Google's purchase of Motorola Mobility

Arming Android

SHOCK. Bombshell. Incredible. Even seasoned observers of the technology industry could not hide their surprise when 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—is 63% above the closing price of Motorola Mobility’s 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.

As for Google, although it will spend about one-third of its cash on the biggest acquisition in its 13-year history, it will also get a lot: plenty of ammunition in the ongoing battle between mobile platforms. Android, Google’s operating system for smartphones and other mobile devices, has taken the world by storm. In America it now powers nearly 40% of new smartphones, outdoing the platforms of Apple and RIM, the maker of BlackBerry smartphones. Worldwide more than 150m Android devices have been activated, a number that is growing by more than half a million every day.

Yet the Android “ecosystem”, as geeks call it, is also facing growing challenges. For one, the operating system has yet to make much headway in the market for computing tablets, mainly because Android devices are still not as user-friendly as Apple’s iPad. More importantly, although Google does not charge for Android, it is becoming increasingly costly for handset-makers—because rivals claim it infringes on intellectual property owned by other firms. In early 2010 HTC, one of the leading vendors of Android devices, agreed to pay royalties to Microsoft for the use of its patents ($5 per device, according to some estimates). And in July Apple won a legal victory against HTC in apatent infringement suit, which could lead to even higher payments.

Taking over Motorola will help Google to overcome both of these problems. Owning a handset-maker allows the firm to integrate software and hardware more smoothly. 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 Motorola’s 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 Android’s use of Java, a software technology.

Although Motorola Mobility’s shares soared close to the price offered by Google, suggesting that the market thinks that the takeover will succeed, it could still hit snags. Another suitor may emerge, possibly Oracle. Antitrust authorities on both sides of the Atlantic, which already have Google in their sights, will certainly take a close look, although it seems unlikely that they will block the merger. More fundamentally, the acquisition could discourage other handset-makers from using Android for their devices if they worry that Motorola will gain an unfair advantage. To allay such fears, Google has said that it will run Motorola as a separate business and that it will not change in any way how it manages Android.

Even if the merger, as so many before it, turns out to be a costly mistake, it is another sign that the market for smartphones and other mobile devices will end up looking different from the personal-computer industry. Whereas with PCs operating systems were developed by one set of companies (mostly Microsoft) and the machines by another (Dell, HP, Acer), mobile devices seem to demand a deeper integration of software and hardware, delivered by a single firm. This has always been Apple’s approach. HP also has its own mobile operating system, WebOS.

Google now seems to be going down this path, and others may follow suit. After the announcement of Google’s takeover of Motorola Mobility, analysts began speculating that Microsoft might now buy RIM or, more likely, Nokia, which has already agreed to use Microsoft’s Windows Phone as the software to power its next generation of smartphones