How might the growing tendency for technology companies to buy other firms patents affect innovation?

Google Acquires Motorola Mobility in a Growth-Oriented as well as Defensive Move By most measures, Google's financial performance has been breathtaking. The Silicon Valley-based firm's revenue in 2011 totaled $37.9 billion, up 29% from the prior year, reflecting the ongoing shift from offline to online advertising. While the firm's profit growth has slowed in recent years, the firm's 26% net margin remains impressive. About 95% of the firm's 2011 revenue came from advertising sold through its websites and those of its members and partners. 6 Google is channeling more resources into "feeder technologies" to penetrate newer and faster-growing digital markets and to increase the use of Google's own and its members' websites. These technologies include the Android operating system, designed to power wireless devices, and the Chrome operating system, intended to attract Windows- and Mac-based computer users. Faced with a need to fuel growth to sustain its market value, Google's announcement on August 15, 2011, that it would acquire Motorola Mobility Holdings Inc. (Motorola) underscores the importance it places on the explosive growth in wireless devices. The all-cash $12.5 billion purchase price represented a 63% premium to Motorola's closing price on the previous trading day. Chicago-based, Motorola makes cellphones, smartphones, tablets, and set-top boxes; its status as one of the earliest firms to develop cellphones and one of the leading mobile firms for the past few decades meant that it had accumulated approximately 17,000 patents, with another 7,500 pending. With less than 3% market share, the firm had been struggling to increase handset shipments and was embroiled in multiple patent-related lawsuits with Microsoft. As Google's largest-ever deal, the acquisition may be intended to transform Google into a fully integrated mobile phone company, to insulate itself and its handset-manufacturing partners from patent infringement lawsuits, and to gain clout with wireless carriers, which control cellphone pricing and distribution. Revenue growth could come from license fees paid on the Motorola patent portfolio and sales of its handsets and by increasing the use of its own websites and those of its members to generate additional advertising revenue. Google was under pressure from its handset partners, including HTC and Samsung, to protect them from patent infringement suits based on their use of Google's Android software. 7 Microsoft has already persuaded HTC to pay a fee for every Android phone manufactured, and it is seeking to extract similar royalties from Samsung. If this continues, such payments could make creating new devices for Android prohibitively expensive for manufacturers, forcing them to turn to alternative platforms like Windows Phone 7. With a limited patent portfolio, Google also was vulnerable to lawsuits against its Android licenses. Innovation in information technology usually relies on small, incremental improvements in software and hardware, which makes it difficult to determine those changes covered by patents. Firms have an incentive to build up their patent portfolios, which strengthens their negotiating positions with firms threatening to file lawsuits or demanding royalty payments. Historically, firms have simply cross-licensed each other's technologies; today, however, patent infringement lawsuits create entry barriers to potential competitors, as the threat of lawsuits may discourage new entrants. It now pays competitors to sue routinely over alleged patent infringements. Risks associated with the deal include the potential to drive Android partners such as Samsung and HTC to consider using Microsoft's smartphone operating system, with Google losing license fees currently paid to use the Android operating system. The deal offers few cost savings opportunities due the lack of overlap between Google, an Internet search engine that also produces Android phone software, and handset manufacturer Motorola. Google is essentially becoming a vertically integrated cellphone maker. Furthermore, when the deal was announced, some regulators expressed concern about Google's growing influence in its served markets. Finally, Google's and Motorola's growth 6 Google views its members (customers) as the over 1 million businesses that post advertisements on its websites; partners consist of website publishers on whose sites Google posts advertisements and with whom Google shares revenue from those advertisements. At 69% of total Google revenue, advertising revenue from Google websites grew at 34% in 2011 , while advertising revenue from its members contributed 27% of total and grew by 18%. 7 Apple, Microsoft, and Oracle accused Google or the companies that use its Android operating system in the handsets they manufacture, such as Motorola and HTC, a Taiwan handset maker, of infringing on their patents. Each has filed its own patent infringement lawsuit. In late 2012, Apple won its U.S. patent case against Samsung. and profitability differ significantly, with Motorola's revenue growth rate less than one-third of Google's and its operating profit margin near zero. Samsung, HTC, Sony Ericsson, and LG are now both partners and competitors of Google. It is difficult for a firm such as Google to both license its products (Android operating system software) and compete with those licensees by selling Motorola handsets at the same time. Nokia has already aligned with Microsoft and abandoned its own mobile operating system. Others may try to create their own operating systems rather than become dependent on Google. Samsung released phones in 2011 that run on a system called Bada; HTC has a team of engineers dedicated to customizing the version of Android that it uses on its phones, called HTC Sense. Motorola Mobility's shares soared by almost 57% on the day of the announcement. Led by Nokia, shares of other phone makers also surged. In contrast, Google's share price fell by 1.2%, despite an almost 2% rise in the S\&P 500 stock index that same day