Why would Google pay $12.5 billion for Motorola? It cost them 18 months of their profits. It's 3 times what Apple, Microsoft, and a consortium of others paid for Nortel's patents. It's 10 times what HP paid for Palm. Hell, Google is guaranteeing twice as much in break-up penalty alone as HP paid for Palm. Why would a smart company like Google, one that's already sunk untold resources into an OS they essentially give away for free, spend so much of their capital on a single Android licensee for whom profitability is a somewhat distant memory?
Patents is the throw away line, the canard Larry Page foisted at the end of his blog post and the sound bite rival Android ODMs repeated, Stepford-like when welcoming Motorola's new overlord to the Open Handset Alliance table. Were Motorola's patents worth 3 times Nortel's? Were they worth 10 times Palm's? (Especially considering Apple and Microsoft are already suing Motorola and Palm's patents are such that there hasn't even been a whisper of patent-suit in their general direction?)
Likewise set top boxes. Apple calls Apple TV a hobby. Google TV could, perhaps, charitably fall into that category as well. Granted, getting Android software onto the actual cable box is more compelling than an iOS box in addition to a cable box, but the key word in all these equations is "cable". Both traditional land-based cable companies (most of which are monopolies) and satellite companies, (which are duopolies or oligopolies), have vested interests in control and content and they're the ultimate arbiter in which boxes they offer and to whom. (TiVo and Windows Media Centers with cable cards haven't fought their way out of that paper bag yet either.) Is that business worth $12.5 billion?
Let's get Oliver Stone about this for a minute and look at a) where Google makes their money, and b) the historical reason for Androids existence and continued development.
Google makes their money from advertising -- monetize eyeballs and attention -- traditionally off desktop web based search using their AdSense and AdWords engines. The world is moving to mobile, however, and Google being the brilliant company they are, and a one-trick pony being the danger that it is, they've expanded into email based advertising (Gmail), bought into video based advertising (YouTube), finally made a credible beachhead into social networks which could be advertised to (Google+), and have previously bought a leading mobile advertising company (AdMob) to help diversify and position themselves for the future. It's still one pony, but it's learning more tricks.
Android was created by Andy Rubin and team -- the folks who originally brought you the Sidekick -- and bought by Google in a move somewhat at odds with Google's previously web philosophies (which likely accounts for the parallel existence of ChromeOS). While Android doesn't directly allow Google to make money in their traditional way, it provides a platform where Google can do just that. Historically that's important because pre-2007, mobile was owned by RIM's BlackBerry, Palm's (and PalmOS') Treo, and by Google's rival, Microsoft and their licensed Windows Mobile platform. Those, mostly front-facing QWERTY devices with incredibly bad browsers (Blazer, Pocket IE, etc.), defined the industry so much that early Android devices looked exactly like them. And intentionally so. Someone familiar with a Treo or BlackBerry or Windows Mobile Standard device could put one down, pick up an Android, and push aside (no NOC or ActiveSync), get a familiar mobile experience.
That was important to Google because, while they owned advertising, they had no control over the screen needed to display those ads. Conceivably, at some point, Palm or RIM or Microsoft could pull a switch, wall a garden, and lock Google out of a mobile OS as quickly and completely as Facebook has locked them out of a growing portion of the web. (This was never as much of a concern on Windows, which owns most of the desktop market, as it's been subject to such regulatory scrutiny that Microsoft likely couldn't ever do wall up IE, much less Firefox, Opera, or other alternatives.)
Android gave Google a mobile insurance policy -- if any of those then-dominant companies cut them off, Google could pour ad-bucks into replacing them with Android.
Then the iPhone happened, and not only did it revolutionize the smartphone market, it put a useable browser in a smartphone for the first time. Google was so into this idea that then Google CEO and Apple board member, Eric Schmidt, briefly took the stage with Steve Jobs at the iPhone introduction to show Google properties would be right there with it.
