Google needs to either divest Motorola's Android business or integrate it. So far, Google says it will do neither.
NEW YORK (TheStreet) -- We are only days away from Google's(:GOOG) first earnings release since it closed its largest acquisition ever: Motorola Mobility.
Unlike Google's previous quarterly reports, this one won't be an all-sweetness-light-and-jingles affair. Instead, it is likely to be more like a congressional oversight hearing chaired by Darrell Issa (R., Calif.).
In other words, Google's management had better have a great story to tell about what it will do with the new Motorola businesses, or there will be some angry shareholders.
When Google reported results earlier in 2012 -- January and April -- the stock tanked in response. Does Google know what it takes to prevent that from happening a third time in a row?
In it last quarter (March), Motorola did $3.1 billion in sales and lost $86 million. Breaking it down, the mobile device business had $2.2 billion in sales and an operating loss of $121 million, compared to the Home division's $884 million in sales and a $68 million operating profit. Considering Google's own $10.6 billion in revenue and $3.4 billion in operating profit, this acquired Motorola business could have a material impact on results.
If Motorola's bottom-line results improve significantly and it turns a profit, this acquisition could at least help Google's EPS. Likewise, if Motorola deteriorates further, it will drag the mother ship with it down.
In order to understand Google's options better, we need to break down Motorola's businesses into four major categories:
1. The dominant reason Google acquired Motorola.
2. The "obvious" business that fits with Google's possible long-term strategy.
3. The parts of Motorola that are at least plausible in a Google strategy.
4. The other parts of Motorola that Google would presumably have no interest in.
Let's take these one by one:
1. It is presumed that Google's panic-purchase of Motorola had everything to do with Motorola's patents relevant to Google's Android strategy. Google's licensees -- most notably HTC -- were at the time taking it on the chin from Apple(:AAPL) in the patent wars, and Google's acquisition of Motorola was perceived as the bold but necessary step to stand up for its ecosystem.
In other words, the patents aren't going anywhere, no matter what.
2. It follows to some degree that Google might integrate Motorola's smartphone and tablet businesses in order to compete directly with Apple and Research In Motion(:RIMM). After all, they are both vertically integrated -- hardware and software. In addition, Apple is constantly held out as the example everyone must now follow because the integrated formula has been so successful.
There is just one problem with this theory.
And that is that Google has said it's not happening. Google is saying that it won't integrate Motorola's Android businesses, but rather treat it as if it were "any" Android third party such as HTC or Samsung. It will deal with this business on an "arms-length" basis.
So what's the point? There is the worst kind of contradiction here. Google is saying is that it will run Motorola as a separate business because it doesn't want to annoy companies such as HTC and Samsung that compete with Motorola's Android devices.
If Google isn't integrating Motorola's Android business, then what's the point of owning it? Google might as well buy small minority shares in the open market of companies such as Dell(:DELL), Hewlett-Packard(:HPQ), HTC and Research In Motion.
But if Google spent $12 billion buying small minority stakes in Dell, HP, HTC and RIM in the open market, people would question Google's sanity and the stock would decline. People are not investing in Google in order for Google to be a passive investment fund.
In other words, Google owning Motorola's Android businesses but saying that it will "keep it separate" makes no sense. Either you integrate the business and compete directly with Apple and RIM on their own terms, or you get rid of Motorola's handset and tablet businesses. You can't have it both ways.
The theory here is that, these days, a hardware business is only worth anything anymore if it's integrated with the company owning the operating system.
If the hardware company only stamps out hardware fed to any and every company by an operating systems provider (such as Google and Microsoft(:MSFT)), then you are basically only like Dell, HP or HTC, just to pick a few. You can try to compete with the Chinese in making hardware running Android or Microsoft Windows. Good luck!
Thus, Google's ownership of a Motorola Android business that is not integrated is a losing proposition that will generate low to nonexistent profits and serve as a drag on Google's stock.
Either Google divests the Motorola Android business or it integrates it. So far, Google's official story is to do neither. This is the big question for Google.
So there are two remaining categories of Motorola businesses:
3. Stuff that's not obvious but also not implausible for Google to integrate/keep. This includes the set-top box business. Historically, this has not been a Google type of business. But you could conceive of a scenario where it could be. Hey, Google TV is one step in this direction. In other words, Google could go in either direction. The main competitors in this business are Cisco(:CSCO) and U.K.-based Pace Micro.
4. Stuff that Google most likely doesn't want and shouldn't. This includes the infrastructure equipment businesses, primarily geared to cable TV operators. This is fiber-optic distribution gear that you hang on poles connecting every Joe Six Pack in the U.S. and beyond. This type of business is a culture shock for Google.
You can easily envision Google divesting some of Motorola's businesses.
But the obvious question Google must answer is whether it integrates the Motorola Android business or gets rid of it. The current official answer of keeping it "separate" makes no sense at all. Google isn't a passive investment fund. Something's gotta give.
At the time of submitting this article, the author was long AAPL and GOOG, and short MSFT.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.