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Case Study Topic: Googles purchase of Motorola Mobility

GOOGLES PURCHASE OF MOTOROLA MOBILITY

Google and Motorola Mobility entered into a "definitive agreement" for Google to purchase Moto's mobile hardware business. Google has paid around $12.5 billion, making the deal its largest to date. The price breaks down to $40 per share. Googles decision underscores a major shift in Google's strategy, one that stands to transform the web giant from a company focused primarily on online services, such as search and email, to a hardware manufacturer building phones, tablets and other electronic devices. Why does Google want to buy Motorola Mobility? One can imagine many reasons, but in press call, Google executives went to great lengths to emphasize that the focus is squarely on patents. Google has been in the middle of a very bitter battle over smart phone patents. Microsoft and Apple's recent purchase of patents from Novell and Nortel seemed to be the straw that broke the camel's back; not long after that move, Google Chief Legal Officer David Drummond wrote a scathing blog post in which he said the companies were "banding together" to use "bogus patents" as a "weapon to stop" innovation, citing the numerous lawsuits against Android hardware manufacturers as evidence. According to them, acquisition of Motorola will increase competition by strengthening Googles portfolio which will enable them to better protect Android from anti competitive threats from Microsoft, Apple and other companies. With the Motorola Mobility buy, Google has got whopping 17,000 patents under its belt -nearly three times the amount collected in the Novell and Nortel deals combined. Moto also has about 7,000 other patents currently pending. Owning a handset maker could improve Android, if it shortens the feedback loop for problemreporting and new ideas, but it could hurt the platform and its end-users more if it scared off competing hardware vendors, shrinking the base to which new applications are written and reducing the diversity of options available to end-users. As a proprietor of an open, multi-sided market, Google needs to serve Androids hardware vendors, app developers, and end-users well enough that a good-sized group of each continue to bring it value and so the end-users watch the ads whose sale puts money into Googles pocket from it all. The patent motivations are more straightforward. As we know, it doesnt take deliberate copying to infringe a patent, and patents are granted on small enough increments of software advance that an independently developed application may incorporate dozens to hundreds of elements on which others claim patents, and at millions of dollars a lawsuit, its expensive to

disprove them. At least if those others are also making phones or software, Google is now more likely to have patents on what they are doing too, paving the way for a cross-license rather than a lawsuit. Wouldnt we all be better off skipping those patent threats and cross-licensing transaction costs? As Googles pre-Motorola travails showed, its almost* impossible to opt-out of the patent system by choosing to publish and not patent your own inventions. Unlike in copyright, where you can share under Creative Commons, for example, and just have to prove you never accessed anothers work if accused of infringement, you can only save yourself from patent claims by assuring that every bit of technology you use was published more than 17-20 years ago! Patents for software motivate lawsuits more than they induce or reward product development. Google + Motorola may prove to have non-patent benefits too, but its early indications shine a spotlight on the thorny thickets of the patent landscape. The expansion opens up a new front in Google's head-to-head war with Apple, putting the two giants in direct competition with one another in several markets, as Google embraces Apple's approach to gadgets by controlling all aspects of development. Google is moving into hardware, which is very different from what they've done all along. It's very difficult for a company to be able to be successful software and hardware company. It worked for Apple to be in the hardware and software industries, but not all companies have been that successful. Google's move toward Apple's close management of software and hardware signals a departure from its previous path and suggests Google may be dissatisfied with its current software licensing arrangements, which have led to the proliferation, but also fragmentation, of its Android mobile operating system. Most directly, the deal marks a defensive maneuver in the high-stakes patent war that has pitted the world's largest technology companies against one another in dozens of drawn-out intellectual property (IP) disputes. Google CEO Larry Page framed the acquisition as a means to protect Google's Android mobile operating system against "anti-competitive threats" by shoring up his company's arsenal of patents. Analysts agree that Motorola's 17,000 patents and 7,500 patent applications are a major win for Google, which lacks a robust portfolio of wireless patents relative to more established players and has been vulnerable to lawsuits from the likes of Apple, Microsoft and Oracle. Over forty lawsuits have been filed against Android, and ongoing patent disputes threaten to impose licensing fees on the software Google has given away to phone manufacturers for free, potentially jeopardizing Android's explosive growth. Google is a relatively new entrant in the mobile space and does not have a lot of mobile IP, so anything it can do to build up its IP in the wireless space will help reduce potential risk to the company from lawsuits in the future. If you look at Motorola's history and role in pioneering mobile communications from the very start, you'll see they have some really key patents that will be useful to Google.

