Tuesday, August 16, 2011

Google’s Motorola acquisition was for patents, not mobile phones

Craig Cartier, analyst, Frost & Sullivan

USA: Last week, Frost & Sullivan commented on the recent intellectual property (IP) battles within mobile ecosystems. Industry giants including Apple, Samsung, Microsoft, and Google have taken the battle from the marketplace to the courtroom with a host of suits and counter-suits against one another.

Directly or indirectly, Google and its Android operating system has been a popular target recently. As Frost & Sullivan commented, Google and CEO Larry Page have been at an IP disadvantage compared to their peers.

Apparently Larry Page felt the same.

On Monday, Google announced its intended acquisition of Motorola, and the blogosphere was buzzing. Much of the commentary revolved around the potential for Google to adapt to the mobile handset industry. Can a creative software giant like Google handle the low-margin world of hardware? What will this mean to Android’s other hardware partners like HTC and Samsung? What about Motorola’s contingent of 19,000 employees?
The answer to all these questions is the same: The Google-Motorola deal is not about hardware—it is about patents.

Google’s business model—offering a free platform as a route to advertising and application revenue—depends on that platform being, well, free. That status has been threatened as a result of the aforementioned flurry of recent patent litigation. It is rumored that HTC, one of Androids main OEM partners, settled a suit with Microsoft by agreeing to pay $5 for every Android device it sells. Other Android manufacturers have also been under attack.

Google responded.

Motorola has a portfolio of 24,500 patents and patent applications that instantly bolsters Google’s strength in the IP war. Looking at some recent patent auctions and using some simple math can show why these patents were indeed the target of Google’s acquisition.

Using one of the industries 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.

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