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Google's vow to keep Android open source may hurt its bottom line

The data supports Android's competitiveness: As Nokia has lost its smartphone handset sales top spot in 2011 and Blackberry withers, its Android-dependent handset makers like Samsung, Motorola Mobility and HTC that have ascended, not Apple.

Grab from Android's YouTube channel

When Google took the patent Cold War in Silicon Valley to a new level with a $12.5-billion bid for Motorola Mobility at an over 60 per cent premium, shares rocketed to to near $40.

But deal-enriched Motorola Mobility shareholders should be wary of warnings signs from Google's regulators who must still approve the deal. In addition, its unclear whether the Motorola Mobility deal is a lost financial and competitive opportunity for Google.

For Motorola Mobility investors, a Google merger fail might lead to a share slump because the company is unlikely to garner non-Google interest. In announcing its merger, the biggest in its history, Google acknowledged it would gain little from handset businesses acquired. Instead, Motorola Mobility's patents will allow Google to defend its growing Android ecosystem from intellectual property litigation by Microsoft , Apple and potentially Oracle . "Motorola also has a strong patent portfolio, which will help protect Android from anticompetitive threats from Microsoft, Apple and other[s]" said Chief Executive Larry Page when announcing the deal.

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Google's Android smartphone operating system is a tremendous success, so much so that the company gives it away and still makes money. Google open sources its operating system freely to handset makers like Samsung, LG, HTC and Motorola Mobility in a push to drive Android adoption that will bolster revenue in adjacent search businesses.

In the U.S., Google's Android market share has more than doubled as of the third quarter to 57 per cent, according to data firm IDC. Meanwhile, Research In Motion's Blackberry has given up share and rollouts like HP's WebOS came to the market dead-on-arrival. Even Apple's iOS has lost share since 2010.

As to whether buying Motorola Mobility will put Android's openness at risk, Google unequivocally allayed that concern when announcing the deal. "We built Android as an open source platform and it will stay that way," said Mr. Page in August. Google has pledged it would continue licensing Android to Motorola as if it were any other customer, without exclusivity after the merger.

In offering Android for free, while competitors Apple and Microsoft keep theirs systems exclusive or charge for licenses, Google is driving Android growth charitably and without veering far from its search business. Google's open sourcing looks very much like the spawn of a "don't be evil" -driven company that's kept consumers loyal and regulators at bay as it's become the most dominant force on the Web.

However, it's still unclear that committing Android as an open platform is the best option. Apple faces stiff competition from Android and handset makers who carry the it, but iOS exclusivity for iPhone handsets has helped the company eclipse ExxonMobil's market cap at times in 2011.

Apple's iPhone businesses is its biggest revenue stream, earning the company $47-billion in 2011 and growing at a 90 per cent two-year compounded rate. Google's earnings via Android pale in comparison in spite of its market-share lead.

Yet, signs already point to the fact that the Android OS could compete against the iOS head-to-head. While Android's taken the OS lead, some of its handset users like HTC and Samsung are challenging the proliferation of Apple's iPhone.

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"In the high end smartphone market it's about the operating system, not the hardware. Without the Android operating system, I don't think HTC or Samsung would have had the same success in smartphones," says Michael Genovese an analyst at MKM Partners.

With a growing number of smartphones on Android conducting Web browsing using its cornerstone search business, Google can generate revenue in adjacent businesses even as it open sources the Android. Google reported annualized mobile search revenue from Android of $2.5-billion in the third quarter. Android-bolstered mobile searches may roughly double every year through 2014, according to Goldman Sachs estimates.

Google is wise to protect Android, challenged by Apple via a 2010 suit against HTC and another by Microsoft in 2011. There is some concern that if the patent wars were to accelerate, it could push users off of Android – as recent announcements may indicate. About the impact of potential legal disputes on Android's handset prevalence, "we believe other handset manufacturers are likely to hedge their bets and start to increase the portion of [units]running on Windows Phone," wrote Goldman analysts in a September note.

The data supports Android's competitiveness. As Nokia has lost its smartphone handset sales top spot in 2011 and Blackberry withers, its Android-dependent handset makers like Samsung, Motorola Mobility and HTC that have ascended, not Apple.

Ultimately, Google's Android strategy may be driven by patent litigation threats. An industry newborn compared to the likes of Apple and Microsoft who own 35,706 and 78,555 patents respectively, Google holds just 4,613 patents, according to Goldman Sachs calculations. With Motorola Mobility, Google's patents would rise to 22,113 – potentially including key patents to keep litigation at bay.

A recent lawsuit indicates the benefit of Motorola Mobility patents. After being on the defensive since 2010, in September, HTC brought patent infringement claims against Apple using intellectual property claims picked up by Google in its Motorola Mobility purchase. Such litigation signals that Google may be correct in focusing on warding off IP litigation, even if it costs the company a shot against Apple.

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About whether an iPhone challenge would be possible for Google, Roger Noll of Stanford Law School says it would be fine if, "Google was not under siege in the war of the trivial patents."

For now, Google is intent on fighting the patent war against Apple, instead of a smartphone revenue war. Still to be seen is whether Google will prevail.

This story is a condensed and edited version of the original.

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