Google Plays Trump Card, Locks Sights on InterDigital

by: Geordy Wang

Shareholders of InterDigital (NASDAQ:IDCC) have had a fantastic month. The stock popped 17% on July 1st, when an Apple-led (NASDAQ:AAPL) consortium of technology companies closed out Nortel's patent portfolio for an earth-shattering $4.5 billion in bankruptcy court. Investors immediately realized the strategic value of controlling a massive folder of patents in the mobile wars. As a company whose only business is to acquire and license patents to others, InterDigital seemed to be in the right place at the right time. The stock then experienced a double pop this week as the news crews went live with the latest scoop: InterDigital's board was thinking about putting the company up for sale, and Google (NASDAQ:GOOG) was one of the first to express interest. All in all, InterDigital shareholders are sitting pretty on a 68% gain in less than a month.

Honestly, who didn't see this coming from a mile away? As Seeking Alpha's Dana Blankenhorn observed, Google is in trouble, and acquiring InterDigital is the right move, the only move they can make to get themselves out of it. Android's open source model has allowed it to spread like wildfire, but it has also left Google with a sickly thin portfolio of patents with which to defend their creation. As a result, Android handset manufacturers have been under assault from all fronts for patent infringement. Leading in the vanguard is Microsoft (NASDAQ:MSFT), who managed to extract a $5 licensing fee for all Android devices that Taiwan manufacturer HTC (OTC:HTCXF) sells - so far, Microsoft has made five times the amount of money from its Android licenses as it made from licensing its own Windows Phone 7. Now Apple is coming in guns a'blazing, and they're not satisfied with royalties, they want to ban the sale of HTC phones in the U.S. altogether. And Oracle (NYSE:ORCL) is getting a piece of the action too.

Eric Schmidt dismissed these lawsuits as "legal fun," but these companies aren't joking around, and neither is the International Trade Commission, who already ruled in favor of Apple once. If Google doesn't take action soon, Android may not be able to survive this storm. Android's main appeal to handset manufacturers has always been its cost, or lack of it - after all, why go through the trouble of developing your own OS when you can use Google's for free? But as it loses to more and more patent infringement charges, the licensing fees will begin to rack up, and suddenly the open source OS doesn't look so appealing anymore. HTC was targeted first because it's the smallest fish in the pond, but it's only a matter of time before other Android phone manufacturers like Motorola (NYSE:MMI) and Samsung (OTC:SSNLF) come under fire. Slashgear reports that smaller Chinese manufacturers, fearful of litigation, are already beginning to migrate to other operating systems like Microsoft's Mango, and even Intel's (NASDAQ:INTC) MeeGo.

Things are not looking good for the folks at the Googleplex. Google desperately needed to win those Nortel patents, and it didn't, but it hasn't lost this round yet. Nortel only put up about 6,000 patents for sale, but InterDigital has a patent portfolio over 8,000 strong, with 10,000 more applications in the pipeline. Successfully acquiring InterDigital would instantly bring Google back into the game ... it might even put them in the lead. Controlling InterDigital's portfolio gives Google two key advantages. First, it gives them a great deal more flexibility in working around the patents of other companies when they're developing Android. And second, it grants them more leverage in negotiating licensing deals in the event that a workaround is not possible. Google has vowed to stand behind its Android partners in court - gaining control of InterDigital will give it the resources to back up its bark with an equally impressive bite.

The only question is, will Apple, Microsoft, and others allow this acquisition to happen? With $38 billion in the bank, Google has a lot of ammunition for a bidding war, but Apple's war chest of $70 billion makes it look like a pauper in comparison. This is one of the biggest tests of Google's mettle to date. Widely admired for its freewheeling spirit and innovative ability, it is now time to see if the tech darling has what it takes to compete on the business and legal fronts. The survival of Android hinges on the decisions Google will have to make in the coming months.

Disclosure: I am long AAPL.

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