There's More to Motorola Than Just Patents

"Google forged a $12.5 billion deal to buy Motorola's cell phone business, a move that could reshape the Internet giant's fortunes in the mobile world while also giving it an arsenal of patents for legal warfare with Apple and others..."

That's how The Wall Street Journal introduced its first look at the merger between Google (Nasdaq: GOOG  ) and Motorola Mobility (NYSE: MMI  ) Tuesday. To an extent, I get the Journal's focus on patents and cellphones -- but the story's much bigger than that.

It's clear that MoMo's trove of 17,000 patents (and 7,000 more pending) was a big attraction to Google. When Google snagged this treasure chest, shares of rival patent producer Interdigital (Nasdaq: IDCC  ) immediately sold off Monday, as it became clear Google would soon have no need to purchase Interdigital's IP warehouse.

It's just as clear why investors, and the Journal, are focused on the Apple (Nasdaq: AAPL  ) angle. Apple's running neck-and-neck with ExxonMobil for "biggest stock in the world" honors, after all. Its iPhones, -Pads, and -Pods are some of the hottest-selling consumer gadgets on the market, and investors are absolutely obsessed with the company. I swear, if NASA announced Monday that it has discovered life on Mars, then by Tuesday, Bloomberg would be reporting on why Martians prefer the iPhone over Android, and Reuters would be asking about cell phone coverage on the Red Planet. It's an epic struggle, and worthy of front-page discussion in the Journal.

But it's not the whole story.

Don't think outside the box ...
Perhaps the least appreciated aspect of Google's buying Motorola is the humble "set-top box," and the nearly commoditized digital video recorders (DVRs) that are beginning to replace it. You see, when Motorola Mobility split off from Motorola Solutions last year, it didn't just encompass the company's money-losing cell phone business. MoMo also inherited the money-making business of building set-top boxes (STBs) and DVRs for the "cable industry."

This could be dangerous for Google. Even as it becomes a more direct competitor to Apple, it's also now a rival to Cisco (Nasdaq: CSCO  ) , which owns DVR-maker Scientific-Atlanta. On the other hand, though, Google has in one fell swoop made itself indispensable to both cable giants like Comcast and Time Warner Cable, and non-cable television service providers such as Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) .

As you may recall, Google attempted to break into the TV market last year with the introduction of "Google TV' software, and Sony and Logitech hardware to run it. Cable providers weren't super enthused at the prospect of further complicating their already diverse array of set-top hardware, however. Consumers were even less thrilled with the idea of paying more money to install another box on top of, and run more wires behind, their already cluttered television sets. In short, the idea flopped.

... think inside instead
Now, with the acquisition of MoMo, Google gets direct access to the biggest customers in the cable TV biz. Customers that already buy "its" products. Customers who may be much more amenable to simply upgrading the software of their MoMo cable boxes than they were to the idea of laying out more money for extra boxes and wires. (Call it "cash for clutter.")

Indeed, if Google hews to the strategy it's used in cellphones, the company could quickly win converts within the cable industry. Historically, you see, Google has made most of its money by giving away technology and software for "free" -- licensing its Android operating system, for example, without charging royalties -- then made its profits on increased advertising revenues derived from use of the operating system. I'd expect Google to take a similar tack with the cable industry, offering either free software upgrades to existing MoMo hardware, or perhaps deeply discounted new hardware with Google TV software pre-loaded -- then making its money on how that software encourages users to patronize Google services.

Foolish takeaway
It's hard to argue with the power of "free." Whether Google uses Motorola Mobility as a conduit for free software, or directs its new subsidiary to sell cable TV hardware at de minimus profit margins in order to profit later on, either way this is going to be an attractive proposition for the cable industry. It's also going to put Apple TV -- and other "cash for clutter" ideas from other manufacturers -- at a distinct disadvantage.

I think Google's going to come out of this a winner.

Keep track of the latest developments with all the major players from this story:

The Motley Fool owns shares of Logitech International, Apple, Exxon, and Google. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of InterDigital, Google, AT&T, Logitech International, Cisco Systems, and Apple, and creating a bull call spread position in Apple and a write covered calls position in Logitech International.

Fool contributor Rich Smith owns shares of Google. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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