In what looks like an attempt to help guard against a legal patent assault by its large tech rivals, Google is spending $12.5 billion to buy mobile handset maker Motorola Mobility.
Early today, Google dropped a bombshell on the technology industry with its announcement that it will buy mobile handset maker Motorola for $40 a share, a 63 percent premium over the closing price of Motorola Mobility on Friday.
Even though Google's chief financial officer Patrick Pichette said that the Motorola business will be run separately from Google's core search and software businesses, the acquisition could take the search giant's attention away from its core competency of developing software. In addition to its traditional business, Google will now have to deal with the business of making hardware.
Motorola, which has been in existence for 80 years, is one of the oldest mobile phone makers on the market. In fact, it developed the first commercial cell phone. It's this extensive history in the cell phone and mobile communications business that likely made Motorola an attractive acquisition target to Google. Motorola has an enviable treasure trove of intellectual property that could help Android fight a mounting patent assault from the biggest names in technology.
In his blog post explaining the deal, Google's CEO Larry Page said that Motorola's strong patent holdings were a major consideration in the deal.
"We recently explained how companies including Microsoft and Apple are banding together in anti-competitive patent attacks on Android. The U.S. Department of Justice had to intervene in the results of one recent patent auction to "protect competition and innovation in the open source software community" and it is currently looking into the results of the Nortel auction. Our acquisition of Motorola 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."
Since the Android operating system was first developed, Google's strategy has been to make the open-source software available to any hardware maker for free. The idea was to compete against Apple's closed iOS platform by allowing hardware makers such as Motorola, Samsung, and HTC to leave much of the software innovation to Google, while they could focus on innovating around hardware. Meanwhile it could also battle against Microsoft, which asks its licensees to pay a fee for using its software.
Android's strategy has reaped rewards. In just three years the Android platform has emerged as the leading mobile operating system for smartphones. Google, which is working with 39 phone manufacturers and 231 carriers around the world, says that more than 550,000 Android devices are activated every day.
But Android's success has drawn the ire of competitors, particularly Microsoft and Apple, which offer their own competing mobile platforms. Oracle, which recently acquired a patent portfolio from Sun Microsystems, has also waged a patent war against Google.
Oracle is using the Java patent portfolio it acquired from Sun to go after Android. Meanwhile, bitter enemies Apple and Microsoft have teamed up to buy patents from Novell and bankrupt Nortel Networks. The goal of these groups acquiring the patents is to force Google to pay $15 licensing fee for every Android device, thus making it more expensive for handset makers to use the Android platform and perhaps slowing Android's growth, Google says. Patent holders have also targeted companies that are already using the Android software, including Barnes & Noble, HTC, Motorola and Samsung.
"A smartphone might involve as many as 250,000 (largely questionable) patent claims, and our competitors want to impose a "tax" for these dubious patents that makes Android devices more expensive for consumers," said David Drummond, Google's chief legal officer. "They want to make it harder for manufacturers to sell Android devices. Instead of competing by building new features or devices, they are fighting through litigation."
This is where Motorola comes in. The company has a patent portfolio that includes more than 17,000 approved patents. And it has another 7,500 patents filed and pending approval. This portfolio of patents is substantially larger than the group of patents that was sold from Nortel Networks.
Earlier this summer, a consortium of bidders, including Apple, Microsoft, and Research in Motion, bought 6,000 Nortel patents for $4.5 billion. The hefty price tag paid for these patents caused Motorola to re-examine its own patent portfolio. And it caused activist investor Carl Icahn to push Motorola to look at more ways it could monetize its hefty mobile patent portfolio.
Google's big buys
A list of some of Google's biggest and/or most important acquisitions to date.
Applied Semantics, April 2003 ($102 million)
Built AdSense, the paid search ad platform that still drives most of Google revenue and profits.
Picasa, June 2004 (terms not disclosed)
Image-organizing tool remains one of Google's most popular services
Android, August 2005 (terms not disclosed)
The platform started by ex-Danger head Andy Rubin is now the second-most popular mobile OS in the world.
