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Google Buys Motorola for Patents and Manufacturing Capability

Google’s $12.5 billion cash purchase of Motorola Mobility pairs up the last major mobile operating system maker without a compelling hardware story with one of its most fervent handset partners, creating an integrated behemoth aimed at competing in both patent litigation and the marketplace with Apple, Microsoft/Nokia, and RIM.

(In January 2011, the firm previously known as Motorola split in two, with Motorola Mobility taking the mobile phone business and Motorola Solutions offering telecommunications products — like WiMax — and services to enterprise and government customers.)

Google says its Android smartphone operating system will continue be “open” and licensed to other firms, and Motorola will be run as a separate line of business. Why irritate other handset makers and blow so much dough? Two reasons: patents and soup-to-nuts smartphone integration.

The patent issue is the marquee item. When Google lost out on bidding for Nortel’s enormous patent portfolio — eventually purchased for $4.5 billion by a consortium including Apple, Microsoft, and Research in Motion — Google’s head legal beagle whined like a toddler about the unfairness.

It is true that competing firms have been gunning for Android, which requires no license to use without the Android name, and no royalties to be certified to use the Android name, software, and related services. By hitting handset makers with patent suits, and in some cases having already settled for per-unit licensing fees, competitors have hoped to raise the price of Android phones, making them less attractive to consumers and reducing profit margins for manufacturers.

Google CEO Larry Page emphasized the engineering and experience side in his post describing the Motorola acquisition, but he didn’t forget to pop in a few mentions of the “anti-competitive patent attacks,” which most firms would describe as the cost and nature of doing business.

(This is separate from the issue that the current U.S. patent system is horribly broken. 20 years ago, the vast majority of patents at issue here would never have been approved. Elements of Apple’s touch-screen hardware would likely have been protected, but the way you buy apps in the App Store would not. However, this is a market reality that all software and hardware firms have to face. We can only hope that these multi-billion dollar patent portfolio acquisitions will shine light on just how the patent system stifles innovation.)

Motorola owns heaps of patents, and Google’s 60-percent-plus price premium over the current value of the mobile firm’s stock represents an aggressive offer to obtain that portfolio. This may level the playing field so that all the various parties involved wind up cross-licensing patents in such a way that the entire threat of preventing the sale of phones or having egregious add-on fees settles down. It has happened before in other competitive hardware industries, although there has never been such a huge array of patents at stake, nor as much money.

To my eye, the more significant part of the purchase is that Google now controls the entire vertical process of making an Android phone, from software through hardware design and production out into selling directly to carriers. For years, only Nokia, with its Symbian and other platforms, and RIM, with BlackBerry OS, had such control of its handsets from start to finish, though Palm was long an also-ran in that category. Motorola, Samsung, HTC, and other makers licensed Windows Mobile for smartphones, and created way too many of their own operating systems for featurephones — the plain phones that once represented most mobile hardware sales. Somewhat generic Linux-based handsets also had a hefty piece of the international smartphone

In 2007, Apple was ridiculed for trying to break into this club. It was hard for pundits to imagine how Apple could put together the necessary operating system, hardware manufacturing chain, and carrier relationships to compete with Nokia’s domination of the international smartphone and featurephone markets, and the popularity of BlackBerry and Windows Mobile in the business smartphone market. And today the iPhone is the single most popular smartphone in the world.

The story quickly changed to Apple being criticized for creating a closed operating system in comparison to other mobile operating systems of the time, which allowed the relatively easy addition of third-party applications, as well as customization by carriers to add features (and bloatware and crapware). But there was no question that even the initial version of iOS was far more capable than existing mobile operating systems.

Google’s late 2007 introduction of Android was championed as a way to get the best of what Apple had to offer in a modern operating system, while also being “open” in the sense that users would allegedly be able to install whatever software they wished and modify the operating system to their liking. Google wouldn’t make any phones per se, and signed up a number of hardware partners to make Android phones. Carriers were initially resistant, until Google saw them, instead of phone users, as Android’s customers, and allowed hardware makers to produce carrier-specific Android phones that had capabilities locked down, including restricting third-party software installation and disabling key features like tethering and mobile
hotspot use.

The problem was that handset makers apparently retained too much leverage, despite Google’s quiet control-freak behavior, which involved setting standards for the use of the Android name, Google apps and data to drive them, and the Android Market. Companies that didn’t adhere to Google’s stringent and ever-changing requirements would be stuck with an “open” phone that they couldn’t call an Android, and which would have lacked most of what people associated with an Android smartphone. A lawsuit against Google by Skyhook Wireless, a firm that licenses positioning system software that can use GPS, Wi-Fi, and cellular radios to determine
coordinates, revealed many of the alleged anti-competitive practices.

Senior Google executive Andy Rubin, Android’s key mover, started making noises about requiring more compatibility around the time that Google’s Android 3.0 Honeycomb release was pushed out for the Motorola Xoom. He later disputed that he was changing his tune, but I prefer to think he was initially frank and then more reserved. Having a set of baseline features, including a requirement to be able to update a phone through all major (such as 2.x) releases would make sense. (Honeycomb was never released as open-source code. Google said it would hold release until both the mobile phone and tablet trees of Android merged into its 4.0
product, due out later in 2011.)

By purchasing Motorola, Google can make sure that Android is realized in precisely the form it wants, with all software and hardware features working together, and software developers having a real-world reference platform to build against. Google did release a couple of Nexus model phones made by other firms to its specs. But despite the love some owners had for them, these were proof-of-concept phones, showing what could be done, and they were neither fully under Google’s control, nor marketed, subsidized, and made widely available in the way that handset makers specialize in.

We’ll see if Google’s strategy works. By buying a handset maker, Google risks alienating all the other firms with which it has worked on Android devices, notably Samsung, HTC, LG, and Sony Ericsson. These firms released terse, white-lipped, nearly identical statements about the acquisition, focusing entirely on the patent issue. But it’s unclear where else these manufacturers might turn for a smartphone operating system. Forked versions of Android without the Android name? A new consortium? More robust adaptations of Linux that aren’t part of the Android tree? Microsoft Windows Phone 7? HP’s webOS?

Google resisted this strategy for so long because of what it must have believed would be strength in diversity. Heterogeneity would produce more kinds of phones people wanted to buy. But diversity also leads to fragmentation, a charge that Google and its supporters constantly resist, despite the availability of phones and tablets running different 1.x, 2.x, and 3.x versions of Android software, not to mention the many reports from app developers — like Netflix — about the difficulty of writing software that works on 700-plus distinct devices with different hardware profiles. A solid hardware lineup from a Google division means an easier time for app developers,
and thus more apps for Android — plus other Android licensees toeing the line on hardware specs in order to compete with Motorola.

But the patent issue forced Google into this mess. Microsoft had already convinced Nokia, partly with a sizable wad of cash, to drop its many different and outdated smartphone operating systems in favor of a full-on commitment to Windows Phone 7. HP purchased Palm two years ago to align its fates behind webOS, and some terrifically interesting results are starting to emerge, however flawed they may be the first time around. RIM is foundering, with its phone sales stalling and an incomprehensibly bad tablet approach. Meanwhile, Apple’s complete ownership of iOS and the iPhone hardware has become a license to print money.

Google pitches its purchase of Motorola Mobility as providing more competition, and that may be the case. By providing a strong patent defense, it may be able to keep making Android just the way it wants. With an aligned hardware subsidiary, Google could produce even better phones along with a more predictable integrated platform for developers to target. With Android remaining a strong and defensible operating system, Apple, RIM, Microsoft/Nokia, and HP will have to work all the harder, and that’s not a bad thing.

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