Google-Motorola likely to draw regulatory scrutiny

Google's plan to acquire Motorola Mobility for $12.5 billion promises to trigger antitrust red flags just as much as it will shake up the mobile-handset business.

As the dominant leader in Internet search and search advertising, Google can't make an acquisition without raising regulatory hackles. And this deal, based on its size alone, will spark trustbuster scrutiny.

"We're quite confident that this will be approved," Google's chief legal officer, David Drummond, said during a conference call announcing the news today. "We believe, very strongly, that this is a pro-competitive transaction."

Google is already facing an antitrust investigation from the Federal Trade Commission. In June, the company disclosed that it received "formal notification" from the agency that it was reviewing the company's business. And last week, The Wall Street Journal reported that the FTC was including the Android mobile operating system in that probe, looking into whether Google is barring smartphone makers that load Android on their devices from using competitors' services.

In looking at the Motorola deal, regulators will most certainly zoom in on Google's industry-leading Android. The question they'll try to answer is whether the Motorola acquisition benefits Android in a way that could increase Google's market power in search and search advertising.

It's an issue that Drummond sought to address right away.

"Android has clearly added competition, innovation, increased user choice," Drummond said on the call. "We think protecting that ecosystem is pro-competitive, almost by definition."

Competitors, though, are likely to see things differently. For now, Google's biggest rivals, Apple and Microsoft have declined to comment on the antitrust implications of the deal. But it's almost certain that they'll raise concerns with regulators.

"One way to look at this is, how is Microsoft going to complain? How is Apple going to complain?" says Eleanor Fox, an antitrust professor at New York University School of Law. "What are they going to want?"

Most likely, those companies will focus on the very same things that Google did as it considered buying Motorola-- its vast patent portfolio. Motorola Chief Executive Sanjay Jha noted on the conference call that the company has some 17,000 patents and another 7,500 patent applications pending.

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• Full coverage of Google's Motorola acquisition, from CNET and its sister sites

Though not all of those are related to mobile devices, those patents will go a long way toward helping Google defend itself and its handset partners from lawsuits alleging that Android has infringed on patents. That's because patent litigation often plays out like a kabuki dance where one company with a patent threatens to sue another company that it believes has infringed on its innovation. The accused company often resorts to asserting it's own patents against its accuser. That leads to negotiations and cross-licensing deals.

But Google has been at a disadvantage in the game because it has a thin patent portfolio for mobile devices. That's why it's been sued by Oracle and its handset partners have been sued by Microsoft and Apple. And it's why Google was so desperate to buy Motorola, offering 63 percent more than Motorola's Friday closing price on the New York Stock Exchange.

So expect Apple, Microsoft, and others to raise concerns of anticompetitiveness over the deal to convince regulators to push a consent decree that would diminish the value of those patents. Google's rivals would love nothing more than to have regulators force the company to have to either divest or cross-license some of the Motorola patents. It won't be easy though.

"In order to have a consent decree, they are going to have to find an anticompetitive angle," Fox said. That's not easy in a so-called vertical acquisition, when one company acquires a customer or supplier, as opposed to buying a rival in a horizontal deal that would eliminate competition. Vertical acquisitions, such as the proposed Google-Motorola deal, tend to be viewed more leniently.

"Because Google has got real enemies some people will try to make noise about the deal," said Ed Black, president of the Computer and Communications Industry Association in Washington, D.C., a trade group that counts Google as well as Microsoft as members. "But from a regulatory standpoint they don't compete horizontally."

In general, federal agencies reviewing proposed acquisitions look at whether the deal will cause adverse competitive effects and whether it will create economic efficiencies that would otherwise not occur, Rick Brunell, director of legal advocacy at the American Antitrust Institute, said. Regulators will also look at whether either party will leave the market if the merger doesn't happen.

Motorola may not exactly be prepared to stop making cell phones, but its market share has plummeted since the success of the Razr half a decade ago. A June article in Fortune magazine called the company "an also-ran in global market share by units and by revenue." A report from market research firm Trefis, which bases its estimates on product desirability and revenue, said Motorola's mobile-phone market share will fall below 3 percent by 2017.

A federal requirement called the Hart-Scott-Rodino process requires companies to notify the FTC and the Justice Department in deals of this size. That also established a mandatory waiting period that must be met before the transaction can be completed.

One important signal is whether whichever agency reviews this transaction makes a supplemental request, which would indicate a willingness to scrutinize the deal more closely. A so-called second request can include extensive requests for documents and delay the process by months.

Disclosure: Declan McCullagh is married to a Google employee not involved with this issue.