On 19 May 2012, the Chinese Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM") announced its conditional approval of the proposed $12.5 billion acquisition by Google Inc. ("Google") of Motorola Mobility Holdings Inc. ("Motorola"). China was the final jurisdiction to clear this transaction, Google having received antitrust approvals from all the other relevant regulators several months earlier. This is the 13th conditional approval by MOFCOM since China's Anti-Monopoly Law (the "AML") came into force in 2008 and the third such approval this year. Notably, this is also the third time (after GM/Delphi and Seagate/Samsung) that MOFCOM has imposed remedies in relation to a transaction that had been unconditionally cleared by antitrust regulators both in the EU and the United States.
MOFCOM review - procedural issues
The Google/Motorola transaction was notified to MOFCOM on 30 September 2011, and the notification was formally accepted by MOFCOM on 21 November 2011. Similar to the Seagate/Samsung case (on which see our e-bulletin here), MOFCOM exhausted all the statutory review periods, including 30 days in Phase I, 90 days in Phase II and 60 days in Extended Phase II; the case was cleared on the last day of Extended Phase II. Thus it took a total of 232 days for the parties to obtain the conditional approval.
MOFCOM review - substantive assessment
MOFCOM focused on six aspects of the transaction, as summarised below.
- Market definition
MOFCOM defined the relevant product markets as the market for smart mobile devices and the market for smart mobile operating systems ("OSs"). This is largely consistent with the approach taken by the European Commission (the "Commission"). However, as one of the most important target assets is Motorola's patent portfolio, the Commission also considered the relevant market for standard essential patents ("SEPs"). It is unclear why MOFCOM did not define a market for SEPs, although it clearly took into account Motorola's patent pool in its competitive assessment, as discussed further at section (4) below. MOFCOM held that the markets for smart mobile devices and for smart mobile OSs are global in scope, but it focused its investigation on the Chinese market.
- Market structure
MOFCOM found that the market for smart mobile devices is highly competitive, whereas the market for smart mobile OS is highly concentrated. According to MOFCOM, there are three large players in the mobile OS market in China, namely Google (73.99%), Nokia (12.53%) and Apple (10.67%). Considering the high market share of Google's Android system, the heavy reliance of the original equipment manufacturers ("OEMs") of smart mobile devices on Android, together with Google's strong financial position and technological capability, as well as high entry barriers, MOFCOM held that Google's Android system enjoys a dominant position in the smart mobile OS market.
- Free and open source Android OS
MOFCOM stressed the heavy reliance of smart mobile OEMs, software developers and end users on Android. In particular, MOFCOM found that there are high switching costs and commercial risks for OEMs who wish to switch to another OS.
- Motorola's Patent Portfolio
MOFCOM recognized that the main rationale for the transaction related to the acquisition of Motorola's patent portfolio. Considering Google's capability in the development and integration of software and hardware, MOFCOM held that Google would have both the ability and the incentive to impose unreasonable royalty conditions on third parties in relation to the use of Motorola's patents, but it failed to provide any detailed reasons for this conclusion.
- Fair Treatment to OEMs
MOFCOM held that Google would have both the ability and the incentive to provide favourable treatment to Motorola's handsets. This conclusion was based on MOFCOM's finding that Google tends to select a lead OEM for each new version of Android, and that Google may systematically favour Motorola's handsets post-transaction, which could impede competition from competing OEMs. This analysis does, however, lend itself to some further questions. For instance, MOFCOM failed to specify any rationale for its conclusion that Google would have the incentive to favour Motorola over other Android partners. In fact, the Commission reached an opposite conclusion, finding it is doubtful that Google could capture more profits by favouring Motorola's smart mobile devices than by having a large base for its search and advertising services.
- Market entry
MOFCOM found that the smart mobile OS market is highly concentrated and that there exist high entry barriers due to the strong technology and financial strength required to develop smart mobile OSs.
MOFCOM review - remedies
In a notable contrast to the unconditional approval granted by the antitrust authorities in the EU and the United States, MOFCOM imposed conditions on Google, including:
- Consistent with its current practice, Google shall keep the Android platform free and open;
- Google shall treat all OEMs in a non-discriminatory manner with regard to the Android platform; and
- Google shall honour Motorola's pre-existing commitment to license its SEPs on “fair, reasonable and non-discriminatory” ("FRAND") terms.
The decision also includes a review clause entitling Google to apply to MOFCOM to review the first two of the above conditions five years after the decision, in relation to which MOFCOM will make a decision in light of prevailing market conditions. Within the five-year period, Google is required to report to MOFCOM and the monitoring trustee every six months for compliance purposes.
This case represents another example of the apparent divergence of MOFCOM's approach in merger assessment from that of antitrust regulators in the EU and the United States. Companies clearly cannot take a MOFCOM review for granted: in relation to any acquisition which triggers Chinese merger control jurisdiction, the merging parties have no choice but to examine closely and separately any and all potential theories of antitrust harm relating to China, even if a safe passage through the EU and/or the US merger control regime is anticipated.