It's the patents, dummy

The tech world is abuzz today regarding Google's decision to buy Motorola Mobile. Why would they pay $12.5B for a company that has been losing money and market share hand over fist in the mobile market?

The title of this post says it all. A while back, Google put out an opening bid for the communications patents of Nortel, a company which during its heyday had been among the premiere R&D companies in the world. When Nortel declared bankruptcy a few years ago, its products were purchased by a rival, but its patents remained with them - their ace in the hole for raising cash to pay creditors.

Well, Google may have made a bold initial bid, but then, Google's rivals ganged up on it and created a consortium that outbid it and won Nortel's patents with an outlandish bid of $6.5B.

Why are companies willing to pay so much for a portfolio of intellectual property patents? Because, they act as a shield against litigation. It's like in the old days of the cold war, when the U.S. and Russia each avoided confrontation on a nuclear scale because each knew that the other had the means of a retaliatory strike even after they were doomed to destruction themselves. Back then, it was called MAD (mutually assured destruction), and the concept is still relevant today.

Let's say one of Google's partners markets a device and is sued by Apple for patent infringement. Without a bargaining chip, Google's partner, if found guilty, is liable for substantial damages. But let's say that Google also owns patents, and when faced with a lawsuit from Apple, Google's partners respond: "Well, if you sue us for violating patent 'X', Google will sue you for violating their patent 'Y'."

This standoff eventually leads to both parties agreeing not to sue one another. Google lost its opportunity to buy such relief when its bid for Nortel's patents was trumped by the consortium (which included Apple and Microsoft). Now, with the (more expensive) purchase of Motorola, Google will gain some patents that will help it defend in patent battles from its competitors.

In the bargain, Google will get manufacturing facilities and a household name in the phone industry (although, at the moment, that name is a bit tarnished). Google will have to convince its other handset partners that the primary reason for this purchase was to acquire patents; and not to directly compete against them.

If Google can operate behind a Chinese wall - granting access to the latest software features to all its partners at the same time - they will be able to successfully integrate this purchase without offending the companies that have made Android so successful.

Remember, Google hasn't been charging a fee to the handset providers for the use of Android, so it's not like Motorola will get preferable pricing. It's just a matter of ensuring that Motorola doesn't get first access to new versions of Android. If Google can maintain that fairness, all will be well. If not, Google will have just spent a fortune to shoot itself in the foot.