Why Google Bought Motorola, and What It Means for Advertisers

Deal Gives Search Titan Thousands of Patents as It Tries to Compete Against Apple

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Search titan Google agreed to buy Motorola Mobility for $12.5 billion, its largest acquisition to date, giving the it a wide-ranging portfolio of patents that allow it to compete more directly against Apple and Microsoft.

Here, we break down what this deal means:

What does this mean for media and marketing? Nothing immediately. This is largely a deal to acquire software patents and has no near-term implications for advertising. Google insists Motorola will operate as a separate unit and will continue to make mobile phones and tablets under the Motorola badge. In other words, don't expect Google phones and tablets -- for now.

So why did Google spend so much money on Motorola? At stake is nothing less than the fast-growing mobile industry that runs on various patents held by major companies such as Microsoft and Apple for which they charge mobile phone makers. Earlier this year, Microsoft demanded Samsung pay a $15 surcharge for every Android handset it made, what Google CEO Larry Page called an "Android tax." Microsoft owns mobile patents and charges phone makers that make use of its technology, and Google alleges that Microsoft (and Apple) are being anti-competitive by charging phone makers for using Android and not their own mobile operating systems. Patents have therefore become an important part of a company's negotiating arsenal in the mobile phone market, and last month a consortium of companies including Apple and Microsoft collectively won a bid to buy out patents from bankrupt Novell, which Google lost.

Acquiring Motorola is about "protecting the [Android] ecosystem, and extending it as well," said Mr. Page. Motorola has 17,000 patents with 7,500 pending. As for Android, nearly one-third of all 73.3 million U.S. smartphone users will own phones that run Google's Android platform this year, up from 24% in 2010 and only 6% in 2009, according to eMarketer projections. Apple's market share is expected to hit 30% this year, up from 28% in 2010. Android is projected to surpass Apple in U.S. smartphone market share in 2012.

Motorola itself has been no stranger to this brewing patent war as it recently alleged that Apple's iPhone violates a number of Motorola patents. That lawsuit is pending and will go ahead separately from this deal.

What else does Google get for its $12.5 billion? To be clear, Google is acquiring Motorola Mobility, a unit spun out of the parent company in January that makes mobile phones, tablets and set-top boxes. Motorola shipped 8.5 million Android-powered smartphones and 700,000 tablets in the first half of this year, compared to the 38.9 million iPhones Apple sold in the same period. Motorola has been bleeding money, losing $137 million in the first six months of the year on $6.37 billion in revenue. Of all mobile devices sold globally last quarter, 2.4% were Motorola handsets, according to Gartner. Samsung sold 16.3% and Apple sold 4.6% of all global mobile devices. Motorola is the No. 3 handset manufacturer in the U.S. by total mobile subscribers above age 13, according to ComScore. By this measure, Motorola trails Samsung and beats Apple.

Motorola also makes set-top boxes, another area both Google and Apple are testing the waters. Apple TV, a set-top box for watching iTunes content and web content such as YouTube, is still a "hobby" at Apple, said an executive on Apple's most recent earnings call. Google TV launched last spring and has yet to gain serious traction.

What does this mean for Android? Again, nothing, according to Google. In a call with analysts this morning Android chief Andy Rubin said Google expects to keep Android open and Motorola won't be getting special services. One of the knocks on Android is that because it is an open-source platform (and not an operating system) every mobile phone manufacturer deploys a slightly different flavor of Android. That means app developers can't create a single Android app to run on all Android phones and instead have to tweak the code to run on different systems. The obvious advantage here would be that Google would enforce a uniform operating system for all Android-powered phones, but both companies say that is not on the table.

Will this deal actually go through? Google has come under a mountain of government scrutiny lately with the Federal Trade Commission launching a top-to-bottom investigation of every part of Google's business. This deal will surely fall squarely within the FTC's sights and it could force the Mountain View, Calif.-based behemoth to sell off parts of Motorola that it considers important to keeping the landscape competitive, or it could scotch the deal altogether. The key to understanding this is to what degree the FTC will consider this deal under a separate threshold to its larger inquiry. Despite Google's seemingly unstoppable growth, it doesn't dominate the mobile media market the same way Apple does.

Motorola shareholders will get $40 a share in cash, the companies said in a statement today. That's 63% more than Motorola Mobility's closing price on Friday.

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