Nortel IP sale will help Google win OK for Motorola bid

August 18, 2011

Remember the Cold War military doctrine of Mutually Assured Destruction? The idea was that if the United States and the Soviet Union both knew the enemy had enough weapons to wipe the entire country off the map, neither would actually use those weapons. Mutually Assured Destruction got the entire world through the age of fallout shelters and Barry Goldwater. So the doctrine should be powerful enough to get Google, Apple and Microsoft past Justice Department antitrust regulators.

It’s a given that Google’s $12.5 billion Motorola bid is going to be scrutinized for its antitrust implications. Google’s law firm on the deal, Cleary Gottlieb Steen & Hamilton, has conceded that point; the firm announced that David Gelfand — who previously escorted Google unscathed through antitrust reviews of its DoubleClick and AdMob acquisitions — will be antitrust counsel on the Motorola bid. The $4.5 billion acquisition of Nortel’s intellectual property by a consortium led by Microsoft and Apple is already under review by the DOJ’s antitrust division. I’m betting that each patent plays will have an easier time passing regulatory muster because of the other.

Before I get to why, there’s the issue of which agency will be investigating the Google deal. Both the Federal Trade Commission and the Justice Department have the power to conduct premerger antitrust reviews. They’ve both looked at Google acquisitions in the past: the FTC green-lighted the 2007 DoubleClick and 2010 AdMob deals; the DOJ rejected Google’s proposed advertising partnership with Yahoo in 2008 and approved, with some modifications, its deal with ITA Software in 2011. The FTC is also reportedly conducting a widespread antitrust investigation of Google’s search engine business. But I have it on good authority that the Justice Department will be handling the Motorola review, partly because DOJ has historically overseen competition in the telephone industry and is already reviewing the AT&T merger with T-Mobile and the Nortel IP sale.

Traditionally, antitrust regulators look at deals as either horizontal or vertical acquisitions. The classic horizontal deal is a merger of two rivals in the same market. A vertical acquisition is one that helps a company with its own upstream or downstream products. Vertical deals are considered less of a threat to competition within a market, so they get less antitrust scrutiny. In one regard, Google’s Motorola acquisition is a simple vertical merger, since it puts Google into two businesses it wasn’t in before: manufacturing smartphone handsets (and set-top devices) and licensing patents.

But IP complicates the traditional horizontal-or-vertical analysis, because patents, by their very nature, are intended to squelch competition: patent holders have a short-term monopoly on their invention. If you’ve paid even the slightest attention to the patent-bound technology industries, you know how viciously patents can be wielded for anticompetitive purposes, particularly when end products like computers and smart phones are covered by hundreds of patents. The FTC conducted hearings in June (here’s the transcript) on what it calls “patent hold-up” — the ability of a patent owner to extract big licensing fees for IP that’s just part of a sophisticated tech product.

So when antitrust regulators look at patent-heavy deals, they have to analyze the patent licenses that will transfer in the merger from both horizontal and vertical perspectives. The relevant market in patent deals, to use another bit of antitrust lingo, is the technology market, not necessarily the market for a particular downstream product or service. When the DOJ looks at the Motorola deal, its antitrust lawyers will want to know which companies license Motorola technology, how those licenses affect the relevant markets, and how much leverage the licensing agreements and Motorola patents give Google in those markets.

That’s where the Nortel IP consortium comes in. DOJ has to ask the same questions about how Microsoft, Apple, Research in Motion, Ericcson, Sony, and EMC can leverage the 6,000 or so Nortel patents they acquired for $4.5 billion in June. The last (and only) time the Justice Department previously reviewed a similar IP transfer was in 2010, when DOJ examined the $442 million purchase of Novell software patents by a different Microsoft and Apple consortium. In that review, regulators barred Microsoft from acquiring any patents outright and said EMC couldn’t acquire 33 of the patents it wanted.

This time around, though, Microsoft and Apple can point to Google’s purchase of the Motorola patents to argue that the Android smartphone platform is now as heavily armed as the iPhone and Microsoft’s Windows Mobile smart phone. Google, in turn, can credibly claim that it needs the Motorola smartphone patents to protect Android from the power its rivals acquired via the Nortel patents.

It would be easy for regulators to look at the two potent patent portfolios (say that three times fast!) — wielded by warring competitors in one of the most cutthroat industries in the world — and see a balance of power. If Google monkeys with Motorola patent licenses, Microsoft and Apple will retaliate with Nortel IP licenses. You can call it mutually assured destruction, but it could turn out to be a constructive end to the expensive smartphone patent wars.

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