Last month, Google announced its plans to acquire Motorola Mobility Holdings, the cellphone company that recently split from Motorola.  As the popularity and use of smartphones have both been growing rapidly of late, many speculated that Google intended to wed its Android operating system with Motorola’s celebrated–and large–collection of telecommunication and hardware patents to poise itself for direct competition with Apple in the cellphone manufacturing arena.  (Although–as an aside–there has been recent speculation that the patents Google is buying may not be as valuable as some had imagined.)

However, as soon as Google made its announcement, onlookers predicted that the deal would run into antitrust barriers (or at least some stumbling blocks).  And they were right: the FTC immediately began looking into whether Google’s control of both software and hardware would create for it an impermissible competitive advantage.  Opinions diverged as to whether the deal would go through, but everyone agreed that it would not slide by without a fight from government regulators (especially because the FTC was already at the time looking into whether Google was using its dominant position in web-searching to promote its own products and services over those of competitors).

But now, the DOJ’s recent action to block a merger between AT&T and T-Mobile has cast some doubt on whether the government will be able to do the same to Google and Motorola by highlighting the legal and structural differences between the two transactions.  The essential difference (and the most viable “out” for Google) lies in the nature of the two sets of merging companies and their relationships to each other:  the merger between AT&T and T-Mobile is a “horizontal” one, while the merger between Google and Motorola is “vertical.”  That is, AT&T and T-Mobile competed directly with each other–on the same horizontal “plane”–and, therefore, a merger between the two would truly reduce the competition for the products and services that they both provide.  Google and Motorola, on the other hand, are not direct competitors, but rather occupy different positions in the “chain of production.”  Theirs is considered a “vertical” merger.  Because the DOJ tends to focus its antitrust efforts much more on horiontal mergers, it is starting to appear as if Google will get off much easier than people originally predicted.  I guess we can’t be certain, though, until the DOJ officially throws in the towel.

Will Pickens

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2 Responses to Dimensional Distinction May Save Google Significant Legal Fees

  1. Niels Melius says:

    While I agree with the author that the Google-Motorola merger is unlikely to be challenged by antitrust authorities, the deal’s structural nature (i.e., vertical versus horizontal) is not dispositive. True, the FTC and DOJ generally focus on horizontal mergers in their merger enforcement activity, but vertical mergers can have equally anticompetitive effects, and the antitrust authorities review them on a case-by-case basis. For example, vertical mergers can raise entry barriers to competition, which may lead to higher prices, lower quality, and less innovation. The mechanics behind this phenomenon are explained by the concept of “raising rivals’ costs,” where a vertically integrated company may be able to increase the costs of its rivals in either the upstream or downstream market through exclusive dealings with its newly acquired subsidiary. This “foreclosure effect” may require firms seeking to enter one of the vertically integrated markets to enter BOTH markets (“two-level entry”), which may significantly increase the difficulty of entry. Applying this theory to the case at hand, imagine if Google began providing Motorola with exclusive access to its latest innovations and newest Android features and began to withhold software upgrades from Motorola’s rival device makers. Downstream manufacturers of phones, such as Samsung, Sony Ericsson, HTC Corp. and LG Electronics, would then be forced to vertically integrate upstream to create their own operating systems/software. It seems these manufacturers do not fear these risks, since they actually support this deal. Their support likely has more to do with patent law than antitrust. The real motivation for Google’s acquisition of Motorola is probably not a desire to raise its rivals’ costs, but rather to defend against future patent infringement suits. The Motorola acquisition gives Google a portfolio of more than 17,000 patents on phone technology that can be used to defend itself and Android device makers from patent infringement litigation. In the end, this may be a good deal for everyone but Apple, who will now face increased competition in the smartphone market. So ultimately, I think it is this deal’s likely positive effect on competition that makes this deal palatable to the antitrust authorities, rather than its structural characteristics.

  2. spals says:

    It would be interesting to see how a Google phone would compete with the iPhone. It almost creates a more direct to competitor to Apple to have someone in both the online realm and in hardware.