Our most recent Innovation Economy Viewpoint is on the topic of Google's acquisition of Motorola Mobility in the fall of 2011.  At a price of $12.5B this is Google's largest acquisition to date and it happens to be in context of a high stakes battle for IP in the mobile sector.  This case brings up a number of new points related to Google's strategy, IP as an emerging asset class and the very role of IP in innovation.  

  

As always, we appreciate your comments as input to a Google-Motorola Mobility teaching case for use in our Engineering Leadership and Entrepreneurship programs.  Comments and responses to open questions may be sent to ie@lists.berkeley.edu.   

  

Following up from our October 2011 Viewpoint, the Solyndra case with background data is now freely available at http://funginstitute.berkeley.edu

 

Ikhlaq Sidhu

Chief Scientist, Fung Institute for Engineering Leadership

University of California at Berkeley


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Google's Acquisition of Motorola Mobility 

An Innovation Economy ViewPoint, February 2012 

Ikhlaq Sidhu, Shomit Ghose, Paul Nerger, John Golden

In mid-August of 2011, Google surprised the mobile industry by announcing its intention to acquire the mobile handset and tablet maker Motorola Mobility (NYSE: MMI).  At  an acquisition price of $12.5B, the deal offered a 40% premium over the market price for MMI, which had been operating at a net loss of 1.7% of sales.  This transaction represented Google's largest acquisition to date.

 

The acquisition was a surprise to the industry because Google licenses its Android Operating System to MMI and many competing handset Original Equipment Manufacturers (OEMs) on equal terms.  As such, does the acquisition signal a Google preference for the Motorola OEM in the future?  Only time will tell the true story, but Google reassured competing OEMs that this was not the case and that motive for the acquisition was to prepare a mobile technology patent portfolio to deal with the threat of patent infringement suits from competitors such as Apple.

 

In fact, the background of Google's MMI acquisition is not much short of a full-scale "Intellectual Property (IP) War" in the emerging mobile communications market centered around Google and Apple.  Motorola Mobility holds 17,000 patents and has another 7,500 pending.  And while patent quality is much more important than mere patent quantity, Apple is believed to have approximately 1,000 patents in this space, which happens to be about twice as many as Google had prior to the MMI acquisition. 

 

Google's acquisition of MMI brings forward a number of interesting questions that affect the Innovation Economy:

  1. Is this acquisition really all about IP, or are there other strategic business intentions?
  2. Will Google move away from being primarily a horizontal provider of search and advertising to being a vertically integrated firm like Apple, or is the acquisition more about Google defending itself and its partners from IP litigation from Apple?
  3. Given the MMI assets, (including $3B in cash) and the market growth in mobile, what is a fair price for MMI with and without the patents?
  4. What does this mean for the market pricing of IP in the future, or is the MMI acquisition simply a special case?  What, if any, are the implications for IP pricing for earlier-stage firms?
  5. Perhaps more fundamentally, does the system for protecting IP still serve the purpose of providing a relatively short-term competitive advantage to those who take the risks to innovate, or has the nature and purpose of IP evolved in a different direction?

 

Today's IP Battlefield

 

Since the introductions of the iPhone and Android platforms, both Apple and Google have fiercely competed for mobile Internet smartphone users, a market previously dominated by RIM's Blackberry product.  This competition is fundamental to the future of search, on-line shopping, virtual goods, games, and an ecosystem of data applications.  In parallel with this competition for users, the new and incumbent players in the mobile space have become increasingly proactive in using legal measures to protect their investments and market share. 

