Google/Motorola Deal Under Review by Hill; Short-Term Impact Uncertain

The House Judiciary Committee “just received notice of the proposal and [is] reviewing it,” a Judiciary aide said. Similarly, a spokeswoman for Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., said staff “is just beginning to review the issue.” A spokeswoman for the subcommittee’s ranking member, Mike Lee, R-Utah, said the acquisition “is among many issues we look forward to discussing with [Google Chairman] Eric Schmidt at the subcommittee hearing next month.” That hearing, which had already been planned, is titled “The Power of Google: Serving Consumers or Threatening Competition?” The deal is expected to be completed by early 2012.

Expect Hill questions about what the vertical transaction means for search engines, handset manufacturers and OS makers that compete with Google and Motorola, a Senate aide said. Google is dominant in the search market and has been increasing its presence in the mobile space, the aide said. Review of the deal should include consideration of how important Android is for handset manufacturers and if Google’s control of Motorola would result in more restrictive terms for other manufacturers, the aide said.

Rep. Robert Dold, R-Ill., welcomed Google to his district, home of Motorola Mobility. “After reaching out to Google this morning, I'm pleased that Google intends to have Motorola Mobility retain its presence here in Illinois,” he said. “While more must be done to spur job creation, it is welcoming news for the people of my district and the surrounding suburbs that Google is going to have a presence here."

The deal is procompetitive and is not a horizontal transaction, Google Chief Legal Officer David Drummond said on the conference call. Android would drive innovation, competition and end-user choices, he said. One of Google CEO Larry Page’s main messages on Monday’s call was that the deal won’t change how they run Android. “We will run Motorola as a separate business and provide separate reporting,” Chief Financial Officer Patrick Pichette said. The acquisition should “mildly” add to earnings, once the deal closes, he said. Google still has plenty of financial flexibility to pursue future opportunities, he said. That could include the purchase of more patents, Drummond said. Google’s Android partners, including Samsung, Sony Ericsson, HTC and LG Electronics, said in a statement the transaction shows Google’s committed to “defending Android."

Small carrier officials said it’s too early to tell whether the deal is good or bad news from their standpoint. “I think the jury is still out on whether the Google purchase of Motorola Mobility will be a good thing or bad thing for small carriers that still have real problems getting access to devices,” said Steve Berry, president of the Rural Cellular Association. “Google could abandon the concept of building OS Android phones for the new 4G ... or they could focus on exclusivity deals with the largest carriers” which “could freeze out the smaller carriers,” he said. But an executive with one competitive carrier said the deal could mean more competition. “This has the potential to reduce AT&T’s and Verizon’s near-complete control over the device market,” the official. “Apple has shown that you can sell a device to consumers separate from a carrier. Google is one of the only other players in the industry with the power to do the same thing, but it lacked the hardware until now. If Google gets serious about the device business, it can be a disruptive force in today’s virtually closed market for devices.”

The American Cable Association will review the deal to understand the impact on the cable set-top box market, “which has been a frustrating one for small cable operators long beholden to the Motorola-Cisco duopoly,” CEO Matthew Polka said. For many cable operators, the question is whether Google’s takeover of Motorola as one of only two major manufacturers will make things better or worse, he said. ACA members will want assurances from Google that it is committed to the cable business model and won’t use its market power to run roughshod over smaller cable operators, he said. Additionally, “the future holds great promise for rural consumers as small cable operators explore IP- and cloud-based solutions in offering video to subscribers on TVs, PCs and mobile devices,” he said. Prior to the deal announcement, Google has had its own interests in all of these areas and it will be important that Google’s other business interests don’t unduly harm the growth of these new competitive market opportunities, he said.

It’s difficult to draw conclusions about how the transaction might affect lobbying on the FCC’s proposed AllVid rules, industry executives watching that proceeding said. Motorola and Google’s policy goals on AllVid don’t seem aligned. Motorola, one of the two major vendors of cable set-top boxes, has recently been quiet on AllVid. In its last meeting with FCC officials on the matter it discussed how “AllVid mandates would likely harm consumers, including those in low-income households,” an ex parte notice filed April 14 shows. Google has been an advocate for AllVid rules as a member of the AllVid Tech Alliance. With the acquisition so fresh and the target clearly not the set-top business, it’s doubtful either party has considered how it would affect their AllVid lobbying, industry executives said. The proceeding has effectively been on hold at the commission (CD Aug 1 p6) .

