Regardless of the size of the regulatory hurdle that the Google takeover bid for Motorola Mobility may be for the United States, the hurdle for Europe will be a formidable one. This despite the fact that both are American companies; they do business on a global scale, with global telecommunications partnerships. While the standard that any merger or acquisition must meet for U.S. regulatory approval typically boils down to, "It's good for business," the standard for Europe is, "It increases competitiveness."
That's hard to prove, especially given the fact that mergers typically result in one less company. But for the E.U., prospective merger partners must conclusively demonstrate that the state of the market following their combination would be more competitive than the state of that market if they had merely partnered. If Google was interested in aiding its case, it could decide to postpone many of the Android platform's planned improvements until after the merger. That could be at least 18 months, perhaps longer. We ran this theory past the mobile industry's leading expert, NPD Group Executive Director of Industry Analysis Ross Rubin, to get his reaction and to see whether he agreed that such a lull, were it to occur, could send the wrong signal to Android developers. (Part 1 of our discussion appeared in RWW last Friday.)
Ross Rubin: In announcing the acquisition in its blog posts, Google used the term, "Supercharging Android." It is unclear whether that referred to now being able to continue developing Android unencumbered, because there's no longer this vulnerability to litigation, or instead to the Motorola hardware. If you take the first scenario, and you say that it's access to the IP portfolio that supercharges Android, because now it doesn't have this albatross, this patent imbalance around its neck, then you can make the case that, "If we don't have the value of this IP portfolio, then you're going to see diminished competition," because Microsoft will be able to sue all the Android licensees, and Android will not be a viable operating system in the market, and a choice will be eliminated for licensees.
ReadWriteWeb: Well, Microsoft has already sued. Anything that they're threatening to do, it's already happening. It's happening now.
Rubin: Yea, but bringing it forward a step, [if Google goes ahead] without the Motorola patent portfolio, Microsoft is in a stronger position to win, and so Android may not be a viable option for licensees until there are fewer options in the marketplace. Before Android, Microsoft was already in the marketplace.
If you tie it to the hardware, then it becomes more of a balancing act. You want to make the case that Motorola gains differentiation by being part of the same company developing the operating system, but you don't want to risk angering licensees by communicating that it's going to have too much of an advantage. So you need to make the case that, had Google not acquired Motorola, it was going to be very difficult for Motorola to continue as a going concern, as a viable option in the marketplace - that essentially what Google has done has been to save Motorola. [And avoid] putting [Motorola] into the vaunted position of having the inside track on everything where it's going to be difficult for other Android licensees to compete.
As I said earlier, the challenge for Motorola before has been differentiation. And there is the opportunity for a Google-owned Motorola to try some directions that other OEMs may not want to move in. There's potential for tighter integration with Google services. There's more potential for a "pure Android experience" that doesn't have any handset maker customizations. But this isn't like the Nexus phones from Google, because Nexus phones were not distributed as part of carrier portfolios. Motorola phones are. So even if Google owns Motorola, retires MotoBLUR, and says, "We are going to present the user interface the way Google has created it," if they want to be in the Verizon and AT&T portfolios - which, of course, they do - they will likely need to customize that user interface, at least on some of their handsets, for the carriers.
RWW: So some differentiation has to take place here in order to demonstrate that the competitive capability of Android as a platform. Google needs to be able to demonstrate that after this deal takes place, the Verizons and the AT&Ts and the Oranges of the world will be more able than before to build new features that maybe are centered around their brands.
Rubin: Well, if they can't do that, they won't launch those services on Motorola handsets. They'll choose a competitor. Regardless of regulatory scrutiny, even if this sails through the regulatory process unchallenged, Google is going to have to consider that balance, which is why it has been so difficult for a company to both license an operating system and produce devices based on that operating system, in the past. It's very difficult to find an example of a company that has made that work to any degree of scale.
For Motorola to be successful in the handset space, it needs to take advantage of this relationship with the parent company. And yet Google has put forth that, no, Motorola is going to be treated just like any separate business unit, operating as a separate company owned by Google, and it's going to be subject to the same bidding processes and won't have any inside advantage versus other Android, top-tier handset and tablet licensees.
The other interesting twist is that, in previous cases where companies try to license an operating system and produce devices based on that operating system, they derived direct licensing revenue. That was the pull to encourage the licensor to favor third-parties. Google does not derive any direct licensing revenue from Android, so as long as there's the same number of devices out there from a revenue perspective, it's revenue-neutral whether they're all Motorola devices or coming from different companies. Again, it just has to be mindful of upsetting the apple cart to the point where the diversity of the ecosystem is threatened, and so potential customers don't come to Android because the choices of the brands that they want are not available, because they haven't been able to compete successfully with Motorola.
RWW: It seems that there's a surface argument there that seems very, very fair: Google's promise, in effect, that it will not be biased toward Motorola, that it will continue being open and fair to the HTCs and the Samsungs of the world because, after all, Google does not get direct licensing from anybody, so it doesn't have a hand under the table, if you will. That argument would [be taken] as fairness and neutrality toward competition. But then there's the argument that neutrality toward competition is not helpful when you're making an acquisition, because when you go before the European courts, you have to say that the acquisition creates new competition that wasn't there before. And if you're completely neutral, then there's no value in the acquisition. You'd have to make the case that part of the deal would aid the carriers in a particular way, that they'd be able to differentiate their products in a way that they couldn't before. In so doing, that would increase competition and thereby give value to the acquisition.
Rubin: Again, I'm certainly no expert on European regulatory policy.
RWW: Neither am I, but I play one on TV.
Rubin: Yes. Don't we all? But it would seem to me that the key to that argument would be maintaining the viability of Android and customization that it enables, by being able to "protect" it with the Motorola patent pool. Then bringing this back to the first question, "Then why buy Motorola?" Why not just acquire the patents, or buy InterDigital? It's hard to say why.
RWW: The whole thing about the value of the Motorola patent pool comes down to the validity of the patents that are under dispute. And the validity of that is a mathematical thing; either they're valid or they're not. So I don't see how that changes with Google protecting those patents rather than Motorola protecting those patents.
Rubin: Well, two things: First of all, yes, it's a bit of speculation. Microsoft speculates that its patents will hold up if it sues for infringement. There's speculation of the value of the Nortel patents when Apple and Microsoft and others bid for those patents. I believe it's impossible to say authoritatively whether they're valid until they are challenged in litigation. So the idea that, if you acquire a large number of them, assuming that they have been pored over by competent attorneys that can make recommendations about how solid they look, and how likely they are to serve as a countermeasure should the company be sued for infringement, that's what drives the decision. It isn't a certainty. It's just trying to build a defense.