  • Value of IP: Under the name Rockstar Bidco, Microsoft, Apple, and RIM recently purchased rights to Nortel's patent portfolio for $4.5B.  This purchase signals a new level of intensity in the battle for IP in the emerging mobile sector.
  • IP War: Patent litigation in the mobile space has been increasing at 25% on a yearly basis over the past six years.  Over the past year, 85 new lawsuits have been filed.   Prominent recent cases have included:
    • Motorola vs. Apple: Motorola asked Moto smartphones to be cleared of Apple IP.
    • Microsoft vs. Motorola: To request royalties from Motorola on smartphones.
    • Oracle vs. Google: For use of Java on Android.
    • Apple vs. Samsung, Apple vs. HTC: For Android functions on products of these Google partner firms. Google is aiding HTC in its case by claiming that Apple is using its patent portfolio to create a monopoly that is against the interest of the consumer.
    • Additionally: 1) Motorola recently won a case in Germany in which Apple was held to have violated some of Motorola's IP. 2) Apple won an injunction to stop Samsung from selling Galaxy Tablets with the Android OS in Germany.
  • Market numbers: Mobile is clearly one of the largest of emerging markets. 
    • In the US, June 2011 numbers showed 323 million subscribers, with 29.7% of households being wireless only.[1]
    • Wireless revenues were $164B of which $55B is for wireless data services.[2]
    • As of November 2011, 43% of US phones were smartphones.  Of smartphones, Android phones led with 40% market share, Apple at 26%, RIM at 23%, Microsoft at 5.8%, and Symbian at 2%.[3]
  • Motorola Mobility had an $8.9B market cap, $3B cash assets, and $3.26B/quarter top-line revenue prior to its acquisition.  Revenues included $2.43B in mobile devices and $0.83B in IPTV in the home segment.  The firm operated at a net loss of $90M in 2010, down from a loss of $1.34B in 2009.
  • Google's 2011 financials showed a $200B market cap, $42B in cash, $10B/quarter top-line revenue, and $3.3B net earnings/quarter.
  • After six years of discussion on how to fix the US patent system, the Leahy-Smith America Invents Act was passed by the Senate and signed into law by President Barack Obama on September 16, 2011.  The principal change in US patent law effected by Leahy-Smith was to switch the awarding of patents from the first-to-invent model historically in use in the US to a variant of the first-to-file model in use elsewhere in the world.  With this law, patent applications filed on or after March 16, 2013 will be awarded on the new first-to-file basis. Leahy-Smith also provided for a new form of administrative proceeding to challenge patent validity and sought to restrict patent-infringement suits against multiple defendants.


Point of View: Patents as the Newest "Asset Class"

 

As continuation of the smartphone litigation war suggests, Leahy-Smith is unlikely to reverse long-developing changes in how US businesses, both large and small, approach IP strategy.

 

  • Traditional wisdom in many technology sectors had held that patents were only to be used for defensive purposes - they were the bargaining chits to trade with a plaintiff for a cross-license in the event of patent litigation.  Although companies in slower-cycle and more capital-intense industries (e.g., pharmaceuticals, materials science) have long invested heavily in IP protection as part of their business models,  companies in fast-cycle and low-capital-intensity industries (e.g. software) typically had not needed to invest significantly in IP. 
  • In various technology sectors, a land-grab is now underway for extant patents - with the Google acquisition of MMI as a prime example - and firms have needed to become more aggressive in the pursuit and filing of new patents for their organically developed technology.
  • Indeed, so-called non-practicing entities (NPEs; less flatteringly  called "patent trolls") have gained newfound prominence.  Such entities' primary apparent goal is to monetize existing patents by aggressively pursuing licenses or litigation with possible infringers.  A classic example of an NPE is Round Rock Research LLC, a venture-backed company that purchased 4,200 patents from Micron Technology in 2010.  A number of large patent holders, including Microsoft, Sony and Nokia, have spun off NPEs of their own.
  • IP has thus proven to be an offensive weapon from which material revenues can independently be wrung as well as a defensive shield for a business providing goods and services distinct from the IP itself.  As such, IP has emerged as an actual asset class, more like than different from a company's real estate or cash holdings.  

It is in this environment specifically - where IP has evolved to become an asset class - in which a heretofore unlikely conflict has arisen between the Internet's largest search provider and the world's most successful purveyor of consumer products.  Google's $12.5B acquisition of MMI is merely the first battle of what will doubtless be a long and unrelenting war played out on the battlefield of IP.



[1] http://files.ctia.org/pdf/CTIA_Survey_MY_2011_Graphics.pdf

[2] http://files.ctia.org/pdf/CTIA_Survey_MY_2011_Graphics.pdf

[3] http://blog.nielsen.com/nielsenwire/online_mobile/generation-app-62-of-mobile-users-25-34-own-smartphones/

 

About the Fung Institute for Engineering Leadership at UC Berkeley

 

The Coleman Fung Institute for Engineering Leadership, launched in January 2010, prepares engineers and scientists - from students to seasoned professionals - with the multidisciplinary skills to lead enterprises of all scales, in industry, government and the nonprofit sector.  

 

Headquartered in UC Berkeley's College of Engineering and building on the foundation laid by the College's Center for Entrepreneurship & Technology, the Fung Institute combines leadership coursework in technology innovation and management with intensive study in an area of industry specialization. This integrated knowledge cultivates leaders who can make insightful decisions with the confidence that comes from a synthesized understanding of technological, marketplace and operational implications.

 

 

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