Google's Motorola Acquisition: The Anniversary Assessment
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May 22 will mark the one year anniversary of Google's (NASDAQ: GOOG) purchase of Motorola Mobility for approximately $12.5 billion in cash. Already we're beginning to hear rumbles in the business/tech media that Google paid too much for Motorola. In this article, I'll discuss Motorola's value to Google, its continuing problems, and the path forward.
A mobile phone business for free
At the time the acquisition was announced, this observation was offered by analysts at Frost & Sullivan and quoted in the Economist:
“Using one of the industry's recent patent auctions as a baseline, in December of 2010, Novell sold off its portfolio of 882 patents for $450 Million. A simple division calculation leads us to a value of $510,204.08 per patent. Why not round that figure off you ask? Well, let's look at the patent value of the Motorola acquisition.
Forgetting that Motorola also makes mobile phones, let's say the entire value of the acquisition was in their 24,500 patents and applications. At a $12.5 billion price tag, that equates to…drum roll please…$510,204.08 per patent. Can anyone guess what heuristic they used in the board room in valuing the deal?
In the Motorola acquisition, Google bought a patent portfolio and got a mobile phone business thrown in for free."
The mobile phone business for free? Well, not quite, given that the Motorola division has posted an operating loss every quarter since the acquisition was final. GAAP operating losses, which include restructuring charges for Motorola, totaled $1.38 billion through Q1. Subtracting the amount Google received from the just completed sale of Motorola's Home division, Google has spent a total of $11.53 billion on Motorola.
Interestingly, Google provided in their 2012 10-K an upper bound to their valuation of the Motorola IP in the form of patents and developed technology. In the course of the year, the value of Google's IP jumped by $5.234 billion, mostly due to Motorola.
Recent legal setbacks in defending some of Motorola's patents also call into question the value of the portfolio. Florian Mueller has documented the status of recent Google patent battles on his blog. Of the eleven legal proceedings he describes, seven were major defeats for Google or Motorola.
The most important defeat, delivered on April 19, was a push back on a royalty demand of $4 billion per year from Microsoft (NASDAQ: MSFT), which would have had Microsoft paying the entire purchase price for Motorola in a few years. In question were Motorola patents pertaining to HD video and WiFi, so-called standard essential patents.
Motorola, by virtue of agreements it entered into, was obligated to license the patents under FRAND (fair, reasonable, and non-discriminatory) terms. Microsoft launched the suit against Motorola back in 2010, claiming the the royalty demand of $4 billion wasn't fair and reasonable. The court agreed and reduced the annual royalty to just $1.8 million per year. The unanimous consensus is that this was a big win for Microsoft.
Microsoft has also been very successful in pressing its own patent claims against infringing Android device makers. On April 17 Hon Hai (parent of Foxconn) signed a licensing agreement with Microsoft to address infringement by the Android and Chrome operating systems. This is the 20th license deal Microsoft has obtained from a manufacturer using the Android OS or Chrome OS in some device or product. These manufacturers include HTC, General Dynamics, Onkyo, Acer, ViewSonic, Samsung, LG, Barnes & Noble, ZTE and others.
There was a perception that Motorola's patent portfolio would provide a form of “mutual assured destruction” protection against infringement suits launched against Android by Microsoft and others, but in fact, the Motorola portfolio has provided very little, if any protection.
Motorola's path forward
Google may have paid too much for the Motorola IP, but more pressing is what Google intends to do with Motorola going forward. While Samsung pushes the Android smartphone envelope with four and 8 core mobile processors and massive 1080p screens, Motorola seems stuck with last year's products: dual core processors and 720p screens. Motorola's product offerings are at best commodity level in a crowded commodity market, and the lack of new exciting products almost a year after the acquisition says that they really didn't have anything that was new or exciting in their product pipeline when Google took over.
Does it make sense to continue Motorola as a subsidized commodity Android phone maker? I doubt that Google's Android manufacturing partners think so. Google needs to salvage the valuable parts of Motorola and quickly jettison the rest. Motorola had R&D and engineering expertise that could be put to work on more advanced projects within Google. Perhaps some manufacturing expertise could be retained for limited run boutique items that mainstream Android manufacturers wouldn't be interested in, but I don't think cranking out more Droid Razrs is worthwhile.
I question whether the brand name itself is worth saving. It has an archaic quality that harkens to a bygone era of vacuum tube electronics. It doesn't really fit in with the digital age.
What to look for in the Q2 earnings report
With an entire year having elapsed, hopefully Google will drop the excuses for the continuing Motorola losses, or preferably, not have any more losses. A year of restructuring should be enough. If Motorola is to continue as a hardware brand, I would also look for new product announcements that actually lift Motorola above its Android brethren. The Google/Motorola X Phone is rumored to have hardware specs equivalent to the Galaxy S4, as well as other features that enhance its value.
Most importantly, Google needs to articulate a clear strategy for Motorola, rather than comforting platitudes about synergy between hardware and software. If Google's management doesn't deliver the above at a bare minimum, then investors should question Google's ability to make effective use of Motorola and call for shutting down Motorola and simply assimilating its remaining assets and personnel.
In fact, I consider this the most likely outcome, following a couple more quarters of Motorola muddling through with continuing losses and unremarkable products. Shutting down Motorola is likely to depress Google shares only temporarily, however, since Google's advertising business continues to grow on the strength of burgeoning mobile ecosystems, Motorola will not have been a disaster, merely a missed opportunity.
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Mark Hibben has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!