Google Buys Motorola Mobility

Google (GOOG) today announced it was acquiring Motorola Mobility (MMI) for $12.5B (or $40/share, a 63% premium over Motorola’s Friday close) in a deal that will cause a substantial impact on the mobile OS and smartphone industries. The transaction is expected to close by the end of 2011 or early 2012, subject to regulatory approval in the US, the European Union and other jurisdictions.

After losing the $4.5B Nortel patent sweepstakes, many industry pundits expected Google to make a move to further strengthen its IPR portfolio and there had been some rumours circulating that the company would perhaps acquire InterDigital (IDCC). Judging by how well Android OS has done and CEO’s Larry Page blog post about the acquisition today, one can logically conclude that the transaction was primarily driven by IP, with Google being able to shore up its patent kitty and as such, better sustain patent assaults by the likes of Apple and Microsoft.  Motorola has over 17,000 patents and with increased Internet usage coming from mobile devices, this was a key deal to protect Google’s own IPR arsenal.

The deal also creates some interesting synergies for Google in the emerging connected home space, with the ongoing shift of set-top boxes software to IP-based, which will give Google an opportunity to get IP to the TV. However Google will have to play along with MSOs in order to maintain a wide hardware product distribution.

On the other hand, the acquisition will present Google with some execution issues. First and foremost, there is the question of how this transaction will impact Google’s other Android OS licensees such as HTC and Samsung. Even though Google tried to reassure the market that they’ve spoken with the top five Android partners prior to the announcement, some questions will still linger. Will these partners continue to remain committed to Google’s Android platform? With few other options available, chances are good for that to happen. However, some might decide to go with a more balanced approach maintaining at least two tracks (one for a proprietary OS like Samsung with Bada) and another one for Android. However, this move can also open some doors for Microsoft to license its own Windows Phone OS. Sure, with Microsoft the OEMs will have to pay a license fee, but they will be assured that they will be getting the same package their competitors are. Last but not least, the move also means that Google will enter the low-margin hardware business (Motorola is expected to make a 3% margin in 2012).