Is Googarola Dead Already?

Did Google spend $12 billion dollars on Motorola, just for the juicy patent portfolio? That’s what some very smart people are saying:

I don’t think Google is going to get into the handset business in any serious way. It’s not a kind of business they know how to run, and why piss off all their partners in the Android army? Much more likely is that the hardware end of the company will be flogged to the Chinese or Germans and Google will absorb the software engineers. Likely Google’s partners have already been briefed in on this plan, which is why Google is publishing happy-face quotes about the deal from the CEOs of HTC, LG, and Sony Ericsson.

Of course, that’s not what I said when I heard the news. And it’s not what Google insider Steve Levy is telling SAI.

My guess is that hardware is sometimes seen as a necessary step to get the software out there. The way this whole thing seems to be going is to protect the Android operating system, and when they began to figure out how to dig themselves out of this patent hole and as is often the case with Larry, the solution winds up to be much bigger, and encompasses some other opportunity. The way he likes to deal with a problem is to come up with a scheme that not only addresses the problem but comes up with something big in addition.

I don’t think there’s a love of hardware there but I think that besides the patent thing, they’re now enamored by the idea of doing interesting things that you can only do if you own the hardware company along with a software company.

And Farhad Manjoo explains why Google must keep Moto’s manufacturing, if they ever want to recoup their investment:

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.

It’s a circuitous path to revenue, something akin to an oil company offering carmakers free engines in order to stimulate demand for gas. Still, this strategy made sense as long as Google’s investment in Android remained small. The Motorola purchase changes that rationale; it’s as if Exxon Mobil bought General Motors. Now Google has to find a way to recoup at least $12.5 billion from Android (on top of whatever else it was investing to build the OS). That looks very difficult. Earlier this year, Gene Munster, an analyst at Piper Jaffray, estimated that Google makes just $6 in ad revenue per Android user per year. By 2012, that number could be $10 per Android user per year. Across all users, that would mean about $1 billion in annual revenue. Even if that figure grows over time, it will take a long time for Google to make back the money it spent on Motorola, let alone to turn a profit.

Stripped of its patents, I doubt Google could get much more than a billion or two by selling what’s left of Motorola — the company has been losing money on every handset it sells. That’s a big, deep hole, and only Apple-size mobile profits will fill it. And Google can’t earn those big margins at ten bucks a sale.

Who’s got it right? Only time will tell. But $12 billion is an awful lot of money to spend — two years of Google’s total profits — on a purely defensive patent portfolio purchase.