Googles Purchase of Motorola Mobility

Our acquisition of Motorola will increase competition by strengthening Googles patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies- Larry Page, CEO, Google It was announced on Monday, August 15th, that Google, the online giant, would buy Motorola Mobility, a maker of handsets and other electronic devices, for a whopping $12.5 billion. The deal not only comes as a surprise, it will have a big impact on the mobile industry, too. For starters, the merger is very good news for the shareholders of Motorola Mobility, among them Carl Icahn, the activist investor. The offer, $40 a share in cash, was 63% above the closing price of Motorola Mobilitys shares on Friday. It is unlikely that shareholders would have got such a price on the open market any time soon. Although Motorola Mobility, which was only spun-off from Motorola in January, has staged something of a turnaround, it is still too small to compete with much bigger rivals such as Apple, Nokia and Samsung. Since March its shares had been trading below their issue price of $25. Google now seems to be going down this path, and others may follow suit. After the announcement of Googles takeover of Motorola Mobility, analysts began speculating that Microsoft might now buy RIM or, more likely, Nokia, which has already agreed to use Microsofts Windows Phone as the software to power its next generation of smartphones. It should not only be able to deliver more competitive Android tablets, but speed up the development of other sorts of consumer electronics (Motorola Mobility also sells television set-top boxes). In addition, Google will gain control of Motorolas huge portfolio of intellectual property, which includes 17,000 patents worldwide. This will give Google, and, indirectly, makers of Android devices, a much better bargaining position in current and future legal battles, which include litigation brought by Oracle, a software firm, over Androids use of Java, a software technology. Motorola, which introduced its first cellphone nearly 30 years ago, has more than 17,000 patents with another 7,500 still awaiting approval. That trove presumably will give Google and its Android more patent protection against a list of legal antagonists that include three of the technology industry's most powerful companies - Apple, Microsoft and Oracle Corp.

Why is Google willing to pay a 63% premium?

Smartphone market is evolving at a very fast pace with innovations being the fuel. What prohibits some other firm to imitate the innovation of a firm is- patents. Patents have become the leverage a company must have in this market to save itself from the law suits. These law suits can infringe heavy financial penalty. Also, it may lead to a stay order from the Court which may result in large losses. Currently, almost all technology firms are engaged in law-suits with each other. Last month, Apple and Microsoft led a consortium of technology companies in a $4.5-billion purchase of roughly 6,000 patents from Nortel Networks, the Canadian telecommunications maker that filed for bankruptcy in 2008. Google, which lost out in the bidding, criticised the deal as anti-competitive. Several weeks later, Google paid $4.5 billion for more than 1,000 patents from IBM. In the heat of the moment, Google very quickly announced the acquisition of Motorola Mobility. The very high premium offered by Google may be because of several reasons: 1. Fearing an acquisition bid by a competitor like Apple or Microsoft who are cash rich. 2. To ensure that the deal goes through smoothly without any resistance from the shareholders. 3. It views the deal as a two way benefit wherein Google gets a large number of patents protecting it from law suits. Also, it opens strategic opportunities to operate as a dominant integrated smartphone vendor. Modern smartphones are subject to a complex web of thousands of patents, even on seemingly small features. Samsung was recently prevented from selling certain Android-based smartphones in several European countries, pending the outcome of a patent infringement suit from Apple. In this case, the disputed item is the Androids photo management software. HTC has had infringement lawsuits filed against it as well.

With the deal, Google becomes a major integrated maker of smartphones, controlling both the operating system and the hardware it runs on. This puts Google on the same footing as Apple, which had previously dominated among integrated companies. The other two integrated players, Research in Motion and HP, which recently announced its exit out of the tablet and the smartphone market, are both lagging significantly in the market share.

According to a study conducted by NPD group, Googles Android has a 52% U.S. smartphone market share, and Apples iOS controls 29%. Blackberry OS had 11% market share, and HPs webOS along with Microsofts Windows Mobile and WP7 held about 5%. Up until this point, Google has had very little hardware expertise and had to rely on its network of partners to make compelling phones for its software. Now, however, Google gains 19000 Motorola employees with expertise in hardware design, manufacturing and logistics. Would Google actually derive value from this transaction or there is a hidden intention behind this deal? Its publicly unknown what Googles plans are, but the acquisition opens the possibility of a purely Google phone to compete head to head against the iPhone. Currently, Googles Nexus One phones are made by HTC, and its newest phone, the Nexus S, was created by Samsung. Investors in Android partners, like Samsung and HTC, may rightfully be nervous about Google entering the hardware field. Though it has so far indicated otherwise, its possible that Google will somehow favour Motorola for future Android releases, hurting the competitiveness of other companies running Android. The smartphone market is fast becoming a two-sided struggle between Apple and Google systems. So far, most discussion of this acquisition has centered around only smartphone hardware and Android patents. There may also be opportunities with Motorolas other products. For instance, Google TV could be combined with Motorola cable boxes to form a new competitor to Netfilx. With Motorolas extensive hardware design expertise, Google could shake up the Android-based handset market. Even though Motorola Mobility will remain a separate company, Google will have the opportunity to integrate hardware and software to make better performing Android handsets. Moreover, it could sell topspec Motorola Android smartphones at less than half of what the competition does incurring losses, but consolidating market share. What Google could possibly be thinking is to raise the levels of innovation. Google is known for innovations and so is Apple. But, in the last five years, Apple has surged ahead with its cutting-edge designs of i-phones and the latest i-pad. Googles products are mostly software and that too, open-source. In spite of being very good, they are not able to create a buzz like Steve Jobs does with every new launch. With Motorola, Google may use the required hardware to bolster the Android performance and may be, develop an altogether new product. If Google succeeds in making such a product, it will reap the benefits of the patents in its name like Apple is doing till now.

