Authorities in China have approved Google’s $12.5-billion deal to acquire Motorola Mobility, clearing the way for Google to put a bow on its biggest corporate acquisition to date. (Google has confirmed the approval, but the news broke by way of an SEC filing from Motorola Mobility.) By acquiring Motorola, Google will for the first time be in the business of making mobile devices like handsets and tablets — ostensibly putting it into direct competition with the likes of Samsung and HTC. However, the acquisition also puts Google in the set-top box business — Motorola Mobility makes millions of them for cable companies — and arms Google with a sheaf of some 17,000 patents it can use to defend Android from infringement claims.
Google is obviously convinced acquiring Motorola is crucial to its business. But how will the acquisition fuel Google’s ambitions — and how will it impact the Android platform?
Google announced its plan to acquire Motorola Mobility back in August 2011, and immediately raised eyebrows. On the surface, the move would seem to violate basic antitrust regulations, since Google makes the Android operating system and Motorola is a maker of Android devices. That’s the sort of vertical market integration antitrust laws were designed to prevent. However, although the deal received scrutiny from regulators, none raised significant objections to it: Within six months, Google had received regulatory approval for the deal from both the European Union and the U.S. Department of Justice. That left China has the sole significant holdout.
Chinese regulators were the only ones to attach significant conditions on the deal: Google has to agree that the Android operating system will remain available for free to Chinese mobile device manufacturers for at least five years. The stipulation comes just as Chinese phone makers start to bet heavily on Android: Some market analyses have Android accounting for as much as 70 percent of the smartphone market in China at the end of 2011, and China’s Baidu has just announced plans to launch its own smartphone (and app store) based on Android. (The main difference? All of Google’s core add-on services have been replaced by Baidu services, plus 100GB of free cloud-based storage.) It also means that, no matter what the outcome of high-stakes litigation with the likes of Oracle, Microsoft, and (potentially) Apple, Google will have to make Android available for free to Chinese phone makers through at least 2017. Keep in mind Android has only been available to developers since late 2007, and phones didn’t start to reach consumers until late 2008.
Putting the pinch on Android device makers
On the surface, Google’s acquisition of Motorola Mobility might not give other Android OEMs much to worry about. According to Gartner, Motorola accounted for just two percent of the worldwide mobile phone market during the first quarter of 2012, while in the United States, Comscore had Motorola accounting for 12.8 percent of total U.S. mobile subscribers — including both smartphones and old-style feature phones. Motorola seems to be beating out Sony and HTC (which has seen its profits drop 70 percent and just got hit with an import ban from Apple). But Motorola is well behind the likes of Samsung, LG, and Huawei — and, of course, behind Apple, Nokia, and even struggling smartphone pioneer RIM. In marketshare terms, Google isn’t buying a leader.
Google has said repeatedly that it doesn’t plan to make major changes to Motorola Mobility’s core businesses, and that the acquisition won’t actually make Google a device maker. A statement like that might be a bit disingenuous, but serves to underscore Google’s explicit intention to treat Motorola Mobility the same way it treats any other Android OEM.
But it’s hard to take those assurances at face value. Once Motorola Mobility becomes Google’s in-house Android device maker, it’s hard to believe they won’t eventually get some preferential treatment. Some of that might be indirect, perhaps as employees drift between the companies. But some of the benefit will also be direct: Inside one by happy Google family, Motorola will presumably have access to resources and channels of communication unavailable to other device makers — even if it’s just showing up for pizza on a Friday afternoon.
Google is trying to counter those sorts of trepidations by expanding its Nexus program — when Android’s Jelly Bean release comes along, the company plans to offer “stock” Android devices from five manufacturers (Samsung, LG, Motorola, Sony, and HTC) and sell them direct to consumers via Google Play. To do this, Google is offering these partners early access to Android code, so they can start working not only on their Nexus devices and be able to offer a stock Android Jelly Bean experience from day one, but also start working on their own custom Android skins for Jelly Bean so they can release updates to existing devices sooner.
Google tried to sell devices directly to consumers with the original Nexus One, and that effort landed like a lead balloon — in part because Google simply wasn’t ready to deal with the support load of selling phones, but also because carriers hated the idea. It’s not clear device makers really want to ship stock Android devices. Every one of them has developed their own shells on top of Android to try to distinguish their offerings and leverage their hardware. Stock Android devices seem destined to be a race to the bottom on pricing — the advantage of being in the Nexus program primarily being getting earlier access to Android code.
Similarly, Google’s expanded Nexus strategy isn’t likely to sit well with mobile carriers, who have repeatedly indicated they have no interest in stock Android devices, and instead want highly customized Android devices that lock consumers into a carrier’s services. Consider the much-anticipated HTC One X. On AT&T, it’s a “Google-certified” device — meaning it it ships with pre-installed Google software and the Google Play Store. However, it also ships with a locked bootloader (so modders will have to find a way to hack around the device to load new or custom versions of Android) and the device ships with a heap of AT&T services (Code Scanner, Family Map, Navigator, and Ready2Go) pre-installed and unremovable.