Google also immediately stopped efforts at launching a BlackBerry or Windows Mobile Standard clone and began work on iPhone clones. (Much to their credit -- it took most competitors years to come to that realization.) They did that because, once again, regardless of how good a browsing (and advertising) experience iPhone (and subsequent devices like iPod touch and iPad) were, Google didn't own them, and that meant they were now one exclusive search deal with Yahoo! or Bing away from being marginalized from the biggest thing in mobile.
Then, even though Apple owned mobile browsing, Apple introduced the App Store which repackaged the web from browser-centric to app-centric, and into a place much more difficult for Google to present the traditional ads that made up most of their revenue. (Buying AdMob helped, though Apple's back-and-forth policies on what data could be collected and shared didn't.) It wasn't Facebook bad for Google, but it wasn't good.
So Android became even more important, though at equal and opposite cost. To drive adoption and win market share, Google gave Android away for free, under a very manufacturer- and carrier-friendly Apache license. Verizon licensed "Droid" from George Lucas, put together a great ad campaign with some well differentiated hardware from Motorola, while HTC and Google collaborated on the Nexus One, and suddenly Google was back in the mainstream and geek-centric mobile games. (Honeycomb, not so much as it is but as it will be after a few more iterations, was a very similar response to iPad and its share of mobile web traffic.)
But manufacturer- and carrier-friendly Apache licenses are bastards to deal with in the real world. Verizon put out a phone with Google stripped out and Bing stripped in, destroying the very reason for Android's existence in the first place. AT&T locked out sideloading. Manufacturers secured bootloaders. Carriers everywhere began pre-installing crapware. China forked Android. Could Verizon one day do the same? Could Amazon? vOS or AmazonOS with Bing everywhere, and Google forced to bid for placement on the very platform they'd spent their resources developing and promoting? (Hey, the JooJoo2 -- sorry, Grid 10 -- reduces Android to a kernel with Amazon appstore and Bing search sitting on top of the revenue layer.) Companies like Skyhook even tried to take Google out of the data collection loop, resulting in the first real, public example of Google retaliating with what Android power they still had left (and also resulting in a lawsuit from Skyhook questioning how Google wields that power.)
At the same time, Samsung started to grow their own OS with Bada, HTC was making Windows Phones, and Motorola bought a company that could, conceivably, give them their own version of webOS one day. (While HP made some noise about licensing webOS itself.)
Meanwhile Microsoft and Apple began suing Android ODMs, Microsoft in an effort to make Android more expensive and Apple in an effort to make it less usable. HTC agreed to pay Microsoft $5 a unit, making it a credible threat. Apple hasn't achieved much of anything other than temporary -- and overturned -- sales injunctions but that could change. While Google makes little off Android handsets today (conversely, Apple owns 66% of mobile profits), making nothing is much, much worse. The idea of losing "free" and losing the UI candy and UX touches that make iPhone so popular once again showed Google that even with Android it still wasn't in control of its own destiny.
Google still lacked a manufacturing arm that could, if everyone and everything else turned against them -- if Samsung forked Android or went all in on Bada, if HTC switched to Windows Phone, if LG inked an exclusive deal with webOS or rebuilt it themselves -- produce mobile products that still offered great value and great experience and did so with Google's software and services inextricably and irremovably backed in.
Ladies and gentlemen, we give you Motorola.
Sure, there's some risk that, with the Motorola deal, Google will alienate licensees and, ironically, drive them exactly where Google was afraid of -- Bada and Windows Phone and webOS, etc. But Google has shown time and time again they'd rather be secure in and of themselves even if it costs them a partner (like Apple on iOS, Skyhook and mapping companies, etc.)
Motorola brings a second pony to Google's show, a gateway to potentially lucrative hardware profits in both mobile and set top boxes that also happens to have some patents. But most importantly --
Like Android has been from the beginning, it remains today -- insurance for Google, and in that regard, Google just doubled down and upped their policy by $12.5 billion.