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).

Conclusion

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.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Google Acquiring Motorola. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The post-PC world

Since the early 1980s, the personal computer has been sitting at the core of people’s experience with technology. But several trends have chipped away at that dominance for the last few years, first with the rise of dedicated devices with computer-like attributes (eg. ereaders and MP3 players), then with reintegrated devices that brought several of those features back together in a more portable form factor (smartphones and tablets).

Along that curve, Microsoft and Intel found themselves in an increasingly difficult position, largely trying to hold on to the legacy platforms that sourced the largest portion of their revenues while unsuccessfully trying to find ways to play in the new world.

Along the way, the two companies grew farther apart. In late 2004, I had called for Apple to move to Intel chips, a call that was met with derision by most people at the time because they thought Intel would never do anything that could run counter to Microsoft’s worldview. A couple of years later, Apple and Intel did make the move, creating what was possibly the first wedge in the Wintel cartel.

Last month, Microsoft made an announcement that was probably similar in terms of overall strength, looking to ARM processors as the future, and moving to a space where their reliance on Intel processor was relegated to the back of the bus. It wasn’t entirely clear at the time but one could see that the Wintel alliance had been hobbled and could possibly die off soon (in related news, HP announced this week that it would consider running its webtop OS on PCs).

Meanwhile, it was only a year ago that Intel and Nokia announced a strategic partnership, where they would merge their OS platforms. The intent there, I suspect was for Intel to start pushing its own chips into Nokia devices, allowing them a play they had longed for in the mobile space.

Yesterday’s announcement from Nokia that it would abandon its own OS effort and focus on Windows Phone 7 probably infuriated some people at Nokia.

Why Winkia will work: Developers

Of course, there is a lot of doubts about the partnership. High level partnership have a tendency to fail (in fact, Horace Dediu has shown Microsoft’s particularly bad track record in the mobile space).

But I disagree. Earlier this year, I argued that Microsoft would acquire Nokia for its distribution footprint. At the time, I did not elaborate but here’s how I see things working.

For starters, let’s look at areas of strength and weaknesses. Microsoft still has a large development community used to developing with its toolset and aching to get into the mobile space. With Windows Phone 7, that crowd now can use the same skills, programming languages and development kits they have been used to for years to create for years.

But the challenge that was presented to date was that there were no users of Windows Phone 7. While the operating system has generally been well received by critics, there has been precious few apps developed on top of it to date. Part of the reason for this, I suspect, is that there isn’t really a built-in public for those apps yet so many developers are waiting on the sidelines. In fact, this is something that people at Microsoft were painfully aware of, as they are now starting to explain to developers that the deal will bring a larger public for their apps. In a recent blog entry, Matt Bencke, Microsoft’s General Manager for Developer and Marketplace in the mobile space, said:

In simplest terms, this alliance can dramatically increase the customer base for Windows Phones, and, by extension, your apps and games. […] For example, Nokia already has strong relationships with operators in more than 190 markets. Nokia also manages an application marketplace that delivers 4 million downloads per day; a channel that will complement the existing Windows Phone Marketplace experience to bring Windows Phone developers and Nokia customers together.

[…]

From a tools and platform perspective, we’re working to make it as easy as possible for developers to take advantage of this new opportunity.

So the message they send here is clear: more people to use your apps and you can use the same tools you know already. This is bound to help create a market where lots of new apps will end up being created in a Windows Phone 7 environment only.

Why Winkia will work: Footprint

So how big is the marketplace we’re talking about? Well, before we enter this arena, let’s make a few key assumptions: growth in the mobile space is largely coming from the smartphone category. In fact, the entry of sub-$100 android phones is basically going to kill the concept of smartphone altogether by just gobbling up the regular phones and pushing the trend to every phone becoming a smartphone. So the game here is for the whole pie instead of a smaller portion.

So how does Nokia do in that space? The Symbian operating system, the one the company is abandoning, was on 37.6 percent of smartphone devices in the last quarter but Nokia overall marketshare in the mobile space was 28.9 percent.

How does it compare to others?  In the OS game, Nokia has a 15.1 percent lead over Android, its next nearer competitor (Apple comes in 4th, behind RIM) and an 11.3 percent lead over Samsung in the overall mobile space.

Meanwhile, Microsoft was nowhere to really be seen, with a mere 4.2 percent of the OS market, coming in above “others” in the OS category.

If the tie-up had happened last quarter, the combined team would hold first place with above 40 percent of the smartphone market, almost double their nearest competitor (Android) and almost triple Apple’s own offerings.

With that large a footprint, any developer will have to think about supporting those devices.

