Motorola is the ammo Google needsFebruary 14, 2012: 2:24 PM ET
The deal to acquire Motorola will give Google the ammo it needs to battle patent lawsuits from competitors like Apple.
FORTUNE -- The Justice Department on Monday gave Google (GOOG) the go-ahead to complete its $12.5 billion acquisition of Motorola Mobility (MMI). Judging by the stern warnings the DOJ issued, and its criticisms of Google's promises to not misuse any of the the 17,000 patents it is acquiring in the deal, it appears that the company might have just barely made it through the investigation. The European Union also approved the merger on Monday.
The DOJ said in a statement that it would be watching Google for any signs of "potential anticompetitive use" of its patents. It must license its patents on "fair, reasonable and non-discriminatory terms." The statement compared Google's commitments on that score unfavorably with those made by Apple (AAPL) and Microsoft (MSFT). Google's promises were "more ambiguous" than those made by the other companies, it said. Nevertheless, the DOJ couldn't find a basis on which to deny the merger. But it warned that if Google steps over the line, the agency "will not hesitate to take appropriate enforcement action."
The acquisition is all about patents, as Google has said from the beginning. It's part of a trend of tech companies buying patents to defend themselves against intellectual property lawsuits filed by competitors with their own stash of patents. The whole thing is a huge mess, with companies suing each other left and right, and technological innovation increasingly being determined by officers of the court as well as by corporate officers.
The DOJ also approved deals for Microsoft, Apple, and Blackberry maker Research In Motion (RIMM) to buy patents from Nortel, a bankrupt maker of telecommunications equipment. And it OK'd purchases by Microsoft and Apple of patents owned by Novell. The companies have agreed not to use patents to prevent competitors from introducing new products and to refrain from charging artificially high prices for patent licenses in order to keep competitors out of a market. Motorola Mobility makes phones and tablets that use Google's Android operating system, so when the deal is closed, Google will be licensing software to its competitors -- all the companies that use Android.
The question of what constitutes artificially high prices is ambiguous, and might end up being worked out in court. That's just one issue in dealing with patents as they relate to antitrust matters, says Michael A. Carrier, author of "Innovation for the 21st Century" and a professor and antitrust expert at Rutgers University School of Law. The law "does not have a ready-made toolkit for analyzing anticompetitive harm from the creation of patent portfolios," he said in an email interview. "Collections of patent portfolios have not (yet) led to a clear framework that the agencies could apply." In approving the patent deals, "the DOJ put a lot of faith in the voluntary statements."
The deal won approval in part because "Google is underdeveloped in terms of its patent portfolio, especially in relation to companies like Apple and Microsoft," Carrier added.
The merger could slow Google's revenue growth at first, according to Barclays Capital analyst Anthony J. DiClemente. But it is on balance positive, he wrote in a note to investors Monday, because the patents will help battle competitors that "have felt the urge to become extremely litigious in the space to help stave off competition from Android, as many are clearly not able to fight off Android's gains head-to-head in the marketplace" -- in smartphones, anyway.
Just last week, Apple filed a lawsuit against Motorola based on patents on technology used in the iPhone. And this week Apple added further to the growing pile of legal actions by lodging its second lawsuit against Samsung, claiming that the new iteration of Android, dubbed Ice Cream Sandwich, violates Apple's iOS patent rights.
With the Motorola's patents in hand and the deal approved (the companies are still waiting for China's OK), Google must move quickly to step up its competition with Apple, in particular, especially in tablets, where Google's Android operating system is lagging even as Apple is getting ready to release the iPad 3. There is much more competitive parity in the smartphone market, but the risk for Google there lies in not moving quickly enough to hold on to market share.
Until now, Google was at a big disadvantage, litigation-wise. Having all the new patents gives it ammunition. "The closest analogy is war" Carrier said. "You need to come to the negotiating table with your pile of patents just to be able to negotiate with the other patent-holders."