Google’s bid to be everything to everyone

Google chief executive officer Larry Page is clearly looking beyond not just search — still the main cog in its profit-making machine — but software entirely. Here’s why: Apple’s $465-billion-odd market capitalisation is currently greater than Microsoft,Google,and Nokia combined,thanks to its ecosystem of tightly integrated hardware and software products.

“The line between hardware and software is indistinct and arbitrary,especially in mobile devices,” says Paul Saffo,a consultant with Discern. “You need to control the hardware to control the overall experience.”

If Google hardware takes off — in the form of phones,tablets,TVs,and maybe even visors with Terminator-like information overlays — it would more tightly tie consumers to the company’s products such as search and YouTube. The goal wouldn’t necessarily be to make money on the hardware but to create more ways for Google to serve up the ads that brought in 96% of the company’s $37.9-billion sales in 2011.

“Google will remain an advertising company,and they’ll use hardware to grow that business,” predicts Aaron Kessler,an analyst with Raymond James Financial.

Even in the best of scenarios,digesting Motorola will be a challenge. The company,with 20,000 employees,lost 20% of its market share in 2011,though the cellphone maker did manage to earn $98 million on $13 billion in revenue. Motorola will likely drag down Google’s earnings for years to come. Barclays analyst Anthony DiClemente assumes that the combined company will deliver profit margins of 41% in 2012,vs 55% if Google remains separate from Motorola. “I didn’t like the deal,but hey,the button’s been pushed,” says Colin Gillis,an analyst with tech consultancy BGC Partners.

Google’s dive into hardware could also alienate device makers like Samsung and HTC,which rely on the Android operating system for almost all their phones. If Google prioritises Motorola over its competitors — say,giving it earlier access to Android upgrades — they might rely more on other operating systems,such as Microsoft’s soon-to-be-released Windows 8. “They need to be very careful that they don’t damage the ecosystem they’ve so carefully built,” says Bill Whyman,an analyst with International Strategy & Investment Group. Otherwise,he warns,the results could be “disastrous”.

Google risks stepping on other toes,too. In recent days,the company’s construction crews have begun stringing fibre-optic lines in Kansas City for a superfast broadband service scheduled to go live this summer,says Jeff Heynen,an analyst with Infonetics Research. Google says its goal is to prove it’s possible to affordably deploy networks 100 times faster than the US average,but carriers such as AT&T and Verizon Communications worry that an innovative,cash-rich rival will start setting up shop in other cities.

“You can bet the current broadband providers are watching closely,” says Heynen. Those same Internet service providers happen to control the cellular airwaves and could make life more difficult for any Google mobile product.

Then there’s the basic challenge of making and selling hardware. It’s taken Apple decades to perfect a lean,adaptable supply chain that minimises inventories and customer service wait times. Google doesn’t (yet) have retail stores nor even a phone number to field customer questions.

Also,Google’s first dalliances with making hardware haven’t been promising. It worked closely with device makers to create its own smartphones under the Nexus brand,which were designed to show off all the bells and whistles possible with Google software,like turn-by-turn navigation. Nexus sales have never been particularly strong. Google TV,a joint project with set-top box manufacturers to bring the Web to television sets,has been even more disappointing. Last year Logitech announced it would stop making the devices because of underwhelming sales — and chalked up a loss of $100 million due to the failure.

And finally,Google isn’t the only software company to recognise the need to be a force in hardware. Microsoft has a hit in the form of its Xbox console and the motion-sensing Kinect add-on,which offer ways for consumers to interact with a whole ecosystem of Microsoft services from their living room. Amazon debuted its Kindle Fire tablet late last year and,while the company reportedly takes a loss on each $199 device,RBC Capital Markets analyst Ross Sandler believes the company will earn $136 on each unit from sales of books and movies.

Even Facebook is rumoured to be readying a phone of its own.