On May 19, 2012, the Chinese Ministry of Commerce (MOC) announced its conditional approval of the proposed acquisition of Motorola Mobility Inc. (Motorola) by Google Inc. (Google).1 This is the thirteenth conditional approval imposed by MOC since China's Anti-monopoly Law (the AML) came into effect on August 1, 2008. The approach taken by MOC, as well as the conditions MOC placed on the transaction, yet again signal that the Chinese antitrust regulatory review process will play a significant and growing role in global M&A transactions affecting Chinese markets.
On August 15, 2011, Google and Motorola announced that they had entered into a definitive agreement under which Google would acquire Motorola for US$40.00 per share in cash, or a total of about US$12.5 billion. By acquiring Motorola, Google obtains control of a portfolio of approximately 17,000 issued patents and 6,800 patent applications, including hundreds of standards essential patents (SEPs) relevant to wireless devices. Although Google announced its intention to run Motorola as a separate business, the vertical integration of Google's mobile computing platform, Android, with Motorola's patent portfolio and device business is expected to enhance Google's ability to compete with other mobile operating systems. Because both Google's and Motorola's businesses have substantial worldwide footprints, the transaction drew international attention from competition authorities, including the U.S. Department of Justice (DOJ), the European Commission (EU), and MOC.
On February 13, 2012, both DOJ and EU approved the Google-Motorola acquisition without conditions. Both regulatory authorities took into account public commitments made by Google to continue non-discriminatory licensing of Motorola's SEPs, and each concluded that the transaction would not be likely to lessen competition in their respective markets. MOC, however, chose to impose conditions on the transaction. Notably, MOC reached different conclusions from DOJ and EU regarding the competitive effects of the transaction, despite the similar nature of the relevant markets at issue.
MOC's review process also took somewhat longer than the DOJ and EU reviews. Google and Motorola initially gave notice to MOC of their transaction on September 31, 2011, but the notification was not deemed complete or formally accepted by MOC until November 21, 2011. Similar to some other cases announced late last year and early this year with conditional approvals, MOC exhausted the full statutory review periods (i.e., taking 180 days from formal acceptance to review the transaction). As such, it took Google and Motorola 233 days after giving initial notice to MOC to obtain conditional clearance for the transaction. Upon the receipt of MOC approval, Google finally cleared the last of the many regulatory hurdles facing the transaction, and the acquisition closed on May 22, 2012.
MOC's Substantive Assessment
Comparing the published decisions of EU and MOC demonstrates that, although each agency uses a similar analytical approach and focus on similar issues, they sometimes reach dramatically different conclusions.
According to the published decision, MOC primarily focused on the following issues:
Definition of Relevant Product Market
MOC defined the relevant product markets for the transaction as (i) the market for smart mobile devices, and (ii) the market for smart mobile operating systems (Mobile OSs), which is basically consistent with the definition of the relevant product markets by EU. However, while MOC considered these product markets as a part of a world-wide geographic market, it focused its review substantially on the Chinese market, while EU considered these relevant markets on a European Union basis or world-wide basis.
In addition, EU analyzed SEPs, as inputs for smart mobile devices, as a third relevant product market. Though MOC took SEPs into consideration when assessing the competitive implications of this transaction, MOC did not analyze SEPs as a separate relevant product market.
Whether Google Has the Ability and Incentive to Foreclose Downstream Competitors by Abusing Its Dominant Position in Mobile OS
MOC held that Google has a dominant market position in Mobile OSs, and projected that it would retain or strengthen its dominance in the near future, in light of the dependence original equipment manufacturers (OEMs) have on Google's Android Mobile OS, and in light of Google's financial strength, research and development capabilities, and high market access.
Having concluded that Google holds a dominant market position in Mobile OSs, MOC concluded that, following the acquisition of Motorola, Google would have the ability and incentive to favor Motorola over other Android OEMs, e.g., by denying other Android OEMs the latest versions of the Android Mobile OS. Based on their investigation, MOC noted that Google has historically selected a lead OEM to test the newest version of Android, and expressed a concern that after the transaction, Google would choose Motorola as its exclusive partner to test future versions of Android, impairing other OEMs' ability to compete. MOC did not comment in its published decision, however, as to why it believed Google would have an incentive to disfavor other Android OEMs.
By contrast, EU also considered this issue, but reached an opposite conclusion. EU did not specify whether Google has any dominant position in Mobile OS, and maintained that (i) the ability of Google to favor a specific Android OEM would not change as a result of this transaction, because such opportunities existed prior to the transaction, and (ii) Google lacked the incentive to restrict other OEMs' access to Android, as doing so would jeopardize Google's mobile search and advertising revenues â€" a business that represents more than 90 percent of Google's revenues.
Whether Google Has the Ability and Incentive to Use Motorola's SEPS to Significantly Impede Effective Competition
Like EU and DOJ, MOC recognized that the rationale for this transaction resides in the acquisition of Motorola's patent portfolio. Considering Google's strong capability in developing and integrating software and hardware paired with its dominant position in the market for smart mobile devices, MOC held that following the transaction, Google would have the ability and the incentive to impose unreasonable licensing conditions on third parties seeking to use Motorola patents. MOC further held that if Google were to impose such conditions, Google could restrain competition in smartphones and adversely affect consumers.