Yet patents are only part of the story, experts say. The acquisition suggests that Google sees itself as unable to adequately compete in the mobility market without its own handset manufacturer. Google's bet is that having greater control over Smartphone software and hardware will help it move beyond the desktop and beyond search. Owning Motorola will allow Google, more than ever before, to create mobile devices that satisfy the web giant's vision for what cell phones and tablets should be able to do. A new breed of Motorola Smartphone could be designed from the ground up to integrate Google products at every turn, from featuring the Google-plus social network to adding near field communication chips that allow cell phones to be substituted for credit cards via Google Wallet. Fundamentally, Motorola offers Google a bridge from the digital to the physical world, and with it, a means of gaining valuable information about its users, such as their locations or what applications they use the most. Though Google said that it will continue to license its Android software, its mobile strategy will cease being at the mercy of third-party handset manufacturers like HTC and Samsung. Instead, Google will able to dictate the price, distribution and features of its own line of devices. Google no longer has to put its future in the hands of companies that deliver mediocre Android devices that damage the whole ecosystem. Apple's success was built on controlling its own destiny and not relying on third parties to deliver its vision. Google is saying, "We're going to deliver our vision as we see fit, much as Apple has.'" Google also stands to bolster its efforts to gain inroads into the living room by spreading to TVs. Google TV, which was unveiled last year but was unable to gain much traction, may stand a better chance when paired with Motorola's set-top box offerings. Until now, Google has been essentially hands off when it comes to hardware: it has offered its Android software to manufacturers at zero cost, without a having a say in the form of the phones Android will power. This disruptive and unorthodox strategy has allowed Google to gain enormous market share in very little time, overtaking Apple to claim 48 percent of the global Smartphone market. To some extent, quality has been sacrificed for quantity as Android has expanded to more than 150 million devices made by more than thirty different manufacturers. Google frequently updates its Android software, but app developers, manufacturers and carriers are not always able to keep up, resulting in a proliferation of different versions of the Android operating system offering a range of experiences for users. Depending on Google's relationship with the handset manufacturer, or the manufacturer's approach to upgrades, a consumer could purchase a Smartphone running outdated software, straight out of the box. Not all Android apps perform equally on different versions of the software, an issue that has been a source of frustration for users and developers alike. Google's new approach -- controlling the Smartphone experience from end-to-end -- mirrors the vertical-integration strategy Apple has pursed with spectacular success, but one that has lately been a bust for the likes of Nokia and Research in Motion. Nokia, for example, recently

ceded its top spot as the world's largest Smartphone vendor to Apple and announced it would retire its Symbian operating system in favor of Microsoft's Windows Phone software. Google is staking billions on its ability to successfully control both the software and hardware components of its company's devices -- all while not alienating its partners, who have been instrumental in Android's rise and with whom Google will directly compete once the Motorola acquisition is complete. Google has had history of picking favorites, but it has never directly competed with manufacturers. Manufacturers have come out with statements of support. But what's said in public is one thing, and what's said behind closed doors is another.

How will Google run Motorola? Google says that it will run Motorola as a separate business. According to them after the transaction, nothing changes -- its business as usual. It's about protecting and extending the ecosystem. Owning Motorola will not only give Android a kick, but will enhance competition and offer consumers greater choice. It will, of course, be interesting to see how that argument shapes up. The biggest question will focus on whether or not a Google-owned Motorola will get preferential access to new versions of Android before other manufacturers. Whatever happens, its going to take Google some time to get this deal done, and if it does get approved, we can expect some significant regulatory concessions.

Why is Google willing to pay a 63% premium?

M&A is all about taking risk. And Google can afford a lot of it. Although the amount of the reverse termination fee is stunning, the concept of such a payment is not unusual. If a deal is spiked for regulatory reasons, a seller frequently wants a no fault divorce the buyer writes a check to the seller, and walks away. In Googles case, the percentage of the payout is a near-record. The reverse break-up fee is a strong statement of Googles confidence that the deal will close in the timeframe allowed under the merger agreement, Google said in a statement. Generally, if a company triggers a reverse termination fee, each side walks away amicably. Everyone agrees thats the end of the fuss and the payouts. But Google has agreed to much more than a no fault divorce and a termination fee. Even if Google doles out the $2.5 billion, it could be liable for as much as a $1 billion MORE if the company violates its obligations under the agreement to use reasonable best efforts to obtain the regulatory clearance. (One sticky problem: No one knows exactly what the reasonable best efforts standard means, but a judge trying to figure out what is reasonable would probably consider that the parties had put a total of $3.5 billion at risk).