According to Google, this deal is about Motorolas 17000-plus patents to protect the Android operating system from the legal challenges. How would Apple react to this news and what does this deal mean to other smart phone manufacturers? This acquisition will not change our commitment to run Android as an open platform. Motorola will remain a licensee of Android and Android will remain open. We will run Motorola as a separate business. Many hardware partners have contributed to Androids success and we look forward to continuing to work with all of them to deliver outstanding user experiences. Larry Page, CEO, Google Although Google has very clearly specified that it will run Motorola as a separate business and it will not affect other smart phone makers, Motorola is bound to get some leverage because of this deal. This may potentially result in other manufacturers switching to other operating systems of Microsoft, Samsung etc. Google has to be very cautious and transparent to other manufacturers regarding this deal. Apple has not taken any stance as of now to counter the deal. Apple relies purely on innovation and cutting-edge technology. Although Microsoft can be expected to take an offensive and go for further buy-outs like RIM but Apple is unlikely to be affected much. Steve Jobs leaving Apple has left a void but the professional firm Apple is, it will continue to develop new and better products. The battle for smart phones is getting reduced to a two-way battle between Apple and Google. It is very difficult to predict who will emerge better in the long run but in the current scenario, Androids cost effectiveness is taking it ahead at a fast pace. Apple already has a large number of patents associated with itself alongside the partial patent buy-out of Nortons patents. In the near term, the challenges and distractions of integration (similar to Nokia/Microsoft) could help Apple gain share. This deal may weaken the hand of Android Other Equipment Manufacturers (OEMs) (Samsung, HTC, LG, etc.) and may put additional pressure on the Blackberry maker, Microsoft to win "third platform" status. Google is saying this deal won't change their commitment to OEMs, however this takeover may be significantly disruptive to the Android OEMs, who now, depending on how Google handles it, view Google as a competitor as well as partner. This turns Google into both a handset supplier and a platform, which may have some conflicting implications. This transaction may accelerate smart phone consolidation. Two possible transactions may gain momentum: Microsoft/Nokia -this transaction may put pressure on Microsoft to formally acquire Nokia to achieve similar objectives, although internal Microsoft challenges to this remain; and RIM may be more attractive as a takeover candidate. What are the other possible legal and regulatory concerns which Google might face from this deal?

There are many potential risks associated with this deal. The all-cash acquisition announced Monday is the boldest move in Google's 13-year history. Besides being by far the largest deal that Google has ever proposed, buying Motorola Mobility would push the company into phone and computer tablet manufacturing for the first time, at the risk of alienating the other device makers that depend on Google's Android operating system. The proposed deal also is likely to increase government scrutiny on Google at a time when antitrust regulators in the U.S. and Europe already are parsing its business practices to determine whether it has been abusing its power to stifle competition. The inquiries are focused primarily on the company's Internet search and advertising businesses, but regulators also are looking into whether Google is using Android to ensure its services receive preferential treatment on devices using that free software. Google is framing its Motorola acquisition as a way to protect the competitive landscape at a time when Android and the device makers using the software are facing a litany of lawsuits alleging that Google's operating system pilfered the patentprotected technology of other companies. Since the start of this year, Googles share price has fallen steadily as investors have begun to fret about its longer-term prospects. Now they have another reason to worry. On June 24th the company revealed that Americas Federal Trade Commission (FTC) had opened a broad investigation into its online-search and online-advertising businesses to see if it has abused its dominant position. Some pundits predict that the trustbusters tussle with Google could turn as bloody as their battle with Microsoft in the 1990s. This deal comes at a time when Google is under scrutiny by regulators in US for abusing its dominant position in the advertising business. It is already badly publicised for diverting too much from its core business and foraying into other domains. The deal may attract attention from authorities in the US and may affect it.

By:Vaibhav Sharma ; 9958931300; pg11vaibhav_s@mandevian.com Narsinha Jawalgaonker ; 7503737723; pg11jawalgaonker_n@mandevian.com Prateek Maheshwari ; 8527845438; pg11prateek_m@mandevian.com