It’s not certain Google would keep the set-top box and other Motorola businesses that affect cable and pay TV, said Executive Vice President Marc Sokol of NeuLion, an IPTV set-top box vendor. “It’s too early to know how Google is going to rationalize the product portfolio within Motorola Mobility.” Google may decide to shed some of those assets, said Robin Wilson, vice president of business development at Nagravision, a conditional access vendor. “If you look at all the acquisitions Google has done so far ... they tucked the companies in relatively well,” he said. “This one is hugely different.” The cultural differences between the companies are stark, Wilson said. “It’s night and day, even in Silicon Valley, between going to a Motorola facility and Google."

If Google was to keep Motorola’s set-top box business, it could extend the Android operating system into the pay-TV environment, Sokol said. “Ultimately, the cost of those devices could go down if they're all running Android as opposed to some operating system from which more revenue is extracted.” It could allow Android application developers access to new platforms and classes of hardware, he said. Google will probably soon clarify its intentions for the set-top and other businesses where Motorola Mobility operates, because it needs to reassure existing partners in those markets, said Rovi’s chief evangelist Richard Bullwinkle. “They have to either say ‘Yes, we're entering the hardware space,’ or ‘We're not coming after you,'” he said. “But if I were one of the manufacturers who has chosen Google’s TV platform -- Sony, for example -- I would be looking for clarification right now."

Google has much to gain from Motorola’s extensive patent portfolio, composed of more than 17,000 patents and more than 7,500 pending applications. The boost to Google’s patent holdings would provide a formidable line of defense for the Android operating system, which has been “under threat” from competitors, said David Drummond, Google’s chief legal officer. “We've been saying for some time that we intend to protect the Android ecosystem,” he said during Monday’s conference call. “We think that combining with Motorola and having that kind of a patent portfolio ... to protect the ecosystem is a good thing.”

This year Google lost two high-profile patent bidding wars to competitors. In July ,Google’s stalking-horse bid to purchase 6,000 patents from Nortel, a bankrupt Canadian manufacturer of telecom equipment, was trumped by a $4.5 billion deal offered by a consortium of Google’s competitors: Apple, Microsoft, Research In Motion, Sony, EMC and Ericsson. Earlier this year, Apple, Microsoft, Oracle and EMC out-bid Google for 882 patents from software maker Novell, which they purchased for $442 million. Drummond claimed that Google’s competitors were using the patent acquisitions to mount a coordinated effort to increase Android licensing fees for phone manufacturers, in a blog earlier this month (http://goo.gl/3H7U7).

Though the Justice Department typically handles telecom deals, this one could fall under FTC scrutiny. If a transaction is greater than $66 million, the companies must file premerger papers with both the DOJ and FTC, who later decide which agency will process the request. A Justice spokeswoman told us it’s too early to comment on the proposed deal as “the acquisition was only announced this morning.” Justice has been eyeing the patent battle for what it called “antitrust concerns,” and forced Apple, Microsoft, Oracle and EMC to change the terms of their Novell patent acquisition back in April.

The FTC refused to comment on the proposed acquisition. The agency is currently investigating Google on antitrust violations related to its search and ad businesses. All Google services will be subject to third-party privacy audits pending the completion of the FTC’s Google Buzz settlement.

At the $12.5 billion price tag, the deal represents the largest acquisition ever by Google, analyst firm Collins Steward said. The deal emphasizes the “tremendous future monetization potential of Android, as well as Google’s huge bet on mobile,” it said. Some Android partners are becoming increasingly annoyed with “Google’s growing world domination,” said Stela Bokun with Pyramid Research. As for Android partners among handset makers, the deal “might not be so good for them in medium to long term,” he said. Meanwhile, Google’s ratings are unaffected by the deal, Standard & Poor’s said.