Google's Move Into Home Entertainment

Another front has been opened in the ongoing war between two tech giants, Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL). That front is consumers' homes as last month Google started a six-month test of a device that would hook into a home WiFi network in addition to linking to other devices in the home through Bluetooth connections.

The new device was first hinted at in December when the company filed an application with the Federal Communications Commission for permission to test a prototype outside of laboratory conditions. It is believed the device is a key cog in Google's goal to establish a home entertainment hub with the capability of streaming content between various devices and with Google at the center of it all.

The development of this device is just the latest evidence of the company's push into hardware. It made a bold move into hardware with its proposed purchase of Motorola Mobility Holdings (NYSE: MMI). The pending deal will not only give Google access to Motorola's portfolio of patents but also put the company into the mobile phone and TV set-top box manufacturing businesses.

Another signal that Google is serious about hardware is the recent hiring of Simon Prakash away from Apple where he was senior director of product integrity, Apple's best quality product engineer. Mr. Prakash is a leading expert in high-volume manufacturing of consumer devices like mobile phones. It is assumed he will be deeply involved in the manufacturing process for this new home entertainment hub device as well as Motorola phones.

After all, what better way to fight Apple's reinvention of mobile computing through its iPhone and iPad devices than with one of its own senior executives.

The pending move into hardware is a real shift in strategy for Google. Previously, the company had always worked closely with hardware producers like phone makers to advance products such as its Android operating system. Another example which comes to mind was the introduction last year of its Google TV service software to bring its services to televisions where it worked closely with television manufacturers.

The question for Google investors is whether this shift in strategy makes sense.

It may not. It already has one of the most profitable business models in existence. Its 65% gross margin, thanks to its search advertising business, ranks it up with Microsoft (Nasdaq: MSFT) and its Windows business with its 73% gross margin.

Look too at the recent hardware successes that Microsoft and Amazon (Nasdaq: AMZN) had. At Microsoft, the Xbox game console became the top seller in the U.S. with revenues for it almost matching the revenues from Windows. Yet since it's a low-margin business, it pushed Microsoft's gross margin to its lowest level in several years. And everyone knows that Amazon's very popular, low-margin Kindle ereaders have been one of the key factors weighing down Amazon's profitability with gross margin of only 20%.

But Google has to do something as Apple is setting the rules for the future of technology right now. Google has to somehow gain closer control over the integration of hardware, software and services rather than letting Apple set the agenda. Apple is so very successful at doing that too. In the last quarter, its operating profit expanded by 8 percent to nearly 38%, within a percentage point of both Google and Microsoft.

Google has to hope its hardware, when it hits the market, will help it regain some ground previously lost to Apple. It really has no choice but to move into hardware or cede the consumer technology battlefield to Apple.

This article was originally written for the Motley Fool Blog Network. Please make sure to read all of my articles daily at the Motley Fool, http://blogs.fool.com/tdalmoe/