Observations on the Google-Motorola Purchase

If you've been on the Internet for very long today, you've probably already heard about this: Google intends to purchase Motorola Mobility Holdings for $12.5 billion, or about $40 a share. The deal, Google's biggest acquisition ever, has been approved by the boards of both companies.

There are potentially far-reaching implications to this deal in both the long and short term: more immediately, Google will gain access to Motorola's massive portfolio of 17,000 patents and 7,500 patent applications (for reference, the Nortel bid that Google lost to Microsoft and Apple earlier this month ago was for just 6,000 patents). This will help Google face the wave of litigation that nearly every company in the smartphone market is currently trying to ride. In the long run, as the companies become more integrated, we could see Motorola phones that exhibit an Apple-like synergy between hardware and software. And that's just the tip of the iceberg. 

What does it mean for Android?

In a blog post announcing the deal, Google CEO Larry Page was careful to note both that the "acquisition will not change [Google's] commitment to run Android as an open platform" and that "[Google] will run Motorola as a separate business," meaning that other manufacturers will be given the same access to Android that they currently enjoy and that Motorola, for the moment, would continue to run as a separate entity and would not receive preferential treatment as an Android licensee.

For the moment, this is likely to be true. Google won't want to deal with an exodus of hardware manufacturers from Android to competing platforms, and even if the stated goal was a tight integration between Motorola hardware and Google software, this would take time to achieve.

Surely, as time goes on, Google will begin to give some form of preferential treatment to Motorola and its handsets, whether in the form of early access to software updates (as we've already seen with the Xoom and Honeycomb) or in features developed specifically for Motorola phones. Even so, Google will likely work to give third parties the same sort of access they have today, since the company's success has come from getting Android on as many devices as possible rather than at trying to beat Apple at its own game.

What of Microsoft?

As mentioned above, Microsoft could potentially see increased interest in Windows Phone 7 from handset makers worried about subpar treatment from Google, but Windows Phone 7 has had such a hard time gaining traction in the market that this seems unlikely.

What is more likely is that Microsoft will try to follow suit and buy up its own smartphone company - some have suggested that Nokia, a company with whom Microsoft already has a cozy relationship, could be a potential acquisition target, and Nokia's stock is currently up about 10% on this speculation. 

Rumors of a Microsoft-Nokia acquisition were swirling earlier this summer, but Nokia called them "totally baseless" at the time, and there are no indications that things are any different now. Still, especially as the patent wars heat up, expect to see more acquisitions as companies try to beef up their portfolios and shore up their businesses.

Clearing The Regulators

The last thing to consider is whether the deal will actually go through at all: both companies approve, but the deal still has to clear the hurdle of the Federal Trade Commission, the US agency responsible for antitrust regulation.

The FTC already has its eye on Google: primarily, the FTC wants to make sure that Google isn't using its dominant position in the search market to promote its other products as it continues to diversify its business. Also of concern to the agency is whether Google discourages its hardware partners from using non-Android operating systems on their handsets. This investigation is still in its early stages, having only started in June, but the scale and scope of the Motorola purchase will be sure to raise some eyebrows.

Despite this, I would say that the likelihood of FTC interference in the Google-Motorola deal is pretty low, since it's not a stretch to say that there's still a lot of very healthy competition in the smartphone market - Android has grown by leaps and bounds in the last couple of years, but Apple and the iPhone are both still very healthy, and Microsoft is taking aggressive steps to increase the presence of Windows Phone 7 in the market. Regulators would be smart to scrutinize the deal, but they probably won't stop it.