By Yinka Adegoke and Liana B. Baker
NEW YORK (Reuters) - The pay-TV industry is nervously watching Google Inc's acquisition of Motorola Mobility -- the largest supplier of set-top boxes to consumers' homes.
While the mobile device business of Motorola Mobility has naturally attracted most of the attention, cable executives immediately noticed that for them the deal means working with a company they have clashed with in the past on a range of issues from so-called net neutrality to piracy.
"There's a general malaise towards Google with us and I'm sure with the other cable companies," said one executive at a large cable provider who asked not to be named as his company would likely still have to deal with Google. "If this was HP or Microsoft I'm sure we'd have been indifferent."
Cable and phone companies have viewed Google suspiciously ever since the No. 1 search engine used its muscle to get regulators to back 'net neutrality' rules that would prevent Internet service providers from rationing access to their networks. The cable and ISPs wanted to be able to manage congestion by blocking certain traffic or charging for passing through their pipes, for example.
Pay-TV providers are also concerned about potential privacy invasions since Google could theoretically use the set-top boxes to mine subscribers' personal data to sell advertising.
"If they have a box in the majority of U.S. homes, there's going to be a need to ensure that privacy isn't abused," said another cable executive."
Comcast Corp <CMCSA.O> and Time Warner Cable <TWC.N>, the two largest U.S. cable providers, among others, both use Motorola boxes, meaning the deal now gives Google immediate access to millions of living rooms across the country.
Though many analysts described Motorola's set-top box business as an afterthought, Google has shown its desire to enter the pay-TV business through last fall's launch of the underwhelming Google TV set-top box made by Logitech <LOGN.VX>. The company also acquired a small Web DVR software company called Sage TV.
The proposing of business models on the part of technology companies like Google, Apple Inc <AAPL.O> and Amazon.com <AMZN.O> that could potentially unravel the cable's industry's cozy $100 billion relationship with programmers is another concern.
"Here's Google, the company most frequently mentioned as a potential disrupter of the pay-TV ecosystem, suddenly finding itself in the awkward position as one of the pay-TV industry's largest suppliers," said Craig Moffett, analyst at Bernstein Research.
If Google's technology ends up inside pay-TV customers' living rooms that could give the technology giant some much needed leverage in negotiations.
"They are highly scared of folks coming in and developing a direct relationship with their subscribers and driving ad and application revenue where the operator is not at the center of that subscriber relationship," said a senior executive at another supplier to the cable industry.
Cable insiders point out that the majority of Motorola's set-top boxes in North America are designed to follow an industrywide standard, so Google would not have as much freedom as it seems to change the boxes.
"Google can't suddenly come in and say 'get rid of all that software and use our software' because Motorola's customers demand that Motorola follow the standards the cable industry has set in place," said an executive at a set-top maker who did not want to be named commenting publicly about a rival.
Not all cable insiders view Google's potential arrival as a bad thing, however. Some insiders told Reuters that the search giant's technology prowess could help accelerate updates to the set-top box for a fast-changing pay-TV world which faces competition from numerous online video rivals such as Netflix Inc <NFLX.O> and Hulu.
But the cable industry's biggest hope -- and defense -- is that the set-top box will eventually lose its relevance as more functions are shifted online or into the computing "cloud".
New York-based Cablevision Systems Corp <CVC.N> has released a remote storage digital video recorder which completely gets rid of the need for a traditional DVR box made by suppliers like Motorola. Time Warner Cable is likely to be next and other cable companies will follow.
(Reporting by Yinka Adegoke, Editing by Peter Lauria and Richard Chang)