Google’s $12.5 billion insurance buy may worry partners

August 15, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Google is spending $12.5 billion on insurance for itself — but its partners may not feel at ease. The search giant’s deal to buy smartphone maker Motorola Mobility locks in patents to help protect its rapidly growing Android mobile operating system. But Google’s plans for the hardware business that comes along with the patents will be the key concern for regulators and other current Android handset makers alike.

Intellectual property suddenly mattered to Google following the recent $4.5 billion purchase of 6,000 patents from the bankrupt Nortel by a consortium of Apple, Microsoft and several others. Google’s much smaller hoard of patents left Android vulnerable. The risk was that rivals could extract increased royalties from the manufacture of Android devices — or, worse, prevent companies selling them altogether.

Owning Motorola Mobility’s 17,000 patents should insulate Android against this danger. Google paid up for this peace of mind with its biggest acquisition deal yet, at a whopping 63 percent premium to Friday’s closing price.

Antitrust regulators may raise an eyebrow. They are mainly concerned that Google might use its Internet search dominance to gain an unfair advantage in, say, the provision of mobile services. But some might also worry that making hardware could give the company a different kind of edge. Motorola Mobility has only a small share of the fast-moving smartphone market, so the deal isn’t likely to be blocked. But Google has agreed to pay its target a whopping $2.5 billion if the deal can’t be consummated.

Other makers of Android handsets face greater discomfort, though several have publicly backed the deal. The likes of Samsung, HTC  and LG always feared that cellphone production could replay computer market history, with hardware becoming a brutally low-margin business with software producers like Microsoft extracting the lion’s share of profit. Now they face potential hardware competition from their software partner.

Assuming Google keeps Motorola Mobility’s hardware operations going, it could one day be tempted to favor its own handsets — perhaps hoping to reproduce Apple’s roughly 30 percent operating margins. Google says it wants to keep Android open to others now and in the future, and gadget-making isn’t its forte. But rival makers of Android-powered mobile devices may still seek insurance of their own, for example by keeping their options open with other operating systems, like Microsoft’s, as well.

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