A-Z of Google Motorola deal



Larry Page, CEO of Google Inc, announced on 15th Aug 2011 that they have agreed to acquire Motorola. This big move has left pundits speculating on the reasons & repercussions of this deal.

Much has been written & discussed on the patent wars between Google/Android & its competitor’s viz. Microsoft, Apple, among others. It’s a murky field out there & I would rather stay out of jumping in the muck apart from saying that it’s natural for a business to protect its vested interests to ensure profits & growth. Patents, rightly referred to as Intellectual ‘PROPERTY’ are assets of a company. The growth of the mobile phone industry has led to companies using these IP’s as weapons to tackle competition.

Google, short of such ‘IP’ weaponry, tried to acquire some 6,000 odd wireless technology patents of Nortel, so they can defend themselves from the lawsuit onslaught of Microsoft, Apple et al. They did not miss the chance to show off the talent of their staff by bidding in mathematical constants, nonetheless, Google lost the bid to a consortium of six companies that included strange bedfellows Microsoft & Apple, Sony, RIM. Soon after, Google whined like a hurt puppy on how patent wars hurt innovation and progress. Its open for debate on which side is right or wrong, but Google was wounded & cornered with multiple lawsuits for patent infringement.

Everyone now had their sights set on Interdigital, which seemed like a logical choice given their 8,800 strong patent portfolio on mobile and wireless devices. And then, Google pulled a hat trick and announced the $12.5 billion acquisition of Motorola. This development has raised many eyebrows and questions; with its cash reserves in excess of $35 billion, why would Google pay 60% premium in cash to buy Motorola and not any other company? If this was to acquire patents, why not buy Interdigital or even just license the patents from Motorola? Why venture into hardware business, a new territory for Google & that too acquire a company which posted $85 million loss.

Sanjay Jha: Windows Phone OS Looks Nice!

On 9th August 2011, Dr. Sanjay Jha, Chairman & CEO of Motorola Mobility, spoke at the Oppenheimer Technology & Communications Conference. Dr.Jha said, among other things, that Motorola is open to the idea of partnering with Microsoft if it could strike a deal similar to the one Nokia signed with Microsoft. “I think we’re completely open to the notion of Windows as a platform” he announced, but did not forget to add “Clearly, all of our focus today is on Android.”. Earlier in July 2011, during the quarterly earnings conference call, Jha said (referring to their patents) “I think that the introduction of number of players with large revenues, which have come into the marketplace as a result of the convergence of the mobility, computing, internet and other segments, I think that that creates an opportunity for us to monetize and maximize the shareholder value in a number of different way.

With those two statements, the CEO of Motorola told the world that (a) They are ready to partner with Windows Phone OS and (b) They plan to seek royalties for its patents from other Android suppliers viz. Samsung, HTC etc. This was not good news for Google, which was already trying to reduce /get out of the patent lawsuits. But it got the message: Motorola is running in loss but it has tons of patents, thus in a position to armtwist Google.

Google: ‘Gimme candy’. Motorola: ‘Want some? Buy the whole candy shop’.

 

Already battered with the onslaught of patent infringement lawsuits and a failed bid for the Nortel portfolio, Google would have thought they can buy the Motorola patents, thus defending itself from further possible lawsuits and also to leverage existing patents to confront Microsoft & Apple with an offer for cross licensing mutual patents. But Motorola seemed to have different plans. They were running in loss and the knew Google was in dire need of patents. Excellent chance to package the patents with the whole unit and bring in revenue. Motorola would have told Google that either entire MMI be acquired or Motorola will consider monetizing patents and check out Windows Phone OS. A patent war between Android suppliers is the last thing Google would desire. And the idea of having a powerful patent portfolio packaged with a hardware manufacturing unit would have seemed lucrative to Google too. Lucrative enough to shell out two years’ profits, not a small amount even for the search giant. How to recover $12.5 billion and further make profits could be thought of later. For now, immediate requirement of patents for defense & offense will be fulfilled. Jha goes back to office a happy man. Google goes back to its campus to ponder on which patents to use to protect themselves and which ones are infringed by Microsoft & Apple, so a cross license deal can be made.

How powerful/useful are the Motorola Patents is a topic for debate, but for now let’s take a closer look at what is attractive in Motorola Mobility:

  • First, the obvious: Motorola has a formidable arsenal of 24,500 patents, which include 14,600 approved & 6,700 pending patents on Mobile technology alone. Heck! They even have the patent for mobile phones!
  • Apart from the patents on Mobile devices, Motorola has plenty of patents on NFC (Near Field Communication), Home business segment (set top boxes etc)
  • Entire product line of Mobile Phones, Smartphones, Tablets are 100% android based
  • Navigation Systems, Home Digital Video/IP video equipment
  • 30% US market share in Android hardware, next to HTC
  • Workforce of 19,000 who are already involved in developing products for android

Google will not only acquire patents aplenty, but also gets a readymade arena to foray into various new avenues: integrate Google TV & Youtube with the Motorola set top boxes. Make use of the Motorola patents on NFC to strengthen Google Wallet. Deploy Google Maps & Navigation on Motorola GPS/Navigation systems. More than anything, Google can now achieve hardware-software integration which has been a VERY successful model as seen with Apple & iPhone.

Larger Picture, Beyond the Patent Files

No doubt that the new patents in Google’s kitty would be a major enabler, but the ongoing Patent wars are actually between the patent owners and hardware manufacturers. Google develops the Android OS and gives it away for free. The hardware manufacturers use the platform, develop devices around it with their own tweaks and UIs and market the devices. Google earns revenues in the form of ad visibility via the multitude of Google services used by an Android user. This is a convoluted revenue stream. Any patent infringement lawsuit is faced by the hardware developer. Reason Google is trying to do something to tackle is they are very serious about Android. And they want to take the OS to the next level.

Android as an ecosystem is thriving because of Samsung, HTC, Motorola and their mobile hardware. One can even say the fortunes of Android depend on the success of these hardware partners. By having its own hardware manufacturing arm, Google can now ensure that Android is not totally dependent on partners, and in fact can set industry standards for Android based hardware. It can get rid of fragmentation, bring in compatibility of apps across devices from all partners, fine tune or even get rid of OEM specific UIs, thus providing an universal, pure Android experience not unlike Apple & iOS. This would mean better & standardized quality everywhere: Apps, hardware, UI.

Then, the argument arises that if Google starts to manufacture its own hardware; wouldn’t the other companies shy away from Android? In the long term, if Google tightens the conditions for Android partners, they probably might. Microsoft could send out feelers to these companies to adopt Windows Phone OS. Already, Nokia CEO Stephen Elop has publicly warned Android Partners that they should be worried about their future with Android. But if you look at the growth of HTC, Samsung which range from 125% – 400%, it would only be foolish to let go of the growth engine that is Android. Google’s own android hardware will ensure the other manufacturers will compete with better design and choices and in turn get protection from Google against infringement lawsuits In short, Android as an ecosystem will be much more vibrant and competitive.

Whatever Larry Page & team have planned, the changes will be gradual and will take some time. Google may even surprise everyone by just keeping the patents and divesting off the hardware arm to one of its Android partners. For now, this is one game changing announcement that will bring in lot of changes in the smartphone industry and Google has just taken a major step on some slippery ground. How it treads, is to be seen.

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Ashwin Siddaramaiah

Lives to eat & travel. Loves driving.

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