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Motorola purchase could shield Google from patent lawsuits

Google Inc.'s deal to buy cellphone maker Motorola Mobility for $12.5 billion in cash gives the Internet search giant the ability to build and market its own smartphone and tablet devices — and puts it squarely in competition with Apple to be the world’s dominant company in mobile technology.

In the biggest acquisition in its 13-year history, Google would be poised to expand its empire beyond its ubiquitous search engine and Web services to offer handsets, TV set-top boxes and other consumer products made by Motorola Mobility Holdings Inc., a recent spinoff of Motorola Inc.

“Google is trying to create its own device brand to compete with Apple,” said John Fletcher, senior analyst at SNL Kagan. Calling it “a G-phone to compete with the iPhone,” Fletcher said Google “sees the value of making its own phone with a killer user experience.”

More immediately, though, Google would gain ownership of more than 17,000 Motorola patents for mobile technology. That would help Google and smartphone makers that use its Android technology — including HTC, Samsung and LG — defend against patent infringement lawsuits filed by rivals such as Apple Inc. and Microsoft Corp.

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Until now, Google hasn’t built its own handsets, instead providing its Android operating system for free to manufacturers. The Mountain View, Calif., company makes its money by selling advertising — and all Android phones have Google’s search engine built in.

That strategy has proved sound; more than 43% of smartphones sold globally in the most recent quarter were Android devices, while Apple’s iPhone accounted for about 18% of sales, according to research firm Gartner Inc.

But with an estimated 550,000 Android handsets being activated each day, the growing popularity of the operating system has been met with claims that Android violates long-standing patents.

“The reason why Google bought Motorola is, first and foremost, about the patents,” said Ken Dulaney, vice president of mobility at Gartner. “They are getting hammered by everyone suing them, and they didn’t have much of a defense.”

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Among the patent actions are Apple’s suits against Android makers HTC Corp. and Samsung Electronics Co., Microsoft’s suit against Barnes & Noble Inc. over its Android-powered Nook reader, and database maker Oracle Corp.'s suit against Google itself.

Earlier this month, Google complained about what it called “a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents.”

Smartphones are filled with dozens of electronic components made by manufacturers across the globe, many of which make similar products. Typically, they have cross-licensing agreements to deal with royalties and intellectual property issues — shielding one another from lawsuits. In buying Motorola Mobility, Google would essentially buy into those contracts.

In announcing the deal Monday, Google Chief Executive Larry Page cited the need to obtain protective patents. While acknowledging that the company could now build and market its own devices, he said Google was still committed to providing Android software to other manufacturers.

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But by buying an Android manufacturer, Google risks disrupting its delicate ecosystem of partnerships.

“There’s no way there can be a level playing field among competitors if this goes through,” said Florian Mueller, an intellectual property analyst who has been following the smartphone patent disputes. “Once one of those becomes a wholly owned subsidiary of Google, they no longer need any other handset makers.”

In statements, however, major partners including Samsung and HTC said they support the deal, viewing the acquisition as a means of defending the Android technology against patent suits.

Brian Pitz, a senior analyst with UBS, said Google would be more circumspect about playing favorites with the companies that had helped it make Android a rapid success.

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“Google’s Android operating system was able to overtake iPhone in just a few years by working with all these players,” he said. “They need to manage those relationships so as not to ruffle any feathers.”

Analysts also were concerned about Google getting into a totally new area: electronics manufacturing.

“You have to wonder if this is the best use of capital and whether ... Google should be in the smartphone and tablet business,” said Scott Kessler, an analyst at Standard & Poor’s. “A lot of people would think, probably not.”

Google’s proposed purchase probably will face tough scrutiny by federal antitrust regulators who already are examining its practices. Analysts said regulators were unlikely to block the deal but could attach conditions to prevent Google from leveraging Motorola’s business and patents to exclude competitors in online search and advertising.

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“I suspect that when the dust settles the transaction will be cleared, but I wouldn’t be surprised if there were strings attached,” said Jeffrey Silva, a telecom policy analyst at Medley Global Advisors.

The Federal Trade Commission is investigating Google businesses such as search and advertising to determine if the company is abusing its market dominance to squelch competitors.

The acquisition of Motorola, however, is likely to be reviewed by the Justice Department, which normally handles telecommunications deals.

In April, justice officials approved Google’s purchase of travel data company ITA Software Inc. But the approval came with conditions, including a requirement that Google license ITA’s software to other websites on reasonable terms.

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Google would pay $40 a share for Motorola Mobility — a 63% premium over the company’s closing stock price Friday. On Monday, investors bid up the price of Motorola’s stock 55%, to $38.12. Google shares dipped nearly 1.2%, to $557.23.

Taking over Motorola also could advance Google’s ambitions to weave the Web further into the way consumers watch television. Motorola is one of the largest makers of the set-top boxes that control cable and satellite television.

Google has tried to market its Google TV, a system that combines conventional television with shows and movies that can be streamed from the Internet, but the product was greeted with tepid reviews and has not been widely embraced by consumers.

Google probably will experiment with integrating Google TV into the Motorola boxes, said Jason Helfstein, an Internet research analyst with Oppenheimer & Co. But the company also must deal with cable companies that may be unhappy with the idea of making it easier for consumers to stream videos on the Internet for free.

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david.sarno@latimes.com

shan.li@latimes.com

Times staff writer Jim Puzzanghera in Washington contributed to this report.


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