Furthermore, Nokia has a long-established relationship with phone carriers around the world (while I have not checked the data, I would be ready to venture that there isn’t really a phone carrier out there not carrying some Nokia phones). That kind of network will be hard to defeat moving forward.

Why Winkia will work: Patents

When he unveiled the first iPhone, Steve Jobs made it clear that there was going to be a huge legal fight in the mobile space.  During the unveiling, he highlighted that oncoming fight in the following way (emphasis is mine):

We have invented a new technology called multi-touch. It works like magic, you don’t need a stylus, far more accurate than any interface ever shipped, it ignores touches, mutli-finger gestures, and BOY have we patented it!

[…]

We filed for over 200 patents for all the inventions in iPhone and we intend to protect them

Apple later sued HTC and Motorola over some of those patents.

Meanwhile, Microsoft has not been shy in suing some companies over patent infringement relating to Google Android. The operating system from Google continues to be challenged in court, the most recent lawsuit coming from Oracle over alleged infringement of Java related patents.

So all and all, the mobile game is one dominated by patent fights. In the lead-up to this week’s announcement, Nokia’s CEO was touting its patent portfolio as something to look at. A story on AllThingsD put it as such (emphasis is mine):

Friday’s investor meeting will also address other aspects of the company, including its services strategy, its plans for its Navteq navigation unit and its plans to leverage its huge patent portfolio.

Between Microsoft’s patents in the mobile space and Nokia’s, I suspect we are soon going to see some lawsuits emerging from the new partnership and going after different aspects of the iPhone and Android devices (though I suspect Google will be the first target, with the iPhone being left for later).

Conclusion

Between Microsoft’s strength in the development community, Nokia’s strength in the hardware and distribution realm, I would venture that we may be seeing the beginning of a major shift in the mobile landscape. Both of the partners are quite strong and I would not be completely surprised if they were to both be able to reverse their fortunes in the mobile space. I also would not be totally surprised if, at some point down the line, Microsoft were to announce that it is taking over Nokia and folding it in. An interesting thing is that the cut in the overall market capitalization of Nokia after the announcement has now left it in a position where Microsoft could buy it in cash if it felt like it.

However, there are still a few things to be ironed out. For starters, Microsoft has just tied its OS to one partner and may have difficulties convincing other players to build mobile phones. Expect Samsung, LG, and HTC to stop investing in Windows Phone 7. So if Nokia fails in regaining some momentum as a result of this partnership, it may take with it Microsoft’s hopes in the mobile space.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Winkia rising. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Strategy: Hardware? Software? Service? Partnership?

Let’s take a look at the players in the “smart phones” market: Apple, Nokia, Microsoft, RIM (blackberry),  Linux Mobile, and Palm. Sun used to have a Java Mobile but it seems to have dropped off the market, in terms of device market share. And then, there’s the new pretender to the crown in the form of Google, with its Android OS offering.

How do they stack up in terms of Hardware? Operating System? Service Offering? Well, here goes:

A first glance at this table seems to reflect some of the player’s pre-existing biases. Microsoft is known for its software business so that’s where it put the most weight; Google is all about free software to power their services; RIM and Palm do a hardware software combo; Apple throws its weight behind a fully Apple controlled experience.

However, there are a few caveats: For example, while Microsoft is in the space primarily as a software provider, it also owns Danger Inc., makers of the Hiptop. And while Palm has its own software, many of its devices are powered by Windows Mobile.

But apart from those exception areas, it appears that strategies are organized across four business models:

• OS only: This strategy is preferred by Sun and Linux. The model here is to provide an operating system that can be used by others. For Sun, this strategy has largely failed as substantially less than 1% of all handsets around the world is powered by their OS. Linux, which really was the first open source mobile OS has captured about 4 percent of the global smart phone market to date. Microsoft is the big leader in terms of that strategy, with its Windows Mobile OS currently powering about 12 percent of all smartphones around the globe.
• Software + Service: All this leaves us with Google and their Android offering. Much of the commenting today is that the move Nokia just made was aimed at the fact that Google had an “open” operating system. But what Google is really trying to do is provide an operating system that melds OS and services. Either that or they are in the OS only camp. Either way, they are not playing in the same space as the iPhone or Nokia (see triple play below).
• Hardware + Software: This model is preferred by RIM, makers of the Blackberry, and Palm (especially with their inexpensive Palm Centro line). This strategy works best if you want your device to be focused on few use scenarios: The blackberry is first and foremost a portable email station; Palm devices are first and foremost PDAs. This orientation comes from a past where the device wasn’t initially intended as a phoe but morphed into one.
• The triple play (ie hardware/software/service): This is the strategy currently used by Apple with the iPhone: they provide the hardware, the software, and a set of services (me.com, iTunes, Software store) on a complete package.  Through recent acquisitions, Nokia has been moving in this direction: while they were traditionally a hardware player, they started adding services to their devices. With today’s announcement, they’re also getting some control over software.