EU again reached an opposite conclusion from MOC. EU observed that Google was bound by Motorola's existing commitments to license its SEPs to others on fair, reasonable and non-discriminatory (FRAND) terms, and noted that Google had committed in a February 8, 2012 letter to various standards organizations that it would remain bound to Motorola's FRAND commitment and honor Motorola's current maximum royalty rates.2
In addition, DOJ concluded that though Google's substantial share in the market for Mobile OS makes it more likely that the additional SEP portfolio could be used to block rivals, Motorola had had a long and aggressive history of seeking to capitalize on its patents and had been engaged in extended disputes with Apple, Microsoft, and others. As such, the transaction was deemed unlikely to materially alter Motorola's existing policies or substantially lessen competition. Like EU, DOJ also took into account Google's February 8 letter when assessing the licensing issue.
Whether Google Will Change Its Current Business Model: Free and Open Source Android Mobile OS MOC emphasized that OEMs, software developers, and users have invested substantially in the Android Mobile OS, and as such, there would be extremely high commercial costs for OEMs to switch from Android to other Mobile OSs. MOC also found that the free and open source model of Android was key to its success of gaining dominant market position in a short period of time. MOC deemed it essential that Google maintain its open source business model after acquiring Motorola. Though MOC argued that any change to the open source model would cause significant adverse implications to OEMs, MOC did not state any basis for concern that Google actually intended to change the Android business model, and did not describe how and to what extent a change of business model by Google would adversely impact market competition.
EU, on the other hand, concluded that Google has an incentive to increase its base for search and advertising services, from which Google derives the majority of its revenues. Any change to the open source business model, the EU reasoned, might cost Google some of its Android OEM partners and ultimately reduce use of its search and advertising services. Moreover, to the extent that changing the Android business model would have market impacts, those impacts are not necessarily unique to the Motorola transaction, given that Google could have changed its approach to Android regardless of its owning a hardware partner.
In light of the foregoing conclusions and after consultation with Google, MOC finally agreed to clear the transaction under the following conditions:
1. Google must continue to license Android free of charge and on an open source basis;
2. Google must treat all OEMs in a non-discriminatory manner with respect to the Android Mobile OS;
3. Google must honor Motorola's existing FRAND commitments with respect to Motorola's patents; and
4. Google must appoint an independent supervising trustee to supervise its performance of the foregoing obligations.
Obligations (1) and (2) shall be in effect for five years as long as Google controls Motorola. If there are any changes in market conditions or competitive conditions, Google has the option to apply to MOC in order to remove or change these two obligations.
In addition, during the five-year period, Google is required to report to MOC and the supervising trustee semiannually for compliance purposes.
The Google/Motorola transaction is another example of how MOC will follow its own approach in assessing global M&A transactions, and may reach conclusions distinct from antitrust authorities in the U.S. and Europe. MOC's unique conclusions may result in part from its relative inexperience in transactions that increase vertical concentration. Its published decision provided little reasoning to support its conclusions as to Google's ability to foreclose competition and little explanation of why Google would have an incentive to do so. In addition, MOC's determination that this vertical transaction could have anti-competitive effects seemed to derive primarily from its conclusion that Google holds a dominant market position in Mobile OS, not any real analysis of the vertical relationship between Google and Motorola. Unlike DOJ and EU, each of which have developed their own dedicated guidelines in respect of vertical and horizontal transactions over time, MOC is still in the formative stages of developing its theories and rules for antitrust review. In addition, MOC is still inexperienced in reviewing transactions that involve the complex interaction of intellectual property rights and antitrust enforcement. Though MOC recognized that the Google-Motorola transaction was primarily driven by Google's desire to acquire Motorola's patent portfolio, the published decision sheds little light on MOC's reasoning and analysis with respect to the competitive impacts of intellectual property transfers, and it is unclear whether MOC specifically considered those impacts when conducting its substantive assessment. For now, MOC's recent decisions underscore the increased importance of implementing a carefully planned Chinese merger strategy when a transaction involves firms with operations in China.
1 MOC's decision is available at www.english.mofcom.gov.cn/aarticle/ policyrelease/domesticpolicy/201206/20120608199125.html .
2 Google sent the letter to the following organizations: the Advanced Television Systems Committee (ATSC); the Consumer Electronics Association (CEA); the Institute of Electrical and Electronics Engineers (IEEE); the European Telecommunications Standards Institute (ETSI); the International Electrotechnical Commission (IEC); the International Organization for Standardization (ISO); the International Telecommunication Union (ITU); the Joint Electron Devices Engineering Council (JEDEC); the Near Field Communication (NFC) Forum; the Open Mobile Alliance (OMA); the Society of Motion Picture and Television Engineers; TechAmerica; the Telecommunications Industry Association (TIA); and the Wi-Fi Alliance. The letter is also published on Google's website at: www.google.com/press/motorola/patents.
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