Google And Motorola

1 January 2017

This $12. 5 billion deal is Google’s first step into the mobile device hardware market and can therefore be seen as a non-­? horizontal or vertical merger, as Google has been active in the market at a different stage of the supply chain through the development of one of the major mobile device operating systems (OSs): Android OS. This merger will strengthen Google’s stance in the market for mobile devices and will mainly boost Google’s patent portfolio. Nearly one third of all mobile device sales in 2011 were smartphones with a growth rate of 58 percent from 2010.

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In this rapidly eveloping market with such a high number of consumers, it is of great importance that there is high competition in order to keep the prices low and to drive innovation. As this market is also very global, antitrust organisations all over the world, for example the United States Department of Justice or the European Commission need to check, whether a merger like the one that is presented in the following could harm competition or increase a firm’s market power in a market above an acceptable level.

Additionally, this paper will face the question, whether the sinergies of this merger are big enough to influence the competition ommissions’ decisions. In order to answer these questions, this paper will firstly present the case and the decisions from both the European and the US point of view. Secondly, it will show an analysis of the economic background of the case to trace the steps of the two antitrust commissions and then, thirdly it will conclude with a competition analysis and a search for efficiency gains that justify the commissions’ decisions, followed by a short outlook.

As an introductory part to this paper, I will give some general information about the firms, their operations prior to the merger and a projection of their ombined future. I will also present the notifying party’s (i. e. Google’s) reasons for why they would like to acquire Motorola. Following this are the EU and U. S. decisions and a short abstract on the differences in their approaches. 1 2. 1 Google, Inc. Google is mainly known as a provider of its internet search platform and online advertising services.

Founded by Larry Page and Sergey Brin in 1998, it became a publically traded company in 2004 and since then it has become one of the biggest players in web-­? based enterprises around the world. Its broad range of products goes from web search tools, via advertising services ike AdSense or AdWords, communication and publishing services, development resources, map-­? related products, statistical tools and desktop applications to mobile applications and the operating systems Android for mobile devices and ChromeOS for personal computers. (Google, Inc. , 2012a) 2. 2 Motorola Mobility Holdings, Inc. MMI, formerly the mobile devices division of Motorola Inc. , became its own publically traded company in January 2011. In the 1990s it was the pioneer of the flip phone, the StarTac. With this and through its focus on this market segment it was able to develop its hit product, the super-­? thin flip phone:

Motorola RAZR. While these boosted its position in the analogue mobile phone market for a while, MMI’s slow adaption to digital technology made it lose the race to its rivals, e. g. Sony Ericsson or Nokia, in the beginning of the 21st century (Motorola Mobility Holdings, Inc. , 2010). Its market share began to drop with a record $1. 2 billion loss in 2007 and continued to drop in the years thereafter towards 2. 7 percent in 2010. This, amongst other issues, has led some people to believe that Motorola was nearing bankruptcy. (Gartner, Inc. , 2011) 2. 3 Reasons for a Merger In its own press release, Google Inc. (2012) states the ain benefits of the deal to be: 1. An acceleration of innovation and choice in mobile computing through which consumers will get better phones at lower prices and 2.

A protection of the Android Ecosystem through Motorola’s patent portfolio, which guarantees Android to stay open-­? source software, which is vital to completion in the mobile device space, as it is ensuring hardware manufacturers, application developers, mobile phone carriers and consumers all to have choice. Since 2008 Motorola has fully implemented the Android operating system for their 2 smartphones, which creates a “natural fit between [the two] companies” Google, Inc. , 2012b, p. 1). This, as well as Motorola being a member of the Open Handset Alliance (OHA), a consortium to create open standards for mobile devices, which now includes 84 firms from every part of the supply chain, will enable faster innovation. Another point that Google stresses in their facts about the acquisition is the long history of innovation in communications technology at Motorola Mobility and additionally the development of intellectual property.

The latter is very important to Google as it will support their own, so far very small, patent portfolio to defend Android OS against the strong competition rom Apple and Microsoft, which is well explained in an extra paragraph in their press release. It is very important to Google to support the constant competition it has injected into the smartphone market since the introduction of the first Android phone in 2008. They are trying to give “consumers, application developers, and mobile carriers high-­? quality alternatives to products like Apple? s iPhone and iPad and RIM’s BlackBerry“ (Google, Inc. , 2012b, p. 2). Google especially highlights what they will not be trying to do with the merger, in order to keep competitors and consumers calm. They do not want to close the Android cosystem and favour Motorola over other hardware manufactures.

The Android OS will stay available to everyone on an open source basis. Google will also not force their partners to use Google search (in order to boost their own advertising revenues). 2. 4 The EU Decision The European Commission (EC) was notified of the proposed merger in late November 2011. Since Google and Motorola Mobility have a combined world-­? wide turnover exceeding €5 billion and each have an EU-­? wide turnover of more than €250 million, as well as neither one company is achieving more than two-­? thirds of its EU-­?

Wide turnover within one European ountry, the merger has an EU dimension and has therefore to be allowed by the EC. In their analysis of whether the merger would bring about competition issues, the EC concluded to focus on the vertical relationships between “Google as the supplier of the open source Android OS and online services on the one hand and Motorola Mobility as a supplier of mobile devices and holder of important Intellectual Property Rights for mobile devices on the other hand” (European Commission, 2012, p. 4).

The EC splits its initial market analysis into three parts: Firstly it focusses on the market for operating systems, secondly it analyses he market for mobile devices and thirdly it discusses the Standard Essential Patents (SEPs) 3 Google acquires from MMI. With their market analysis they conduct a competition analysis and conclude in all areas that the merger does not raise any competition issues, which can also be seen in the economic analysis that follows later. Their decision therefore is to drop the investigation and allow the deal to go through without any remedies or changes to be made. 2. 5 The US Decision

The United States Department of Justice (DOJ) has approached the case in a similar, however, slightly different way. It combined the investigations f the merger case with acquisitions of certain patents by Apple Inc. , Microsoft Corporation and Research In Motion Ltd. , as all of these were linked to each other. In their analysis, the DOJ followed a similar approach to the EU, checking, whether the proposed acquisitions would create incentives and abilities for the acquiring firms to “exploit ambiguities in the SSOs’ F/RAND [fair/ reasonable and non-­? discriminatory terms] licensing commitments to hold up rivals, this preventing or inhibiting innovation and competition” (U. S. Department of Justice, 2012, p. 2). In terms of Microsoft Corp. ’s and Apple’s acquisition of

Nortel patents, the division’s concerns were lessened by the “clear commitments by Apple And Microsoft to license SEPs“ (U. S. Department of Justice, 2012, p. 1) on FRAND terms, as well as their commitments not to seek injunctions in disputes involving SEPs. However, the Department of Justice identifies Google’s commitments to be less clear. The Department refers to Google’s open letter to all Standard Setting Organizations (SSOs) and argues that Google’s statement does not directly provide the same assurance, as for example the other companies mentioned before.

Google for example mentions in their letter that it will not seek njunctions for the infringement of SEPs against a competitor, however only for disputes involving future license revenues, and only if the counterparty “forgoes certain defenses such as challenging the validity of the patent; pays the full disputed amount into escrow; and agrees to a reciprocal assurance as the other companies’ statements concerning the exercise of its newly acquired patent rights“ (Lo, 2012, p. 3). These are, however, only reasons for the Department to decide on further monitoring of how competitors are exercising their patents, in order to identify potential misuses of the SEPs and not to prohibit the merger.

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