So looking at this, it becomes apparent that while many are pointing to Nokia going after Google, it may not be the target. Since Nokia does service and hardware already, getting more control over its own OS is probably an important move.

Open Sourcing

I can already hear some readers snickering: Symbian’s been open-sourced so Nokia does not have control. Let me make something very clear: the gold rule (“he who’s got the gold makes the rule”) applies to Open Source as it does in other areas. While it won’t get exclusivity, Nokia, having paid $400+ million to open source Symbian will be considered “more equal than others” by the Symbian foundation, I’m sure.

But why open source? If we look at the players mentioned above, their position on open source and their market share, the picture becomes clearer:

Looking at the market share date, Nokia’s move doesn’t seem to make sense: They currently control 65 percent of the market, why would they bother? But here’s the thing: There’s this newcomer called Apple and they didn’t exist 18 months ago: they now have 7 percent of the market and are growing.

If I’m a Nokia executive and I’m looking at this data, I start worrying. So what do I do? I look at competitive advantage: initially, I try to compete with cooler devices (the Nseries) and while it stops some of the bleeding, it doesn’t appear to fully halt the competition. So I start looking at services as a way to stabilize revenue (Maps, Music, Games) but that doesn’t stick. Then I realize that my problem is the operating system: I’m stuck with that alliance of partners I have but they’re slowing me down. So I have to take over. But I can’t do that by just kicking all of them out. So I acquire and open source.

The open source move fills three strategic objectives:

• I get to keep partners still involved but get them to agree to my taking charge.
• I get other people to improve my code and/or developing FOR it, thus allowing me to counter a potential Google threat if it ever materializes.
• I get to look more “open” than Apple and will use that in my messaging

The Future: Collateral Damage Then Status Quo

Of course, while it works out great for Nokia, there is a little bit of collateral damage:

• Sun’s offering, while interesting had already sunk largely into irrelevancy so they’re no longer a player.
• Palm OS, was teetering on the edge but now it’s pretty much cooked.
• Linux, while still having teeth, will probably see its market share dwindle as its unique selling proposition (more open than others) is gone.

So that’s unfortunate but what does it do to the rest of the market. Well, in fact, it looks like today’s events wont’ have much impact: Palm, Linux and Sun represent about 5 percent of the market. With Apple at 7%, RIM at 11%, Microsoft at 12% and Nokia at 65%, it looks like the market will stay pretty consistent. The remaining 5% will be carved out by the existing players and by Google’s entry into the market. Nokia will remain at the top for now.

Potential events that could have a more disruptive effect: a Microsoft/RIM partnership (or outright acquisition) which, when integrated would give Windows Mobile a 23% market share. But short of such a move, it looks like the situation will mostly stay at status quo for the time being.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title No Changes in Mobile. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

It’s a very smart move on the part of Apple, which highlighted the change in the way the company is operating by changing its name from Apple Computer, Inc. to Apple, Inc. , reflecting the fact that they are no longer just a computer company.There were a few interesting items of interest, though.

For starters, no mention of how the phone will sync up with a computer. Are we to assume that it’s Mac Only or will it synchronize with computers running Windows too? If so, does that mean that a new set of applications will be available to Windows users to sync their address book, calendar and email with systems like Outlook or will the device require to manage those things specifically using Apple applications on Windows?

The other thing that was interesting is the announcement that the phone will run on quad-band GSM and will be using EDGE network. This means that the phone will get decent but not great data service. Perfect for email and light web browsing but not quite fast enough for video streaming. However, the introduction of WiFi in the device, which many other companies have avoided for fear of losing battery capacity, could take care of that.

The other interesting thing is that the operating system on this device is OSX. This seems to point out to two possible issues: First, what does that mean for PortalPlayer, which has traditionally provided Apple with the operating system (embedded on a chip) for the iPod? The second question is what does it mean in general: What Apple has introduced is basically a mac in a small form factor, which could easily compete with the UMPC specifications introduced by Microsoft. It’s pretty clear that Apple has a lot of plans in the future for that device but they didn’t say much about the significance of OSX, providing it almost as an aside (and what does it mean for the next version of OSX, which was not mentioned during this keynote at all, a surprising omission in itself.)

Who loses?

