Google is Acquiring Motorola—But What Does it Mean?

This week’s big news is Google’s proposed $12.5 billion acquisition of Motorola Mobility.  There’s been a barrage of news and analysis surrounding this announcement, so we here at SmallBizGoMobile are going to distill it all down, and try to separate the facts from the hype, and the PR buzz from the players’ “real” motivations.

Is This a Done Deal?

Right now, Google has only announced that it’s reached a deal with Motorola Mobility, which is still subject to FTC approval, and, given the size of the deal (which would almost double Google’s workforce, from roughly 29,000 to 48,000), it will likely be scrutinized by other federal agencies, such as the Department of Justice.  The two companies’ international interests and operations means that the deal will also have to be vetted by European regulatory agencies, where Google is already being investigated for NINE different antitrust complaints.  Here in the US, Google is under investigation by the FTC for possibly engaging in anti-competitive practices regarding the Android OS and non-Google search engines, with former Google CEO Eric Schmidt subpoenaed for testimony before the US Senate in September.

Given the precarious nature of Google’s existing relationship with regulatory agencies, it’s not surprising that its Motorola deal includes a reverse breakup fee (which guarantees Motorola a certain amount of money in the event that the sale falls through), but what is surprising is that the reverse breakup fee is $2.5 billion!  That’s equal to roughly 26% of the overall value of the sale, far higher than the 3.8% median fee typically associated with such deals (by comparison, the reverse breakup fee for AT&T’s still-pending bid to purchase T-Mobile was set at 7.7%).

Why is Google doing this?

According to CEO Larry Page, via Google’s official blog, the Motorola acquisition “will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”  Motorola holds over 12,500 issued patents, and 7,500 patent applications, which Google claims will serve as a solid legal defense against the aforementioned suits filed by Microsoft, Apple, and others.  On the surface, this seems a plausible-enough justification, as Google attempted–and ultimately failed–to purchase Nortel’s collection of mobile-related patents earlier this year.

However, as Florian Mueller points out, Motorola Mobility has already been engaged in patent lawsuits with Microsoft and Apple–over the very patents that would ostensibly bolster Google’s legal position–and so far, they’ve been floundering in court.  That is to say, Motorola’s patent holdings simply aren’t strong enough to stand up to Redmond and Cupertino’s portfolios, so it’s unlikely they’ll provide much firepower for Google’s own patent suits.  And, since Google hasn’t been aggressively building an internal patent portfolio of its own over the past few years, it’s unlikely that they have any significant number of patents that could bolster Motorola’s collection.  Furthermore, if it was solely Motorola’s patents that Google was interested in, they could have made an offer for only Motorola’s patent collection, or attempted to secure the rights to litigate with those patents (and since Motorola Mobility had $56 million in operating losses in Q2 2011 alone, it’s quite likely they would have accepted the quick cash-infusion).

So What’s Google Really After?

If, in fact, the patent-justification is little more than a red herring, then why would Google want to buy Motorola?  In a word, hardware.  Motorola Mobility has 91 production facilities around the world, which are constantly churning out mobile phones and cable television boxes.  Android’s “fragmentation problem” has been the subject of seemingly endless reports and analyses, and if Google were able to control the specs and manufacturing processes for its own line of Google-branded Android phones, it could have a strong impact on other Android handset manufacturers, such as HTC and Samsung, forcing them–through market pressures–into tighter hardware and software compliance, while still allowing Android to exist as an ostensibly “open” platform.  If Google rolls out a line of self-manufactured Android phones (with a “pure” Android experience, along the lines of their Nexus handsets), to all major carriers, companies like HTC will likely feel compelled to offer similar such offerings.  Google probably wishes that it had the same type of hardware/software clout that Intel and Microsoft enjoy in the netbook arena, and the Motorola acquisition would significantly enhance their ability to standardize the Android ecosystem.

The Motorola Mobility acquisition would also help Google resolve the difficulties it has encountered in its long-suffering Google TV project, which was initially slated for its big reveal at the Consumer Electronics Show in January.  Much to the consternation of Sony, Samsung, LG, and other manufacturers who planned on unveiling a wide array of Google TV-powered hardware at CES, Google decided, at the last minute, to pull its software, citing the need for more time to refine it. Since then, there have been no new Google TV products introduced to the market, and its unclear how Google’s abrupt decision may have affected its relationship with manufacturers.  Though Google has since revealed an updated Google TV interface, it may face considerable challenges in convincing manufacturers to return to the platform.  Were Google to suddenly possess its own set-top-box manufacturing facilities, however, it could release the Google TV platform on its own terms.  As with Android, this would allow Google to circumvent the messy process of addressing the stipulations and needs of various manufacturers; instead of the extensive coordination and negotiations needed for a successful cross-manufacturer launch, they could simply release the product and platform on their own terms, and tacitly force other manufacturers to follow suit.

Where’s Do We Go From Here?

In looking at the proposed Google/Motorola Mobility deal, both strategic and legal analyses suggest that this deal is really about the hardware, not the patents.  There’s perhaps no company better suited to Google’s medium-term ambitions than Motorola Mobility, with its established presence in both mobile phones and set-top boxes.  Perhaps the biggest question is now this: If regulators refuse to permit the acquisition, will Google simply go after another, comparable manufacturer (though there aren’t any other companies out there that manufacture mobile phones and cable boxes at the same scale as Motorola Mobility, it would be conceivable for Google to attempt to purchase a smaller, phone-only company, or a smaller, cable-box-only company), or will they attempt to build up such manufacturing resources internally?

Any way you slice it, Google has indirectly put its cards on the table.  Though Google’s Android partners have publicly welcomed news of the proposed acquisition, it’s likely that, in private, many of them are feverishly re-assessing their future development plans.  Even if Google really is interested solely in Motorola Mobility’s patents, they will, nonetheless, have for the first time a robust global manufacturing system; for a company as large and influential as Google to undergo such a dramatic change, there will surely be significant consequences.