Google’s ramped-up Nexus strategy might see some traction in emerging markets and amongst consumers who prefer pre-paid plans. Those markets tend to be dominated by retailers, not carriers, which could give Google an opportunity to put an unadulterated Android experience in millions of users’ hands.
Will Motorola shield Android from lawsuits?
Google has indicated that its interest in Motorola is primarily about patents. By bringing Motorola Mobility’s pool of 17,000 patents into Google’s portfolio (including 18 that are generally considered very valuable), Google argues it will be better able to protect Android from infringement claims from other technology companies, and therefore keep Android a free and open operating system for everybody.
That’s a fine idea, except that the terms “free” and “open” are disputable terms in the Android world. Sure, anyone can download the Android source code from Google, for free. But Microsoft is going after every Android device manufacturer for per-device royalties on everything they make because they claim Android device infringe on Microsoft patents — which wouldn’t really be true if the system were free and open. And so far, nearly every device maker has caved, including Samsung, LG, HTC, Acer, ViewSonic, and Quanta (maker of the Kindle Fire). Barnes & Noble was resisting, but finally caved and entered a $300 million partnership with Microsoft. There are essentially three holdouts: gear makers Inventec, Foxconn, and Motorola.
How’s that going for Motorola? Last week Microsoft managed to get Motorola’s Android devices banned from import to the United States. Motorola — and, soon, Google — has a dog in the fight, though. It’s managed to get Windows 7 PCs and the Xbox 360 banned from import to Germany on patent infringement grounds. It’s also seeing some success in efforts to get the Xbox 360 banned from import to the United States under similar infringement claims.
Android also faces significant threats from Apple. The iPhone 4S may be responsible for HTC’s recent profit slump, but former Apple Steve Jobs famously despised Android as a stolen product and was willing to “go thermonuclear” to see Android put away. Although current CEO Tim Cook has been less vitriolic (indicating the company prefers to settle rather than litigate) there has been no real change in Apple’s stance towards Android, with ongoing litigation against HTC and Motorola — and, when Google acquires Motorola, it also acquires a direct legal conflict with Apple.
Motorola has had some success against Apple — managing to get iCloud push notifications shut down in Germany — but has also taken considerable heat for its efforts to extract exorbitant licensing fees for standards-essential patents that are supposed to be available to anyone under fair, reasonable, and non-discriminatory (FRAND) terms. Notably, Apple and Microsoft have both pledged they will not assert infringement claims of standards-essential patents in lawsuits where they are licensed. Motorola is being investigated by the ITC for possible abuse of patents that are supposed to be available under FRAND terms. (Samsung faces a similar probe in Europe.)
So far, Google has made no pledge that it won’t assert infringement claims on Motorola’s standards-related patents going forward. Industry watchers take this to mean Google intends to play hardball using Motorola technologies that are key to mobile communications standards in order to “protect” Android.
Opportunity to challenge Android?
Motorola Mobility represents Google’s biggest acquisition to date, so the company clearly believes the move is important. However, the takeover seems to be primarily about damage control and getting more intellectual property into Google’s hands. Bringing Motorola Mobility in-house doesn’t seem to be about advancing the Android platform or Google’s primary businesses — which, of course, revolve around advertising. Moreover Google risks alienating Android device makers and makes all of Motorola’s legal problems its own.
Google may get some unexpected benefits from acquiring Motorola Mobility: the company manufacturers an enormous number of cable modems and set-top boxes. Those represent solid revenue streams, and, given that Google TV has yet to take off in the marketplace (former Google CEO Eric Schmidt predicted it would be on the majority of new TVs by mid-2012 — clock’s ticking!), Google may have an opportunity to innovate the Google TV platform on its own without undercutting an established market. But hardware has never really been an issue for Google TV. It’s content. And acquiring Motorola isn’t going to help Google’s position with film studios, television networks, and streaming video providers.
It’s also difficult to assess the impact such a large acquisition will have on Google. Motorola Mobility has more than 20,000 employees worldwide — that will increase Google’s overall headcount by about 40 percent. Google will almost certainly eliminate redundancies — fire — a portion of Motorola Mobility’s people once the acquisition is complete, but the takeover is almost certain to have an impact on Google’s corporate culture.
If the Motorola acquisition does tick off other Android device makers — and the expanded Nexus program fails to assuage them — it could represent an opportunity for another smartphone platform to gain ground against Android. The obvious candidate here is Microsoft’s Windows Phone, which so far isn’t making serious inroads into the smartphone market. It would be a tough sell — Microsoft essentially has its own in-house phone maker in Nokia — but if Microsoft can convince equipment makers and mobile carriers there’s a financial upside to pushing Windows Phone ahead of Android, both OEMs and carriers would likely get on board. After all, they’re not motivated by Android being free and open — they’re motivated by the bottom line. These companies are paying Microsoft for each device anyway — maybe it makes sense to make devices that will have the best seat at the table in the Windows 8 world.