Judging from the reaction on the stock market, it’s pretty obvious to see who loses: Palm (makers of the Treo), RIM (makers of the Blackberry), and Motorola and Nokia will obviously not be thrilled with the entrance of Apple in this market. The exclusive deal with AT&T (ooops, sorry, Cingular) will also have a negative impact on Verizon, Sprint, and T-mobile as Verizon will see a number of users switching to them in order to get their hands on this device (in informal discussion with a number of fellow geeks, the disadvantages of moving to Cingular were far outweighted by the coolness of this device).

Let’s take a quick look at specs and see how the difference devices fare against this new entrant:

So looking at it, this phone is pretty expensive (you pay for the Apple premium) but packs a lot more features than other phones in the same category. It’s got a better camera, more memory and a larger screen as well as WiFi. It’s talk time (for the category) is actually pretty good (only bested by Nokia’s E-62) and it is a little heavier than the competition. For a first entry in the market, I’d say that Apple has a winner on its hands.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title The iPhone is here. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

AOL started moving further on its AOL Anywhere Strategy by announcing partnerships to deliver its Instant Messenger services on the Bell South and Sprint PCS network and to equip Neopoint, Nokia, and Motorola devices with the necessary software to do this too.

Microsoft announced partnerships with Nextel and Airtouch to deliver MSN to their networks. This follows recent announcements by Microsoft that its technology would be integrated in Sony and Quallcom wireless devices.

Meanwhile, Palm Computing announced a deal with Sun Microsystems to make Sun’s iPlanet service available to Palm VII users.

But with all the hype, one has to wonder whether wireless is truly here and what hurdles it has to overcome. From this issue on, I will take a quick look at some of the issues facing wireless web implementors these days, adding wireless as a new category of coverage. We will start with the formats.

WAP, WML, HDML, PQA???

It seems the wireless space in adept at developing a new set of standards. While this world is just burgeoning, a number of implementations have already surfaced.

WAP

: As defined by the WAP Forum, WAP is the Wireless Application Protocol. Think of it essentially as HTTP for the wireless crowd. Backed by the W3C, the IETF, and the ECMA, as well as most large wireless industry players, WAP has become the de facto standard for wireless delivery. However, some companies (NTT comes to mind) have tried presenting alternatives to WAP and have so far been relatively unsuccessful. However, I doubt that WAP will go very far as it limits the number of characters that can be sent to about 1600. For stock quotes or weather reports, it’s a great think but beyond that, I doubt that anyone will use it for Ecommerce or content.

WML

: WML stands for Wireless Markup Language and is an XML based subset of HTML. However, a war as broken out in that space, with phone.com (one of the early pioneers in the wireless space) striking out on its own and developing a competing standard called HDML.

HDML

: HDML, or Handheld Markup Device Language, phone.com proposal for a new markup language. At the current time, the W3C has worked with phone.com and other markup language partners in an attempt to resolve the incompatibilities between the two offerings. With the cachet of WML increasing over the past year, phone.com has started supporting both format but offers HDML has a language with new tags that allow it to extend WML applications. Because it was an early player in the field, phone.com has taken a lead and could be the Microsoft or Netscape of that space. As a result, the extensions they are providing can’t be ignored.

HTML 4.0 mobile

: Last year, with the introduction of HTML 4.0, the W3C made some recommendations in terms of supporting HTML for wireless devices. Throwing further confusing in the wireless space, the W3C decided that HTML 4.0 and its successors might be the way to go, throwing more oil on the wireless fire. While no recommendation has been made yet on an actual standard and in spite of the W3C’s claim that it is working to resolve disputes with the W3C, expect some serious in-fighting between the different groups as they try to position themselves in the next hot web application space.

PQA (Palm Web Clippings)

: A couple of years ago, I pointed out that the Palm OS could be a potential Java competitor in the non-PC devices space. As could be expected, Palm went out and introduced the Palm VII, a wireless device with connections to the web. What was surprising, however, is that instead of going out and supporting either WML, HDML, or even HTML, they decided to introduce their own format to distribute web content: PQA or the Palm Query Application language. PQA is a paired-down HTML version that allows you to distribute content on the wireless Palm platform. Since services like OmniSky plan to offer wireless access to Palm devices other than the Palm VII, and since Palm already has an established footprint in the PDA space, expect PQA applications to pop up left and right.

A lot of format but what do I implement for?

At the current time, it seems there are no clear winners in the space however it seems clear that WAP has a strong lead in the delivery space for small bits of data. But WAP will not be the way to do Ecommerce or content as a clear character limitation makes it fairly useless for this. On the markup front, I’d strongly recommend looking at WML as it has received support from some of the larger players (Microsoft and Sun, among others) and seems to be the basic level of functionality. However, you should also look very seriously at the PQA format because of Palm’s extremely large footprint in the PDA space.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Wireless: A confusing Landscape. You can follow him on twitter here or receive his weekly newsletter by subscribing here.