Google and the Innovator's Dilemma

Google (Nasdaq: GOOG  ) has been making some rather evil moves of late. Just because the search giant has been transparent about why it's creating a new "C" share class -- to give those in power even more power -- that doesn't make it any less evil.

Can we add another potential transgression to the list? Has it been lying about its intentions with Motorola Mobility (NYSE: MMI  ) ?

Mixed feelings
In the immediate wake of the $12.5 billion proposed acquisition Motorola of that was announced last August, there was a very major question lingering on the minds of every other hardware OEM on Google's Android partner list: Were those not getting acquired by Big G destined to play second fiddle?

Hardware partners saved face by issuing statements at the time in staunch support of Google's move, as it would help in "defending Android, its partners, and the ecosystem." Tell us how you really feel, guys.

With Google wanting to acquire one of their competitors, Google stands to become a competitor. Google assured everyone that it wouldn't play favorites, contrary to these leaked slides.

Have no fear
More recently, Google even promised that it would build a "firewall" between itself and its soon-to-be subsidiary to preserve Android's neutrality and hopefully prevent OEMs from making eyes with Microsoft (Nasdaq: MSFT  ) Windows Phone, as the software giant has been aggressively courting OEMs and developers alike.

Android chief Andy Rubin even said it would make little sense to collaborate extensively with Motorola, considering it has a single-digit market share, and since working together would undoubtedly be taken in a hostile light from other partners.

A fork in the road
As I discussed in my article "What's next for Googorola?," once the search giant has the patents it wants, it will find itself with Moto's bleeding handset business that may keep generating nine-digit operating losses if literally left to its own devices. There have also been rumors that Google is exploring a possible sale of Moto's hardware businesses while it hangs on to the IP.

According to a recent Business Insider report, Google actually wants to employ Apple's (Nasdaq: AAPL  ) strategy of hardware and software integration. Two sources have supposedly confirmed that the search giant is at least interested in following in Apple's footsteps.

It would be a different approach from the Nexus-branded Android flagship phones, which have been made with third-party OEMs like HTC and Samsung that have collaborated with Google to build devices that are considered the cream of the Android crop. If these rumors turn out true, there goes that whole "firewall" promise along with the blessings of OEMs, which would surely and justifiably feel threatened.

An uprising in the making?
Originally, it made perfect sense for Google to also tap Moto's set-top box (STB) division for a reinvigorated and integrated Google TV push into the living room. However, the report also mentions that cable operators were able to band together and pressure Google into a new plan to sell the STB business or risk going to war.

Presumably, if this worked on the STB side, then Android OEMs could similarly threaten mutiny and sway it to sell Moto's handset segment, which would ironically probably be sold to one of them anyway. The earlier rumors had pegged Chinese OEM Huawei as a potential buyer, after all.

China also happens to be the last remaining regulator that needs to sign off on the deal before the Googorola mating is consummated (till spinoff do they part?).

Decisions, decisions
Ultimately, Google has three main potential courses of action after the deal is done. Just like your mother always taught you: When confronted with a tough choice, make a table of pros and cons. It goes without saying that Google will keep the patents, so I'm only considering what Big G might do with the device businesses.

Strategy

Pros

Cons

Keep device businesses and segregate Less hostility from third-party OEMs, which have less motivation to explore Windows Phone. Substantial operating losses ($142 million last year).
Keep device businesses and integrate Ability to build higher-quality integrated devices to better compete with iPhone. More hostility from third-party OEMs, which may consider embracing Windows Phone. May result in Android market-share losses.
Sell device businesses Avoid operating losses from hardware divisions while recovering portion of acquisition cost. OEMs feel relieved. No ability to build integrated devices.

There's no clear-cut strategy that stands out as the best route, so Google will definitely have its work cut out in the coming months on how to proceed with its mobile strategy. Just like Clayton Christensen proved extensively in The Innovator's Dilemma, sometimes the choices that innovative companies make while at the top of their game can inevitably lead to their downfall -- although in this case, there's no apparent disruptive threat on the horizon. But then again, you never see them coming anyway.

With Android claiming the No. 1 spot in mobile OS market share as it faces the mother of all dilemmas, is Google about to sow the seeds of its own mobile downfall?

What do you think? Which route should Google go with? Share your thoughts in the comments section below. While you're at it, pick up a copy of this free report on The Next Trillion-Dollar Revolution, the same one that Google is currently riding with Android. It's free.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, and Apple, as well as creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2012, at 6:24 PM, DJDynamicNC wrote:

    The timing is rough for Google on this, with an aggressive Microsoft angling for market share in both mobile and tablet computing. They really can't risk pushing away their OEM allies.

    On the other hand, Microsoft wants to license Windows phone and make money that way; Google gives Android away for free. It's not clear that Windows Phone will be able to compete with that, though I think it may be able to be profitable without taking all of the cake.

    We live in interesting times!

  • Report this Comment On April 19, 2012, at 8:27 PM, bsimpsen wrote:

    Google isn't sowing the seeds of their own destruction, Amazon and Apple are, Samsung is thinking about it and Microsoft is winding up. Google hasn't been able to make a nickel off Android, and if Samsung has to cough up a few bucks/handset to settle IP lawsuits with Apple, Android doesn't look so cheap anymore. If Samsung slips in with Microsoft, Google is out of mobile.

  • Report this Comment On April 20, 2012, at 11:01 AM, DJDynamicNC wrote:

    That's a lot of dominos to line up. I would argue that Android does make Google money in a variety of ways, both through mobile advertising and through increasing the tie to Google systems and apps - I had an Android phone and am reluctant to switch out now because all my contacts were conveniently stored in my Gmail account, which is a great service (and one that makes them money).

    It would be a big surprise if Google were "out of mobile" entirely but I could see some slippage happening.

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