in its ongoing fights with Apple and Microsoft, which could push Microsoft to acquire a handset makers like Nokia or convince Apple to launch pay TV type services.

Stock prices for both Nokia and RIM rose this week after the Google–Motorola deal was announced.

And, as mobile devices and tablets become more important for the delivery of TV content, the Google–Motorola Mobility deal highlights the fact that major players in the mobile, online and PC sectors like Apple, Google, Amazon, and Facebook, are likely to play an even bigger role in the TV industry in upcoming years.

For example, Google, which has long been interested in wireless video distribution, might consider bidding for broadcast spectrum being put up for auction by the Federal Communications Commission, notes SNL Kagan's Armbrust.

"Now that Google has indicated it is committed to maintaining and improving its leadership in wireless, it will be interesting to see if they decided to play in the spectrum auctions," she notes.

The need to bulk up to counter heavily capitalized players like Google and Apple might also encourage more mergers in the content and distribution sectors, much like the NBC Universal/Comcast deal, notes Armbrust.

"Google could push cable and broadcast into each other's arms because of the breadth and wealth and the position that Google has as a very successful IP company," she says.