Google's War Against Apple

August 17, 2011

Fun fact: You think this was a pricy acquisition? Not even close… The most expensive acquisition I could identify was Vodafone Airtouch acquiring Mannesmann in 2000 for $202.8 billion followed by AOL acquiring Time Warner for $181.6 billion in 2001.

Google's War Against Apple

The 63% premium Google is offering to acquire Motorola Mobility has caused quite a stir; the pending merger of "Motorolans with Googlers" [Googorlas??] has opened conversations about the value of IP and patents, the escalating number of lawsuits due to patent infringement, as well as the question about the future of the open Android operating platform. It is hard to filter out what analysts/investors really think about the deal by looking at share price activity during the day, given the instability in the financial markets right now, but here are the facts. At 3:30pm EST on 8/17/2011...                

Google (GOOG): -1.21%

Apple (APPL): -0.14%

Microsoft (MSFT): -0.87%

$12.8 billion is a hefty price tag and a 63% premium is steep. Google is gaining access to 17,000 patents. There were discussions in the Financial Times and New York Times about the new valuation of patents and a new focus on IP. But is that really true? Maybe in this particular space, analysts have not paid much attention to patent portfolios, and only now that litigation is publicly escalating and M&A activity between these tech giants is rising, they are beginning to take a closer look. The actual competitors in this space have always had a strong eye on IP. Certainly in other industries, patents have been essential and key to M&A valuations and acquisition premiums. Look at the pharmaceutical industry. Talk about the need to patent your formulations to guarantee future revenue streams.

Of course, ownership of patents during this time seems to be more relevant than ever considering that seemingly new litigation is filed every day and everyone is going after each other, like children on a playground…fighting for world dominance (see Apple: Litigation as a Business Strategy). In general, patent infringement suits are warranted, but the recent escalation is not only consuming tremendous financial resources, but also stifling innovation due to concern over legal action among smaller entrepreneurial businesses.

Another point that has been heavily debated back and forth since the official announcement of Google's acquisition, is the future of the open operating platform, Android. In its official investor relations' announcement, Google stated that it is firmly committed to its current Android partners and the "vibrant open source community". Some analysts have speculated that going forward, Google will give Motorola Mobility handsets some kind of exclusivity. Why risk having Google's current partners switch to a Microsoft-based operating system for their smartphones? Nokia may be a bit too optimistic assuming that "the acquisition will play into the hands of Microsoft platform."  Google will have to be careful in how aggressively it pursues direct competition with its current partners. There should be plenty of room for additional customer segmentation.

Initially, I believe there is truth in one assessment, which is that Google is indeed defending Android and its partners (FT: Lex Column). The acquisition was pursued as a means to "protect profitability of the handset manufacturers that deploy Android." In reality, this may be an opportunity for Google to build a stronger core (no pun intended) against Apple, based on existing and acquired patents, but also an opportunity for further innovation.  Together with all Android-partners, which may become loyal soldiers/allies if executed correctly, they can build one united front against Apple.

So yes, I do believe this is war against Apple…

[P.S. My husband says I am a cynic and should write about more positive things. There is always next time…]

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