The deal, Google's largest to date, puts the search king squarely in competition with Apple in mobile and living-room entertainment and cements a firm bunker to defend itself from ongoing battles with rivals over technology patents.
The acquisition, to "supercharge" the Android mobile OS, has the approval of both companies' boards and is expected to close by the end of this year or early 2012.
"Google could create a range of products that enable very rich, multidevice experiences in the same way that Apple does across iPhone, iPad and Apple TV," says Forrester Research analyst Charles Golvin.
The gambit reflects the importance of mobility as Google duels with Apple for advertising and digital entertainment revenue.
"I think there's an opportunity to accelerate innovation in the home business by working together with the cable and telco industry," Google CEO Larry Page said in announcing the deal early Monday.
Industry experts note that Google is taking a tack that Apple is known for in building its iconic iPhone, relying on slick integration of software and hardware. The maneuver was copied by Hewlett-Packard in folding Palm's WebOS under its umbrella.
Motorola Mobility, best known as a maker of wireless phones, cable modems and cable TV boxes, was spun off in January from its parent company. Google's acquisition offer is a 63% premium over the closing price of Motorola Mobility's stock Friday.
Sales of handsets are soaring as nearly every major tech player — Apple, Google, Microsoft and Samsung, to name a few — grabs for a slice of the multibillion-dollar market worldwide. There is an insatiable thirst among consumers for the latest hot mobile device. Some 429 million mobile devices were snapped up worldwide in the second quarter, up 16% from a year ago. Google claims 150 million mobile activations of Android worldwide and touts that 550,000 devices are activated every day.
Google's Android is the leading operating system, with 43% of the market, according to Gartner, vs. Apple's iOS operating system, with 18%.
The deal underscores how smartphones have become the computing vehicle for consumers to shop, play games, search the Internet, listen to music and run business applications, says Joe Steger, global technology transactions leader for Ernst & Young.
The Google-Motorola deal, if approved by regulators, could boost the Internet giant's stature in the household and have far-reaching implications for consumers as Google incorporates Motorola features into its Android OS and — potentially — brings Google technology to such home appliances and TVs, analysts say.
Google TV, which brings search, the Web and apps to televisions, has been slow to catch on and doesn't have the content offerings or studio deals in place that Apple's iTunes does. Still, the deal with Motorola Mobility, a maker of set-top boxes, gives Google a stronger position for Google TV.
"Now they have an actual manufacturer under their own control rather than to have to rely on Sony or Logitech," says Golvin.
"Google sees the need to arm itself with its own in-house device brand to compete effectively with Apple and create an iconic device line like the iPhone," says Sharon Armbrust, senior analyst at SNL Kagan.
Shares of Motorola Mobility soared 56%, to $38.12, on the news in trading Monday. Google's stock slid 1%, to $557.23.
The rivals
Google's purchase could also be the first step toward consolidation in the crowded smartphone market, says Santa Clara University professor Henry "Hank" Nothhaft, former CEO of Danger, maker of the Sidekick cellphone.
In teaming with Motorola Mobility, Google could "radically change the Android calculus" for major consumer brands such as Samsung, LG and HTC — all of whom make smartphones supporting the Android operating system but might compete with Google after the Motorola Mobility acquisition, says Greg Sterling, an independent analyst.
The moves and countermoves could ultimately benefit Microsoft, whose Windows 7 phones were "simply too slow to emerge in the market," says Darren Hayes, a professor at Pace University's Seidenberg School of Computer Science and Information Systems.
For Samsung, it could mean making Bada, its low-level OS that's had some success in Asia, available in Europe and elsewhere, Sterling says. It might even "force" Samsung to cozy up to Microsoft Windows OS as an alternative, he adds.
The same holds true for HTC, a longtime maker of Windows-based handsets that has strayed to the Android platform. "HTC will look for more balance now with Windows" to protect its competitive flanks, Sterling says.
"Windows revenue has been dropping recently and will continue to decline if Microsoft does not make the same type of bold acquisitions (in the mobile market) as Google," Hayes says.
The Motorola-Google matchup heightens speculation about whether Microsoft will want to acquire Nokia or Research In Motion, maker of BlackBerry smartphones, to form such a hardware-software combination.
Patent wars
What the deal isn't likely to do is dislodge the legal logjam over high-tech patents, which has lawyers at tech heavyweights working overtime and filling court dockets.
Some industry observers claim the high-profile patent disputes are stifling innovation and encouraging some companies to hoard patents in hopes of winning large legal settlements or scaring competitors away from developing products.
But the Holy Grail for Google could be the treasure trove of more than 17,000 patents that Motorola Mobility holds — valuable weapons in the ongoing battle with its mobile rivals.
"Motorola has a strong patent portfolio which will help protect Android from anti-competitive threats from Microsoft, Apple and other companies," Page said in the conference call Monday.
Google in June missed out on a highly sought-after group of mobile patents owned by Nortel Networks that went for $4.5 billion to a group including Apple, Microsoft and RIM.
Patent battles are brewing across the telecommunications landscape as mobile rivals seek dominance and ways to extract licensing fees from one another. Apple is suing Samsung, for example, and has so far been granted a preliminary injunction banning the Samsung Galaxy across many EU nations.
Oracle claims Android software infringes on several patents related to Java, which Oracle acquired from Sun Microsystems last year.
At the same time, Apple is suing Motorola over the design of the Motorola Xoom tablet, while taking Samsung and HTC to court for mimicking the "look and feel" of the iPhone.
Microsoft in recent months has pursued legal action against several companies, including Motorola, that make Android phones and tablets that the software giant claims infringe on Microsoft patents. Microsoft has sued or persuaded some companies to pay it license fees.
"Motorola has some pretty good patents in there. This is a pretty important thing for Google to have to level the playing field," says Michael Barclay, a fellow at the Electronic Frontier Foundation, based in San Francisco.
