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The (Patent) Fear Factor in the Google-Motorola Deal

We’re getting more details about Google’s $12.5 billion bid for Motorola, thanks to a filing by Motorola with the SEC. The document outlines how Google ultimately offered $40 a share for Motorola, a 60 percent premium over the share price at the time, even though Google was the only one negotiating with Motorola.

The document suggests Google was eager and anxious to buy up Motorola, going from initially bidding in the high $20s to low $30s. And it sounds like Motorola may have capitalized on Google’s eagerness by upping its demands and insisting the company must be bought whole instead of making a deal for Motorola’s patents.

But the real story, argues patent analyst Florian Mueller, isn’t that Motorola squeezed Google for more money; it’s how and why it was able to. Mueller says Motorola was, in essence, threatening Google with a number of dire consequences to Android if Google didn’t buy up the manufacturer. Ultimately, he says, it wasn’t simply about the patents, which he has argued in the past are of less value, or Google’s interest in getting into the hardware business. It was about responding to these veiled threats and ensuring Motorola didn’t undermine the success of Android by following through on its threats.

Mueller has been a sharp critic of Google and was criticized for reading too much into recent documents, suggesting Google might favor Motorola to the exclusion of other Android manufacturers. But he’s got some very compelling thoughts on the dynamics of this deal and on the timing of the various moves. Here’s a look at the threats as identified by Mueller:

Motorola might sign a licensing deal with Microsoft and possibly settle with Apple. In its cases against both Microsoft and Apple, it’s possible Motorola could have given in and sought some licensing resolution, something the company raised in its filing. That, Mueller argues, would have been a major capitulation by one of the strongest Android manufacturers and would have been an admission that Android infringes on Microsoft and Apple patents.

Motorola might look at becoming a Windows Phone 7 manufacturer to help mitigate its patent situation with Microsoft. Motorola’s chief executive, Sanjay Jha, expressed some openness to exploring Windows Phone 7 during the Google negotiations. Motorola has been dedicated to Android as its smartphone platform. Mueller believes Motorola may have been looking at building Windows Phone 7 devices as a way to settle its case with Microsoft under more favorable terms.

Motorola was potentially looking at suing other Android manufacturers for patent infringement. On Aug. 9, the same day Jha expressed openness to Windows Phone 7, he also talked about the possibility of collecting royalties from other Android makers. Motorola could have raised the price of Android devices with patent suits, Mueller says, and possibly wreaked more havoc if Motorola abandoned Android, which would make it even easier to target Android manufacturers with lawsuits. On Aug. 9, Google boosted its previously rejected $30 bid to $37 a share and then to $40, a 33 percent increase in one day.

Motorola could have sold parts or all of itself to another bidder. While Motorola and Google entered into a mutual confidentiality and nondisclosure agreement during the negotiations, Motorola was also weighing “other strategic alternatives.” Om wrote that Microsoft was talking to Motorola about buying its patent portfolio, which helped Google pull the trigger on the deal. Motorola, in its proxy filing, communicated early on that it wanted to keep the company whole because selling patents separately might hurt its ability to operate as a standalone company. At its Aug. 9 board meeting, Motorola directors discussed whether to solicit proposals from other potential buyers before deciding to negotiate privately with Google. But the threat was always there that Motorola could look to other suitors that could have made life tough for Google.

I’m not sure if Google was prompted by these threats in the way that Mueller speculates. But it sounds plausible that Google was motivated by more than just patents. As observers have noted, they aren’t quality patents, don’t offer the best protection for Google, and didn’t dissuade Apple or Microsoft from suing Motorola. And I don’t think Google is interested in really undermining its Android ecosystem by competing heavily with its manufacturing partners, even if Google Chairman Eric Schmidt said the deal was for more than patents.

What makes more sense is that Google needs to do everything it can to keep the Android express going, and if Motorola defected to another platform, started suing Android manufacturers, struck licensing deals with Apple or Microsoft, or fell into the hands of those rivals, it could have caused significant damage to Android.

By scooping up Motorola, Google can prevent a lot of those issues from arising while also obtaining a fair amount of patents along the way. It also means that Google is now responsible for Motorola’s legal battles, which could still strike a big blow to Android if Motorola loses.

Is Motorola worth $12.5 billion? That’s arguable. But it sounds like Google was backed into a corner, with Motorola basically calling the shots. This indicates Google is willing to go to great lengths to keep Android running, but it also exposes the company to similar threats from other partners. At the very least, we’re reminded again that Android may be a free platform, but it’s certainly not cheap for Google to maintain.

Also from GigaOM:

What the Google-Motorola Deal Means for Android, Microsoft and the Mobile Industry (subscription required)

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Ryan has covered personal technology and wireless for the San Francisco Chronicle and now writes for GigaOM.

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