Just What Did Google Buy?

Eric Savitz

Was Larry Page's first major move as Google's CEO a big screwup? At the very least, the search engine giant's $12.5 billion deal to buy smartphone and set-top-box maker Motorola Mobility seems likely to cause complications. Among other things, Page might discover--to his horror--that he has given comfort to the enemy: Microsoft.

The conventional explanation for Google's deal--the largest acquisition in the company's history--seems reasonable. This transaction will provide a stronger hand in the high-stakes game of global smartphones. Google's Android operating system has been a huge success--consumers are registering new Android devices at the rate of 550,000 a day. That makes it a serious threat to Apple, Microsoft and the rest of the non-Android smartphone players. To compete, all the combatants have been stockpiling patents, in something of an arms race. Patent litigation is on the rise.

The Motorola deal comes as a response to the recent $4.5 billion acquisition by a group led by Apple and Microsoft (Research In Motion, EMC, Sony and Ericsson were also involved) of 6,000 patents previously controlled by Nortel Networks--a deal in which the buyers dramatically trumped Google's $900 million offer.

Motorola turns out to be quite a consolation prize. The company, after all, was a true pioneer in mobile phones, even as it has become a shell of its former self. The former Motorola engineer Marty Cooper, in fact, made the first-ever wireless phone call in 1973. The deal gives Google a trove of 17,000 patents, plus 7,500 still pending.

But Google isn't just buying patents. It is swallowing Motorola Mobility whole, including the handset business, which has lately focused mostly on selling Android phones, and one of the two major U.S. players in cable set-top boxes.

And here's where things get sticky.

While putting on a brave face, Google has triggered alarm bells for the growing number of handset and tablet manufacturers--like HTC, Samsung, LG and Sony Ericsson--that rely on Android to power their devices. Will these Google partners now turn to competitors? True, Google swears it will operate Motorola as an independent business and won't favor the house brand over other licensees. It's a good line, if not all that convincing.

Further, what does Google know about making hardware? It has no carrier relationships or a supply chain or any other accoutrements of a modern handsetmaker. It can't rely on Motorola for all of that; Motorola's struggles to stay relevant in the handset business led the company to split into two pieces and made Mobility vulnerable to an acquisition. Owning a hardware company will also result in lower company margins--online ads are a lot more profitable business than smartphones. Some analysts have speculated that the hardware business could be sold off to an Asian handset buyer in a deal analogous to IBM's sale of the ThinkPad unit to Lenovo. But Google certainly won't include patents in a potential sale, which makes a sale a lot less appealing.

I'm not buying the theory that the acquisition of Motorola puts Nokia and Research In Motion into play. They are simply too expensive for most buyers: $20 billion or so for RIM and likely $30 billion for Nokia. Samsung seems the only obvious buyer; Microsoft is an oft-mentioned suitor for Nokia, but the two already have a tight licensing relationship.

Still, I think Google's move might cause some handsetmakers to seek alternatives to Android. Carriers, no doubt, would be happy to have a third strong alternative to Apple and Android phones. There are multiple options. Nokia could dust off its Meego operating system. Hewlett-Packard CEO Leo Apotheker has said the company wants to find licensees for the old Palm WebOS software; now he might find takers. Research In Motion could license the QNX software it plans to use for all of its high-end phones. But I think the real opportunity is for Microsoft Phone 7--and the next generation, Phone 8. Microsoft has already lined up Nokia to use its software, and HTC continues to sell Microsoft-based phones. The software has been well reviewed; what's lacking is something to ignite the attention of consumers, handsetmakers and developers.

How ironic if Larry Page has provided the spark.

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