That brings Googles total potential exposure to around 28% of the purchase price. But, wait! Theres more. If Motorola Mobility thinks Google has violated the agreement, before it tries to collect that $3.5 billion, it can try to get a court to specifically enforce Googles obligations with an injunction. So Google owes 20% of the price if there is a no fault divorce, but if Google is at faultand found to have failed to properly pursue the deal the at fault divorce price could be either an injunction or 28% of the price. And that is much more than the standard reverse termination fee. Theoretically, Googles liability for damages could have been unlimited, but how likely is it that a regulatory blockage is going to cause damages much more than 28% of the purchase price? What does it all mean? It means Google has to make the regulatory approvals happen for this deal, almost no matter what the consequences are. It also means, even more than in the case of AT&Ts proposed takeover of T-Mobile that the antitrust cops are in the drivers seat. They can get just about anything they want from Google if they think it is appropriate from an antitrust perspective. Rest assured the government will be fully aware of its power. Google must have wanted this deal very badly. Would Google actually derive value from this transaction or is there a hidden intention behind this deal? Home to major leading smartphone manufacturers, Koreas industry observers have been following the deal closely, but not everyone sees the acquisition in the same light. While some believe that Google has made a move to protect the patents owned by Android makers and distributors, others suspect that Google has set itself up for a future monopoly over Android software. One of the key reasons for Google to buy Motorola Mobility is the stack of patents the company has, as Motorola was one of the companies behind the very first cell phones and much of that technology is what today's handsets are building upon. It's also important to remember that Motorola Mobility makes a range of other products such as optical networking solutions for digital cable TV and internet, something else which ties in nicely with Google's overall businesses. It's no doubt that this will have some interesting developments for consumers as well and if nothing else, we'll hopefully be seeing better support for Motorola's Android handsets when it comes to version upgrades of Android.

According to Google, this deal is about Motorolas 17000 plus patents to protect the Android operating system from legal challenges. How would Apple react to this news and what does the deal mean to other smart phone manufacturers?
According to Google, nothing will change in terms of Android's open approach to mobile development. Android head honcho Andy Rubin said he had talked to the "top five licensees" of Android software and that they "all showed enthusiastic support." Samsung, Sony Ericsson, HTC, and LG all issued their own statements of support as well, though it's hard to read too much into that type of bland and carefully crafted PR-speak The early signs are that investors dont believe that a Google buyout of Motorola Mobility will significantly hurt Apples business. But is that really the case? Once the Google-Motorola partnership gets going, Apple may find it has to work even harder to maintain its position in the mobile industry. Googles blockbuster deal to acquire Motorola Mobility for $12.5 billion has set analysts, critics and industry observers on a tear predicting what might happen across the industry. But it was Apples stock price following the announcement that perhaps stirred the most speculation about what the future might look like for companies in the mobile space. Following the announcement of Google acquiring Motorola Mobility, Apples shares gained. On Aug. 16, the shares were initially down, sparking some to wonder if investors are becoming gun shy by Googles news. However, it seems that the dominant thought on both Wall Street and Main Street is that Apple will be totally unaffected by the deal. When its all said and done, the iPhone maker will still sit atop the mobile space with no real threat from Google or Motorola Mobility. But that might not be the case. As powerful as Apple is, and as important as its iPhone and iPad are to the mobile space, the company will be affected by the acquisition. How? Lets see: 1. Motorola was on its heels Motorola Mobility was doing a fine job of competing against Apple and all other competitors in the mobile space prior to the acquisition. The companys line of Android phones were well-built, priced affordably and generally some of the better options for those who didnt want an iPhone. Now that Motorola Mobility will have Google behind it what makes anyone think that its level of quality wont only improve? 2. Google has the cash One of the biggest issues with Motorola Mobility has been its inability to invest the kind of cash in its platforms that Apple has in the iPhone to keep competitors at bay. But now that Google will be putting its cash up to help Motorola Mobility, all bets are off. It shouldnt surprise anyone if Motorola offers up some vastly improved devices featuring forward-thinking technologies that could put Apple on notice. It seems now that a spending war is sure to happen.

3. Consider the Android issue Over the last few years, customers have grown increasingly fond of Android to the detriment of iOS, BlackBerry OS and other mobile platforms. Now that Motorola Mobility is on Googles side, expect that issue to become even greater for Apple as consumers warm to the idea of having products designed and sold by Google. Make no mistake, Googles brand means something in todays marketplace and it could help improve Motorola sales and thus hurt sales of other products, including the iPhone. 4. Now two Android vendors are threats Its important to note that for the most part, Samsung was Apples only major threat in the mobile space. That company was nearing quarterly Smartphone sales that matched Apples. But now that Motorola is working with Google there is good chance consumers will buy more Motorola devices. Apple must now worry about the size and growth of two competitors. Simply put, Apples concerns in the mobile space just doubled.

