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Motorola Faces Uncertain Destiny with Google

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Motorola has survived crises and technological change, but it has never grappled with something like this: a murky future governed by Google, a powerful master with unclear intentions.

Hundreds of framed patents hang on two separate walls at the headquarters of Motorola Mobility in Libertyville, Illinois. They testify to the pride in innovation at Motorola, a luminary of American business that has survived corporate crises and enormous technological change.

But the company has never grappled with something like this: a murky future governed by Google, a powerful master with unclear intentions.

In announcing its plan last week to purchase Motorola Mobility for $12.5 billion, Google emphasized its interest in the company's rich trove of 17,000 patents. That portfolio would allow Google to defend itself against competitors like Apple and Microsoft in the legal arena, where billions of dollars in patent licensing fees can be indirectly negotiated through lawsuits and countersuits.

But while industry analysts and insiders say the rationale makes sense, they also say it leaves Motorola in an unusual position. Many acquisitions are aimed at creating some well-articulated synergy between the two companies, but Motorola's future role in this union - - beyond patent warehouse -- is unclear.

Heightening the uncertainty is that the companies involved, both of which declined to comment, are in some ways as different as two technology companies can be. Google makes Internet services and software, thrives on high profit margins and distributes its product using giant data centers. Motorola makes hardware, has modest margins on a good day and moves its products on trucks and airplanes and through brick-and-mortar stores.

Some hope the cultures will fuse and lead Motorola to a future as storied as its past. Martin Cooper, 82, who worked at Motorola for 30 years and developed the first hand-held cellphones there, said he hoped great things would come of combining Google's momentum and confidence with Motorola's tradition of excellence in radio technology.

"The combination might make Motorola successful -- again," said Mr. Cooper, whose patent from the early 1970s for cellular phone technology is among those that hang at the company's entrance.

At the least, industry analysts said, Motorola almost certainly would become a laboratory for Google to seek to perfect Android, its mobile phone software, in concert with newly acquired hardware engineers. Others say Google might wind up giving financial backing to Motorola to help it revive its flagging fortunes.

But if it appears to be getting too cozy with Motorola, Google risks upsetting other phone makers like HTC and Samsung, who build some of the most popular smartphones and tablets running on Android.

"How do you compete with your partners and also work with them?" said Ben Schachter, an analyst with Macquarie Capital, who called the situation a "head scratcher."

Google has said it will allow Motorola to run independently. But some analysts and investors say Google could pare back or sell big parts of Motorola that create conflicts with partners or are not central to its goals. And that makes for uncertain times for the 19,000 employees at Motorola Mobility in Libertyville, a northern suburb of Chicago, and around the world.

"It's like, thanks for everything you did in the 20th century, but you're being bought by a search engine," said Roger Entner, a telecommunications industry analyst and founder of Recon Analytics, a market research firm. He added, "Nobody ever buys a company and leaves it alone."

Motorola traces its beginnings to 1928, when two brothers, Paul and Joseph Galvin, started a company making power converters for household radios. In 1947 it changed its name to Motorola, after its popular car radio brand. The company produced radio phones that helped American troops communicate in World War II, car phones in the 1980s and the trend-setting MicroTac and Razr cellphones, among other products.

But in recent years, after the Razr's popularity faded, Motorola flirted with financial doom. It was only in the past few quarters that it came back under the leadership of Sanjay Jha, a former executive at Qualcomm, a telecommunications equipment maker, who joined Motorola in 2008 when it was in danger of missing the rise of the smartphone.

He made significant changes, cutting thousands of employees and splitting the business in two: Motorola Solutions, which sells equipment to businesses, and Motorola Mobility, which handles consumer products like phones and television set-top boxes.

Motorola Mobility scaled back distribution in Europe and much of Asia, focusing its efforts on China, Latin America and North America. It emphasized fewer phone models and hitched its fortunes to Google's Android software.

In the company's second quarter this year, it reported revenue of $3.34 billion and a profit of $26 million. That was up from revenue of $2.6 billion and a loss of $87 million for the period a year earlier.

And the company shipped 11 million devices in the quarter, up from 8.3 million in the period a year earlier. Most of the increase came from smartphones -- to 4.4 million, from 2.7 million in the period a year earlier.

The company has been producing products that dazzle gadget fans - - no easy feat when taking on the iPhone. During the Consumer Electronics Show in Las Vegas in January, Mr. Jha wowed audiences with the Motorola Xoom, a tablet computer than many considered to be the first real contender to Apple's iPad.

But the shipment numbers still pale in comparison with, say, the second quarter of 2006, when Razr sales were soaring. Motorola shipped 51.9 million of them that quarter. That was just before the phone's price and popularity began to slip, dragging Motorola's fortunes down with it.

Lawrence Harris, a senior research analyst with C.L. King & Associates, an investment bank, said the mercurial nature of the phone business might wind up feeling very foreign to Google -- and challenging. He said he was also not sure that Google had put that much thought into what to do with the physical manufacturing, the distribution and the sales staff. Even further afield for Google is Motorola's involvement in making television set-top boxes, a modest part of its business.

"The priority is the patents," Mr. Harris said, noting that the acquisition had come together quickly, suggesting that Google had not had time to devise its entire strategy. "Then they'll have to address how to get their arms around manufacturing."

In announcing the deal, Larry Page, Google's chief executive, said that the two companies would "create amazing user experiences that supercharge the entire Android ecosystem."

Kevin Smithen, an analyst at Macquarie Capital, said Google might eventually sell the phone and set-top businesses. Motorola would be "pared down if Google goes in that direction," he said.

But others say Google has the chance to help Motorola grow. Carolina Milanesi, an industry analyst with Gartner, said Google's ample pocketbook could help Motorola return to former glory by expanding in places like Asia and Europe, and also by helping it sell lower-cost smartphones that might appeal to a mass market.

Gartner's research puts Motorola's 2010 share of the mobile phone market at 2.4 percent, down from 4.8 percent in 2009, though Ms. Milanesi noted that more profitable smartphones were making up an increasing share of Motorola's sales.

"Money from Google could get them back, if not where they were, to a more prominent role," she said.

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