YouTube, October 2006 ($1.65 billion)
Video-sharing site that was initially a copyright risk now earns more than $1 billion a year.
DoubleClick, April 2007 ($3.1 billion)
Helped launch Google's display advertising business.
FeedBurner, June 2007 ($100 million)
Helped users and advertisers manage RSS feeds.
Postini, June 2007 ($625 million)
The company's e-mail security services have become key features of Google's enterprise apps business.
GrandCentral July 2007 ($45 million)
The technology behind Google Voice.
AdMob, November 2009 ($750 million)
Gave Google a major technology inroad into the mobile advertising business.
On2 video compression, February 2010 ($133.9 million)
With this acquisition came codex that Google later renamed WebM and is pushing as a new Web video standard.
ITA, June 2010 ($700 million)
Purchase of travel search company was opposed by competitors who felt it would give Google unfair power.
Like.com, August 2010 ($100 million)
Visual search and e-commerce engine boosted Google's product and image search sites.
Slide, August 2010 (terms not disclosed)
Social media company founded by PayPal veteran Max Levchin was purchased as part of effort to make Google products more "social."
AdMeld, $400 million (June 2011)
Aimed at helping Google optimize online display ads.
Motorola Mobility, August 2011, pending ($12.5 billion)
Would give Google valuable intellectual property and get it directly into the handset business.
Google: In search of patents
Jason Helfstein, an equities analyst with Oppenheimer, believes that Motorola's patent portfolio was the main driver in Google's decision to acquire Motorola. He also said in a research note published Monday morning that based on the price that Nortel's patents recently fetched at auction, Google is getting a bargain. A price tag of $43 a share is "probably the cheapest and most efficient way for Google to get a strong IP position in wireless and defend the Android eco-system against legal challenges," he writes.
Motorola's combined intellectual property portfolio is about four times larger than Nortel's patents, which recently sold for $4.5 billion in cash. This means that Google is getting four times the intellectual property for only twice the price.
Indeed, CNET senior writer Jay Greene pointed out in a recent article about Google's patent woes, that it would likely get more aggressive in acquiring its own patents.
"As much as Google appears to loathe playing the patent game, spending money to prevent litigation rather than innovating, it may have come to realize that it has no other alternative," Greene wrote.
In June, Google bought 1,000 patents from IBM, which included technology from Web-based querying to servers and routers. It also bid on the Nortel patents, but lost that battle to the consortium that included rivals Apple and Microsoft.
The company has also been reportedly eyeing patents from wireless technology developer InterDigital. Apple, Samsung and others in the mobile market are also in pursuit of these patents, according to reports. And there could be even more patents up for grabs in the future as Eastman Kodak has said it's considering selling some 1,100 patents related to digital imaging, important technology for mobile phones.
Some analysts have speculated that Google may be interested in those patents. There was even talk of Google potentially bidding on BlackBerry maker Research In Motion, which holds 3,134 patents and patent applications for mobile devices. RIM's depressed stock price had made it a potentially attractive target. But now that Google has announced a deal with Motorola, the chances of Google also going after RIM's portfolio seem rather slim.
Google's chief legal officer and senior vice president David Drummond had hinted earlier this month in his blog post blasting competitors Apple and Microsoft that Google would be looking for ways to acquire more patents.
"We're also looking at other ways to reduce the anti-competitive threats against Android by strengthening our own patent portfolio," Drummond wrote.
On a call with investors and journalists this morning, Google's legal team would not divulge how Motorola's patents would factor into its legal strategy. But Drummond said he believes the Motorola patents will help protect all Android products.
"We have been saying for a long time that we intend to protect the Android ecosystem," Drummond said on the call. "While we're not prepared to talk specific strategy, Motorola having that kind of patent portfolio to protect the ecosystem is a good thing."
Updated 12:00 p.m. PT: This story has been updated with additional information from Google's conference call Monday morning. It was also updated with additional background information from a previous article written by CNET senior writer Jay Greene.