The shareholders of both companies have voted in favor for acquisition, although it still needs to pass the scrutiny of the SEC and some other instances. It's an interesting move by Google, especially as the company still has several other major handset vendors that may or may not turn elsewhere for their device OS needs in the future, all depending on how Google handles things.We should be quick to point out that Motorola Mobility will remain a separate entity from Google and it won't be part of the Google branded companies. However, we can't but wonder what benefits Motorola Mobile will see from this close relationship with Google and if Google wants to keep its other Android partners happy, it's going to have to make sure that Motorola Mobility doesn't get any special treatment, something that doesn't sound very likely. On the other hand, there are only so many options when it comes to alternative smartphone operating systems that consumers would deem acceptable over Android. It's clear that both Microsoft and HP have an opportunity here and as far as Samsung goes, the company already has its own platform in the shape of Bada. It will be interesting to follow how things unfold, but at the moment HTC, LG, Samsung and Sony Ericsson are all still behind Android and have commented that Google's purchase of Motorola Mobility is a positive thing for Android in general. The Acquisition Increases Mobile Search/OS Competition Imagine the questions that Nokia, LG, HTC, or Samsung must have. Up until this morning, Google was your partner: they made handsets cheaper by providing a free and open operating system, and they made it easy for developers to make apps for your phone. Handset makers had no problem with allowing Google to make ad revenue with Google search plastered all over the phone by default. Suddenly, Google is their newest competitor, and they have to be asking questions like, "Should we continue to give ad revenue to a (now) direct competitor? Should we follow Verizon's lead and make more phones powered by Bing on Android?" Expect Windows/Bing-powered phones to appeal more to device makers; we will see about whether they can pass such a preferences on to consumers.

Hardware Isn't Software In many markets, Google is dominant in search, but this is their first real forray into hardware. It could be argued that this isn't vertical integration at all - it's an entirely new, closely-related vertical. Google's expansion into online services like travel, email, and social media contrasts sharply with the Motorola deal. Regulators are concerned when an industry is dominated by a single entity. Motorola is, by no means, dominant in the mobile handset industry. In fact, they've been getting killed until recently. The bottom line is that consumers' choices remain almost unchanged by the deal. Sure, we probably won't be seeing those Windows 7 devices by Motorola, but they were likely to be a very small percentage of one company's sales. The deal has almost no impact on Google's search market share (most Motorola phones used Google search already), nor does it alter the market share in the handset industry at all. What are the other possible legal and regulatory concerns which Google might face from this deal? Do Regulators Care? The larger the company, the more scrutiny it will receive. Many regulators conform to the popular mentality that "big is bad," and feel the need to protect (or at least appear to protect) the all-powerful and nebulous "little guy." Expect the merger to be tied in red tape for several months while it is examined and scrutinized from every angle, with particularly sharp criticism from the EU. This move by Google will likely draw sharp scrutiny from federal antitrust regulators already engaged in a probe of the search giant's business practices.It won't go through without a fight. Federal regulators are expected to focus on whether Google's control of both hardware and software in the Smartphone market would give the company an unfair competitive advantage in areas like mobile Web search. The takeover could also allow Google to outmaneuver other handset manufacturers currently using the Android system. The Federal Trade Commission is currently investigating whether Google has used its dominance in Web search to unfairly or illegally promote its own online businesses at the expense of rivals. FTC investigators are also looking at whether Google pressured carriers of its Android system to give preference to the company's other mobile products and freeze out competitors. Google acknowledged the existence of the probe in June. Google's high profile could lead regulators to demand concessions before the deal is approved. Such concessions could include close federal monitoring of the Android marketplace for several years after the deal closes. Intense competition in the mobile handset market, and Google's pledge to keep Android open source, make it unlikely that the government will stop the deal. Google has also touted the fact that all five of the largest handset manufacturers currently using the operating system have endorsed the deal. Government would be hard pressed to make the case that this is anticompetitive.

Conclusion
In a world where information is literally at your fingertips, one corporation reigns supreme: Google Inc. or atleast they will one day. After Googles latest acquisition of Motorola, the question of if Google will rule the world has become when instead. They can use the following strategy. If I had to guess, I would say Google will have the world under their thumbs by atleast 2030. Furthermore I think their takeover will be silent . one day well just be surfing the internet playing the wiki game and the nest Google doodle will have them celebrating the one-year anniversary of when they took over the world. If you view Google conquest as a game of Risk(the game of world domination) then Google is standing in the position of owing Africa, Australia and all of South America. They have aborder on all of the major continents and can attack from any direction. Google has made a solid step in the right direction by buying Motorola (aka Europe, in this hypothetical game of risk). Now there will be a whole sect of people who Google can track and research as they decide wich plan of action will be best to take over the world. To continue this path Google can begin taking over Asia, a disjoint number of different phone distributors (territories) and they can start with buying out the new AT&T and T-Mobile merger and continue acquisitioning corporations until finally taking over Apple (their main competitor in world domination). Their last step in world domination is a waiting game. By the time Google has taken over different corporations, all they have left to do is wait for North America to lose defenders against its massive borders until Google can sweep in and buy them out. The new powered by Google would be a plus for everyone. As peoples lives move into the virtual sphere there is no better person to take charge thata corporation who specializes in virtual worlds.