Today’s announcement that Google is acquiring Motorola for $12.5 billion is the latest big stunner in the mobile industry. And yet, when looked at closely, it makes total sense.
An inexpensive patent bet
In his note announcing the acquisition, Larry Page made it clear that a lot of the acquisition was due to Motorola’s strong patent portfolio. At the current time, the company holds 17,000 patents and has filing for another 7,500.
Earlier this year, Carl Icahn, Motorola’s largest shareholder, estimated that the patent portfolio alone could be worth $4 billion. In June, Apple, Microsoft, and RIM banded together to acquire 6,000 patents from Nortel and keep them out of Google’s hands: the pricetag on that acquisition was $4.5 billion. This means that the consortium had paid about $750,000 per Nortel patents. If you were to apply the same number to Google’s acquisition of the Motorola patent portfolio, the price tag would be $12.75 billion. It is interesting to see how this number is extremely close to what Google ultimately offered for Motorola.
But it gets better…
Motorola Mobility, the unit Google is acquiring, has $3 billion in cash on hands, reducing the price of the overall deal to $9.5 billion and dropping the per patent price to just under $560,000 per patent, assuming none of the filed patents are accepted or under $390,000 per patent if you assume that Motorola will get all 7500 filed patents approved.
… and realize this is all based on a $0 valuation of the rest of Motorola’s assets.
So what’s in there? In order to get a better understanding, one just has to look at some of the patent-related lawsuits Motorola has filed in the mobile space. For example, last October, they assessed that Apple had violated 18 specific patents in areas like WCDMA, GPRS, 802.11, wireless email, location based services, device synchronization, etc… The next month, they sued Microsoft around things like an online marketplace, map services, video coding, etc…
So the company has a set of patents that are covering large areas of what we now know as the smartphone space but that’s not all.
The handset business
A lot of people are going to focus on the fact that Motorola has a healthy mobile handset and accessories business. This business has been valued at about $3 billion and generated $3.3 billion in revenue in the last quarter. That business covers handsets, as well as accessories.
If Google were true to its word that it wants to continue working closely with its partners in the Android ecosystem, it might have to reconsider the handset unit as part of the asset mix it’s offering. A way to handle some of this could be through divestiture, by selling off some of the parts or exchanging them for patents, if that’s what Google is after.
For example, the company could hand off the accessories business (bluetooth headsets, etc…) to HTC, which has traditionally been a strong player in the manufacturing of such devices, in exchange for a guarantee that the company would continue developing on Android and/or some of the patents the company may have acquired in its recent deal with S3. The company should also look to sell Motorola’s manufacturing divisions to HTC, which could merge them into their more traditional contract manufacturing offerings.
The company could also sell the handset unit to Samsung in exchange for a similar deal.
Google would then be able to consolidate the patents and protect all companies in the Android ecosystem and avoid any potential channel conflict in the process.
The TV business
Another noteworthy part of this acquisition is the TV set-top business, which has been valued at $2.5 billion in the past but is also seen as having a value of near $0 in this acquisition deal.
Through acquisitions, Motorola has become the leader in providing boxes that connect cable and satellite broadcasts to television. In the US, for example, they are part of the duopoly with Cisco in the TV set-top box business.
This creates ample opportunities for Google and its floundering Google TV offering. Through this acquisition, the company now has a chance to control a large part of the future access to the living room. It won’t happen quickly but I would not be surprised if GoogleTV started showing up as part of cable package offerings over the next few years.
Along this path, Google acquires a large amount of relationships with cable TV providers which may help it in ts quest to deliver YouTube content to more people.
Winners and Losers
A deal of this size is so disruptive that it engenders its own set of winners and losers.
I would say that, at first glance, the big winner on this is obviously Google and the big loser is Apple. With this deal, Google has gone on a full assault on the Cupertino-based giant (which, just last week, became the most valuable company in the world.)
First, the cold war between Google and Apple has now gone hot: Motorola and Apple were involved in several lawsuits prior to this acquisition and I assume that Google will not back down from those.
Secondly, Google is not only going after the mobile business but gets to be disruptive to the movie and TV business (due to the set-top unit) and could potentially thwart Apple’s burgeoning AppleTV business while at the same time undercutting iTunes in the video space.
It is unclear as to whether Microsoft and Nokia are either winners or losers in this deal.
Microsoft could end up a winner if Samsung and HTC decide to spend less time on Android and use Windows Phone as a hedge. Or it could be a loser if it turns out that integrating hardware and software is the key to success in this market (the company acquired Danger a few years ago and was unsuccessful with its own handsets).
Nokia could be acquisition targets for Microsoft, which could make them winners moving forward. Or Google could offer free phones, killing both Microsoft’s chances at selling an independent OS and Nokia’s chances at selling many Microsoft-OS based phones.
RIM and HP (due to the Palm unit) strike me as the biggest losers in this market. Neither of them has a strong footing in the marketplace and today’s announcement seems to further strengthen the Android position, giving them less room to maneuver. Furthermore, the rich patent portfolio Google is acquiring may mean that the two companies will have to pay more royalties to a business that has been killing them. Either way, the future is, at best, uncertain (if they were to license their OS out, they may have a chance).
Today’s announcement substantially reshapes multiple competitive fields. The effects will be felt in both the mobile and living room spaces for months and years to come. It’s a bold play by Google but also one that is pretty conservative because the benefits accrued as a result of this acquisition are substantially larger than the price tag (let’s not forget that, considering Motorola’s cash reserves and revenue projections, Google is bidding less than 1x Motorola’s yearly revenue on this). This deal seems like a real game changer with little or no downside for Google.