Google just spent $12.5 billion to acquire Motorola Mobility, which manufactures mobile phones and TV set-top boxes. To put that into some kind of perspective, the world’s leading search company is forking out almost two years-worth of its total global profits to buy a loss-making handset manufacturer, that has around 4% of the world smartphone market and teeny-tiny slice of the tablet market. At a price that is a 63% premium on the current market value of the business.

It has been reported that Google agreed to pay Motorola a $2.5 billion break-up fee if they didn’t complete the deal. Clearly, Google really, really wanted to get this done; but why?

In July Google lost out on a basket of 6,000 patents and patent applications spanning wireless, wireless 4G, data networking, optical, voice, Internet and semiconductors belonging to bankrupt telecoms firm Nortel, despite bidding around $4 billion. The winning consortium included RIM, Apple and Microsoft, Google’s major rivals in the smartphone and mobile computing space. Google wanted the patents in order to defend its Android operating system against the growing threat of litigation.

The Motorola deal gives Google ownership of some 17,000 patents, almost 3 times as many as in the Nortel deal, but at almost 3 times the cost. Google needed Motorola’s patent library and Motorola knew it: they made Google pay through the nose.

Google CEO Larry Page said, “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”

Owning patents and defending Android is all very well, but in order for this deal to pay off in the long run there have to be products that consumers actually want to buy. And the fact is that right now Motorola doesn’t have a compelling portfolio.

As Daring Fireball’s John Gruber puts it, “If every Motorola product was removed from every store in the world tonight, and replaced by the closest equivalent devices from HTC and Samsung, would the mobile landscape be significantly different tomorrow?”

Whilst HTC and Samsung both issued statements welcoming the deal, any preferential treatment for Motorola will have them looking afresh at their options. The challenge for Google is how to make Motorola relevant in the consumer and business markets without alienating its other Android partners. If they can figure that out $12.5 billion may not seem like such a big deal after all.

Image with thanks to keso