Google’s Motorola buy: patent spending, or emerging market land grab?

The acquisition of Motorola by Google took the tech industry by surprise, and the deal’s ramifications will doubtless be felt going forward. Already, theories are flying round regarding the motivation behind the deal, and the steps that competitors may take to accommodate the acquisition.

The most obvious ‘rival’ partnership is that of Microsoft and Nokia, and the notion of Nokia as a potential acquisition has been floated, with a Nordea Bank analyst observing that the Finnish firm has “quite a bit more on the table [than Motorola] and yet there is little difference between the valuations of the two companies.” However, the relationship between the two firms is already close, and coupled with Microsoft’s robust patent portfolio this suggests that a takeover is unlikely.

In terms of how the deal could affect the market, Nokia is conscious that the move could alienate current Android patrons, possibly even prompting them to jump ship. The firm reportedly said that the deal could “prove to be a massive catalyst for the Windows Phone ecosystem.”

Google will certainly need to tread carefully. Firms which have up until now supported Microsoft’s platform as well as Android may could withdraw support for Google’s OS if the company begins competing with them in the device arena. LG, HTC and Samsung for example would all be affected if new Android technologies were released – at least initially - exclusively on Motorola devices.

All smartphones manufactured by Motorola run on Android. It is the world’s eighth largest smartphone vendor, with 4.3 million shipped in Q2 2011 – of the top ten, seven manufacture devices which use Android. The acquisition means that Google is no longer merely a provider of an open source OS, but a smartphone vendor – and this brings it into competition with many of its partners.

However, Samsung and HTC have already expressed a positive outlook: Samsung has stated that “the news is so sudden that we are still studying its implications ... but we are not viewing it so negatively”, while HTC considers a stronger Google patent portfolio as being “beneficial for the whole [Android] group, the whole camp.” This last remark is particularly significant, as many industry observers are speculating that acquiring Motorola’s handset business was not the aim of the deal.

If dominating the Android handset market is not the primary incentive for the deal, what is Google’s motivation? The most likely candidate which analysts have identified is Motorola’s extensive collection of patents; Frost & Sullivan speculate that this is the key reason for the acquisition. Google is not the only industry giant to have been embroiled in patent litigation concerning mobile technology, but has come under particular fire recently, with an IP disadvantage seemingly the key problem.

The spate of IP disputes could therefore have posed a threat to the core pillar of Google’s business model – the free platform, fundamental to accruing revenue from advertising and applications. Acquiring Motorola’s 24,500-strong portfolio of patents would dramatically strengthen Google’s position in terms of IP – and may therefore have been the primary reason for the deal. Given that before the deal Google controlled a mere 1,000 patents in the mobile phone arena, the argument looks even more compelling.

To add weight to this theory, F&S analyst Craig Cartier notes: “Using one of the industry’s recent patent auctions as a baseline, Novell sold off its portfolio of 882 patents for $450 million in 2010 – a value of $510,204.08 per patent.” Disregarding Motorola’s mobile business and focusing solely on the 24,500 patents, the $12.5 billion acquisition would amount to $510,204.08 per patent. “In the Motorola acquisition, Google bought a patent portfolio and got a mobile phone business thrown in for free”, adds Cartier.

The patent holding firm InterDigital – previously tipped as a potential acquisition for Google – registered a drop of over 10% in its share prices following the news, although its value had already increased substantially as a result of the speculation. InterDigital may yet form an alliance with another firm eager to keep pace with Google.

Google’s  acquisition of Motorola comes hard on the heels of the sale of Nortel’s patents in which Google was the loser to a consortium comprising Apple, RIM, Microsoft, Sony and others, which rapidly became known as ‘everyone but Google’. Google opened the bidding for Nortel’s 6,000+ patents before losing out to the consortium. This move could now be interpreted as a smoke screen to conceal Google’s true target.

Interestingly, Microsoft was reportedly considering a buyout of Motorola due to concerns that the handset company’s IP would be seen by Google as a means of further raising Android’s profile.

Google’s major rivals Apple and RIM could both benefit from a disturbance in the Android arena; the latter in particular could well seize the opportunity to address the shortcomings of its own device portfolio. RIM has significant traction in the business handset market and also boasts an alluring number of patents - both factors that could spur a larger firm into a purchase.

But while the patent argument is strong there is, however, another view, which relates much more to developing and emerging markets. The simple fact is that the power of smart phones is only just starting to be realised in emerging markets. In these areas, where PCs have not been widely used, smartphones will rapidly become the internet access device of choice.

Apple and RIM have enjoyed a head start in smartphones in the developed countries. But the much bigger prize is still up for grabs, and by getting first mover advantage and flooding the market with affordable smartphones using Android, Google and all Android phone manufacturers will reap an even bigger reward.

If this really is behind Google’s move it also gives them a very powerful reason not to favour Motorola devices over those from other Android manufacturers.

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