Google announces its intent to acquire Motorola Mobility for its patents. The winners are Motorola shareholders and Android licensees, the losers are Microsoft and Apple. Ironically, it is not clear on which side of the line--winner or loser?--Google itself belongs.
The move was unexpected. Motorola Mobility has been for sale for quite some time, and Motorola even went through the effort of spinning it out to make it clear it wanted the division to be gone. If there was a buyer, that was the time to acquire. No one stepped forward so the company split itself and excommunicated the consumer division from its core enterprise and government activities now known as Motorola Solutions.
But patents are the new gold. The intent of patents is to reward innovation, though that idea has become corrupted. Now more often than not, patents are stifling innovation. Any successful idea is subject to patent infringement claims--and the victor is often the one with the deepest pockets.
Patents came to represent the gold fillings of the Nortel carcass. The installed base of customers, the products, the software, and manufacturing know-how all offer some potential for future revenue, but not like the annuity assured by its treasure trove of patents. Google was shut out of those patents. Google made the first legitimate bid--but Microsoft, Apple, RIM and others joined in forming the Not Google Intellectual Property Exchange.
Lacking these patents highlighted a Google problem. Its phenomenal success with Android has invited some big trolls. Its first major Android partner, HTC, had already succumbed to paying Microsoft royalties on its Android phones. HTC was the first to deliver an Android handset, and also the first major Microsoft handset partner to defect. The defection paid off, with recent sales growing 83.3%. Microsoft has since been negotiating with Samsung, LG, and other Android makers seeking similar patent royalties. Oddly, Microsoft is positioned as the primary victor of the Android onslaught. Android is even more financially attractive than its own Windows Phone--as MS must cover its expensive R&D costs for Windows Phone.
Patent suits are not pretty, so most firms are willing to capitulate on royalties rather than go through prolonged expensive litigation. Google is indirectly victimized, but so far it avoided direct suits with Microsoft and Apple. That’s impressive considering the number of mobile tech-related patent suits taking place. Motorola has also been mostly on the bench regarding the mobile lawsuit game, but is being sued by Apple. Expect updates on that front soon.
Google can’t afford to sit out the patent battle. Motorola has been in mobile since the beginning and holds 17,000 patents (not to mention 7,500 in "Pat Pending" status). That's three times more than the Microsoft gang acquired from Nortel. Of course, in patent law the quantity of patents is only part of the defense; it is the quantity in the litigant's bank account that really matters. With its partners being squeezed and Samsung's Android products being shut out of various markets by Apple--Google has now declared its intent to join the fight.
Google acquiring Motorola Mobility changes the scenery in big ways. First and foremost, it arms Google with a hoard of patents. This is why the deal happened. But there are many more ramifications. Assuming Motorola is left un-altered, it puts Google in the hardware business. It also puts Google in competition with many of its partners, and it changes the Google relationship with service providers.
There is still consensus in the US that it is bad to be a hardware company. Most US companies believe software is the place to be and are working diligently to shed their hardware divisions if they still have them. But Apple demonstrates over and over (Macs, iPhones, iPods, and iPads) that significant benefit and elegance are possible only with a tightly integrated solution. Apple is the champion on the integrated side, and Microsoft is the champion on the partnering side.
Google does an impressive job avoiding hardware--not only with Android, but with its new Chromebooks as well. Most likely Google will shed Motorola's hardware manufacturing capability (grab the patents and dump), but there is also the possibility that Google opts to try and best Microsoft's mobile strategy with a more Apple-like approach.
This though could create a problem with Android's existing partners. The CEOs of Samsung, HTC, Sony Ericsson and LG, all on queue, released supportive statements about Google's acquisition, but they all reference defending Android. They all must also have concerns about their partnership status which failed to make the final version of the release. Google included in their announcement this assurance to its partners:
"This acquisition will not change our commitment to run Android as an open platform. Motorola will remain a licensee of Android and Android will remain open. We will run Motorola as a separate business."
Google has a choice: Leverage Motorola Mobility as a means to create an iPhone killer with tightly integrated hardware and software, or get rid of it. Keeping it an arm's-length equal partner is a huge liability (both in actuality and in perception) hardly worth the effort or risk. The partner relationships are much more valuable. Last July, Motorola Mobility beat Q2 street expectations and only lost $56 million. The reality is Motorola Mobility is much better off, as are its competitors, if Google sets it free.
It isn't just consumer smartphones, but tablets and other devices using Android as well. Both Cisco and Avaya are using Android now for enterprise tablets. Google's approach to allowing vendors to grab and branch Android has been critical to its widespread adoption. The idea of Google directly benefiting from partner innovation and leveraging with a more tightly integrated solution could disrupt the fragile ecosystem.
Although there are a few more sides to that coin. Motorola Mobility opens up two new doors for Google; an opportunity to work directly with the carriers and a new chance for Google TV. Mobile service providers impose various restrictions and controls on their hardware partners. This is something Apple effectively bypassed, which ultimately changed the market for the better. Unfortunately, the lesson didn't stick, and bloatware and technology restrictions remain a common practice on non-Apple devices. Google may indeed be able to overcome these barriers more effectively than its partners. The conversation may become mutually beneficial if Google and the carriers work more closely on ad revenue and other carrier-specific topics.
The Google TV issue is a sore subject to Google--effectively shut out of the market by content providers and the embarrassment that Logitech recently reported more returns than sales. Motorola Mobility is a large provider of set top boxes. Companies like Comcast suddenly become huge customers of Google with this transaction. Although it isn't clear how, this new pecking order may be the path to resurrect Google TV.
Most likely, Google will be out of manufacturing within a year. It's the path of least resistance and the acquisition was about the intellectual property. With proper indemnification, the Motorola brand and manufacturing capability will make some existing Android partner very happy. The transaction does give Android a major boost, as its future was becoming dim with litigation.
Google's move is good for Android and will likely boost the innovation and products coming to market. The big changes to come will be behind the scenes, the lawsuits between partners and competitors. It is really the pecking order that has change, if anything. At least that's the intent. It's a complex game of chess, and this was a response to the Nortel Patent move. Who knows what the market will look like after the next move? With the big players rich in cash and the ongoing growth of the mobile sector, the game isn’t over yet.
Dave Michels is a frequent contributor and blogs about Telecom at PinDropSoup.com.
