Will Legal Troubles Kill Google?

Jul. 6.11 | About: Alphabet Inc. (GOOG)

What transformed Microsoft (NASDAQ:MSFT) in the 1990s from a fast-growing innovator into a slow-growing tech laggard? Lawyers, strategists, and PR people.

The turning point was the government's anti-trust case against the company. Not the result, the case itself. Engineers and programmers found themselves outnumbered at their own meetings by lawyers and PR people. Layers of management and procedures grew until it became easier to say no to ideas, after long consideration, than to say yes.

Is this about to happen to Google (NASDAQ:GOOG)? The signs are ominous.

The FTC investigation of Google search is one bad omen. It may not turn into a case, but it probably will turn into a set of rules for search results that discourage innovation, putting a layer of lawyers between engineers and their work.

Far more ominous are the growing legal threats against Android.

I commented on them last month. The clouds grew darker today when Google failed in its attempt to buy Nortel's patent portfolio. Instead they went to a consortium of its rivals, led by Apple (NASDAQ:AAPL) and Microsoft.

A host of companies large and small are now in court with Google over Android, a Linux distro optimized by Google for mobile under the rubric of the “Open Handset Alliance.”

Most attention has focused on the patent suit Oracle (NASDAQ:ORCL) filed directly against Google, and recent news on that front is promising for Google.

More important are suits filed against Google's OEMs, with which relationships are already strained. These include patent suits filed by Microsoft and Apple, which now have more patents under which to file further suits.

Android was first created by Andy Rubin, whose company it acquired in 2005. Rubin's earlier start-up, called Danger, was bought by Microsoft in 2008. Google recently re-united the Danger followers to manage Android hardware.

But will they be able to create anything that doesn't get Google tied up in patent court? It's unlikely.

Already, there are signs that Google innovators are frustrated, and some of the best are leaving. As one wrote, “It was no longer fun going to work anymore.” Another wrote the company has become strategic and secretive.

Some of this is natural attrition, some of it is natural growth. But frustration with process is obviously growing.

Will patent law let Google continue to innovate, or will government kill America's best tech company? With the Nortel deal there is no doubt Google will remain out-gunned in the patent wars for years to come. The FTC investigation could be just the start of a long road,

I just keep thinking of the Microsoft lesson. If you and your lawyers are busy manning the barricades, you're not moving forward. If you're not moving forward in tech, you're moving backward.

Disclosure: I am long GOOG.