The Audacity Of Fear: Patent Neglect Forced Google’s Drastic Motorola Bid

The largest acquisition in Google (NSDQ: GOOG) history is about as far from its original mission of Internet search as one can get: it might soon own one of the oldest companies in the tech industry. That itself isn’t all that shocking, given how Google has spread far and wide in the years since PageRank was first conceived, but its bold purchase of Motorola (NYSE: MMI) is perhaps the first major acquisition at Google that was motivated by fear of having made a huge strategic blunder.

By agreeing to spend $12.5 billion to acquire a middling smartphone company, Google has definitely found a short-term answer to its patent problem. Besieged on all sides by competitors with older and deeper patent portfolios, Google and Android were ripe targets for those trying to blunt its advance as a mobile power, and Motorola’s portfolio will make life much easier for Google’s legal team.

But Google’s inherent disdain for the modern patent system has forced it into a place that co-founders Larry Page and Sergey Brin could not have imagined in 1998. Most of Google’s big strategic acquisitions have been about seizing upon opportunities in growing businesses or technologies, such as with Doubleclick, YouTube, and AdMob. All of those deals fit right in with Google’s vision of Web-based software and services as the future of the computing industry.

This acquisition came because Google was running scared. It has been scrambling to find a “Plan B” after it failed to acquire the Nortel patents when a consortium of companies including arch rivals Apple (NSDQ: AAPL) and Microsoft (NSDQ: MSFT) schemed to bid up the price, denying it the ability to countersue companies like Oracle that are threatening the existence of Android. And it is now paying a steep price for having neglected its mobile patent strategy until Oracle delivered a huge wake-up call.

The Price Is What?: But how did Google decide that Motorola’s patents were worth a 63-percent premium over Motorola’s closing price on Friday and nearly one-third of Google’s cash and marketable securities on hand at the end of the second quarter when it didn’t think Nortel’s patents were worth $4.6 billion?

A source familiar with Google’s strategy during the Nortel patent auctions told me weeks ago that Google couldn’t quite bring itself to see a patent portfolio as valuable as an actual company with skilled people. Google is obviously no stranger to growing through acquisition but the idea of paying that much money just for patents appears to have unsettled Page and Co., and probably explains why the company mounted a PR offensive two weeks ago over Microsoft and Apple’s strategies toward “bogus” patents on which Google itself had bid billions of dollars. By (correctly) pointing out the many problems with the patent system, Google was attempting to distract attention from how badly it misread the intensity of the mobile patent wars and just how precarious a position it was in while painting those who would band together buy and sell patents like commodities as bad actors.

In other words, when it found itself in a defensive posture Google was much more comfortable buying a company that happens to have patents as opposed to patents without a company, because deep down it still believed that many of these software patents should never have been granted in the first place. But with a horde of competitions chasing it into courtrooms, Google had to act fast to ensure a defense, especially because Microsoft was courting Motorola as well, as reported Monday by GigaOm.

Investors are not convinced that Google knows what it is doing, sending Google’s stock down 1.2 percent on a day when the broader Nasdaq market was up over one percent. That’s because despite the welcome patent coverage this deal presents daunting integration issues: Motorola has 19,000 employees compared to Google’s 29,000, a huge presence in suburban Chicago while Google is concentrated on the coasts, and it has been trying to remake an engineering-driven culture with more of a focus on consumers while Google is perhaps the most engineering-driven company in the tech industry.

Brave New World: Google said it plans to run the company as a separate business, but it might be harder for Motorola’s engineers to have to get in line behind their competitors when trying to visit their parent company then to integrate the companies. Google has never managed inventory. Page and Brin famously disdained consumer marketing in building their search engine, and now they want to buy the “Hello Moto!” guys. Just two years ago Google tried to blow up the smartphone market by proposing to sell phones through its own store, and it will now start lining up buyers from wireless carriers to consider its newest products.

Many early reactions to the deal assume that Google will rid itself of some of the headaches by shedding Motorola’s hardware division in due time, which would end the channel conflict problem, get Google out of a commodity business it has never proven it can run, and still allow it to control a sizable mobile patent portfolio.

But GigaOm’s sources said that Motorola chose Google in part because it wanted to actually run the business, whereas Microsoft was just interested in the patent portfolio. And Google executives insisted they planned to run Motorola the same way it is currently run, even to the point where it wouldn’t necessarily be granted pole position on new Android versions. (More on why I find that hard to believe here.)

Page has wasted no time re-attaching his stamp to Google after taking back the CEO chair in April, and this is probably the most audacious move Google has ever made. Yet this is a move Google has been forced to make by external pressures, rather than one it is making because it sees a grand opportunity or wants to expand an idea that is already working.

By taking a more expensive and enormously challenging route to patent protection, Google proved once again that it is determined to be an unconventional company no matter what the cost. It’s hard to believe that Google wouldn’t have won the Nortel auction for even half of the $12.5 billion that it is willing to shell out for Motorola, but Larry Page wanted a company.

Now all he has to do is figure out what to do with it.