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Google’s Motorola Acquisition and the Impact on the Tablet Market

Google and Motorola Mobility announced on August 15 that they have entered into a cash deal for Google to acquire Motorola for $40 per share, or a total of $12.5 billion. The boards of both companies unanimously approved the deal, which is expected to close by the end of the year or early next year.

The surprise announcement is mainly focused on the smart phone business where there has been significant litigation for intellectual property infringement. More specifically, Android smart phone brands have been subject to litigation and have been paying royalties to Microsoft. During a conference call, Google executives underscored the 15,000 patents and 7,500 pending patents in Motorola’s portfolio, which may ward off some litigation threats. We believe this is the incentive for the acquisition. The focus is on the smart phone business is due to the #1 share in unit shipment volume. In the technology industry, all the major companies have cash; the real currency is IP. Companies are looking to protect and maximize profits from unit shipments.

In the short term, this acquisition is meant to help protect Google’s smart phone partners and to provide cover as they try to grow their businesses. Google’s goal is to enable more players to build mobile devices that can connect to the internet. The more users that can connect to the internet, the better for Google as these users are likely to use Google’s products (search, email, maps, etc.) and to be served ads as a result. Since Google’s main business is ads, they win.

As a platform, Motorola also makes sense for Google because Motorola hardware fits all the major platforms that Android is available: TV set top boxes, smart phones, and tablets. Additionally, the companies are familiar with one another; Motorola was Google’s preferred hardware partner for the rollout of Android 3.0 (Honeycomb).

For the tablet market, we believe volumes are too low for the Android players to require much protection from IP infringement litigation, but this deal could help to protect the hardware partners in the future as volumes begin to increase. In particular, it may help to ward off potential lawsuits from Apple, which has become increasingly litigious in the tablet market.

Whether Motorola ends up getting preferential treatment as part of Google remains to be seen. Google executives said Android will remain open and that Motorola will remain a licensee. Motorola will be run as a separate business. Motorola had been considering a move to California, but in May accepted incentives worth over $100 million over the next 10 years from the state of Illinois to remain there. This is an indication that the two businesses will remain in separate states, making it tougher for Google to manage closely.

We’re certain the other hardware partners will pay close attention to Motorola and its tablet business. However, at the end of the day, there isn’t much financial incentive for Google to listen to its hardware partners because they aren’t paying for a product. It’s mainly Google aiming to support the ecosystem with a common OS. From that perspective, it is important for Google to want to make its partners happy. Partners have repeatedly complained about Google’s difficulty in communicating guidance, something the Android team is hoping will become easier once Ice Cream Sandwich (the codename for the next version of Android) is released. The hope is that one OS for smart phones and tablets will streamline maintenance of the OS.

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