Is Google’s acquisition of Motorola working out?

Google Motorola

Back in May, Google dotted the I’s and crossed the T’s on its $12.5 billion acquisition of Motorola Mobility. The purchase was by far Google’s largest acquisition to date, and a contentious one. By acquiring a mobile handset maker, Google was essentially putting itself in direct competition with Android hardware partners like Samsung, Acer, and HTC. But Google swore Motorola wouldn’t get any special favors, and — according to Google, anyway — the acquisition was more about acquiring Motorola Mobility’s patent portfolio than getting into the handset business. Google wanted to make it far more difficult for a company like Apple or Microsoft to claim Android infringed on its intellectual property. If they did, Google could bring Motorola’s patent portfolio to bear.

But so far, things don’t seem to be working out all that well for Google, and after nearly six months Google’s plans for its Motorola acquisition are far from clear. Is it just a case of Google working a long-term strategy with benefits that aren’t yet apparent? Or are we looking at something more like HP’s acquisition of Palm, which ended badly for almost everybody?

Money pit or golden goose?

Google Motorola

Back in July, Google posted its first revenue report that included any figures from its Motorola acquisition, and the overall numbers were surprisingly good. Google’s total revenue totaled $12.21 billion, a 21 percent increase from the same quarter the year before.

Motorola had lost money for 14 of the previous 16 quarters, so it was expected to drag down Google’s earnings. That bore out, but not as badly as many thought. About $1.25 billion of Google’s quarterly revenue came from Motorola, with over $840 million coming from Motorola’s handset business. Although sales of low-end phones continued to decline, Motorola’s Droid Razr Maxx sold pretty well. If Motorola Mobility had still been operating as a separate business during the quarter, it would have lost $38 million. That’s not a huge figure — it’s about 3 percent of Motorola’s total revenue.

Google’s financial results for the third quarter of 2012 are due next week, and while the company’s stock is riding high (Google’s market capitalization recently surpassed Microsoft’s) Motorola is still expected to drag on Google’s finances.

First, there are the layoffs. Back in August Google announced plans to lay off about 4,000 people from the former Motorola Mobility — about 20 percent of the company’s former staff, along with shuttering about a third of Motorola Mobility’s locations (mostly outside the United States). Google initially forecast the cuts would cost $275 million, with the bulk of the charges to impact Google’s third-quarter earnings — those are the ones due next week. However, in an SEC filing last week Google raised the price tag for $300 million, and also revealed it will spend about $90 million closing offices and factories as it exits particular markets. Most of those closures will apparently be in Asia and India. Add it up, Google is saying it underestimated the cost of laying off 4,000 Motorola Mobility employees and closing facilities by about 25 percent. If Motorola’s revenues are flat for the quarter (and there’s not much reason to expect they’ll go up) then restructuring charges will consume roughly a third of the revenue Motorola brings in to Google — and Motorola was already operating losing money. Google may face more costs, too:  The company has indicated it may do more restructuring, and might incur “significant” new charges to do it.

But those costs may not matter, up to a point. Google plans to focus Motorola primarily on smartphones rather than low-end feature phones, and that means cutting out Motorola Mobility’s other operations. (One possible casualty is the smartphone-to-notebook Webtop docking technology — not that anyone was using it anyway.) However, Motorola Mobility also has a home unit that makes things like set-top boxes for cable companies, which accounts for about a third of the former company’s revenue. Google, of course, has Google TV and the Nexus Q, and is not interested in set-top boxes, so last month Google hired Barclay’s to assist with selling that home division. According to Bloomberg, the unit might sell in the $2 billion range — about half of what Motorola itself was asking for it back in 2009. If Google can find a buyer, the sale would more than offset the costs of restructuring Motorola’s mobile business as even a period of continued losses from Motorola’s handset business.

The patent situation

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Part of the reason Google bought Motorola Mobility was for its portfolio of 17,000 patents (and more than 7,000 pending patent applications) many of which are directly applicable to mobile technologies. Prior to buying Motorola, Google had just lost out on a portfolio of some 6,000 patents that had belonged to the bankrupt Nortel. A consortium from Microsoft, Sony, RIM, and Apple bought those up for $4.5 billion. The deal left Google out in the cold and touched off one of Google’s now-infamous screeds against the patent system.

Google has admitted to focusing more on innovation than patent protection — with the result that Android may be dangerously exposed to the likes of Apple and Google (even if the monster that was Oracle has now been dispatched). Google wanted to go after the Nortel patent portfolio so it would have bargaining chips when — not if — other companies came after Android. With a deep patent portfolio of its own, Google would be in a better position to apply pressure, cut deals, and (hopefully) keep Android free and open so as to foster the growth of the Android ecosystem. When the Nortel patents slipped away, Google was forced to look for another cache of patents… and settled on Motorola Mobility.

So how have Motorola’s patents helped Google? So far, not much.

Aside from the high-profile Apple-versus-Samsung and Google-versus-Oracle battles that have taken place in the United States, one of the most active patent battleground has been in Mannheim, Germany. Rulings in Germany don’t apply to any other jurisdiction, but give Google, Microsoft, Apple, Samsung, and others leverage in their broader patent litigation battles.

Google and Motorola did just win a victory against Microsoft in the Mannheim regional court, which ruled that Motorola was not infringing on a Microsoft patent that covers single applications that can run on multiple handset devices. However, that ruling is an exception is a so-far-bleak battle. Right now, no Motorola Android devices are available for sale in Germany, thanks a series of three rulings in Microsoft’s favor. (The onslaught isn’t over: Microsoft also claims Motorola’s use of Google Maps infringes on a European mapping patent.) Microsoft has been able to leverage its own patent portfolio to negotiate license agreements with almost all Android device makers. Google may say Android is free and open, but essentially every Android device maker but Motorola is paying money to Microsoft for every device they make. Motorola claims it is “reworking” its offerings for the German market and phasing out lower-end devices.

Ya gotta have standards

android money shutterstock palto

Motorola has been asserting patents of its own that cover aspects of the H.264 video encoding standard, claiming infringement from Microsoft in both Windows and the Xbox 360. Motorola even won an injunction on the sale of Xbox 360 systems in Germany, although a U.S. court has ruled Motorola can’t enforce that injunction. Yes, it’s weird that a U.S. court can rule a decision by a German court unenforceable, but the German court ruled that U.S. law has precedence because the dispute is between two U.S. companies.

The pressure Motorola is applying to Microsoft is more complicated. The H.264 video patents are supposed to be available to anybody under Fair, Reasonable, and Non-Discriminatory (FRAND) terms. Motorola is reportedly insisting on a 2.25 percent royalty rate for every Xbox 360 sold; Microsoft argues those terms are utterly unreasonable and would have Microsoft paying around $4 billion a year just for those video encoding patents.

In fact, many of the patents Motorola (and now Google) have been asserting against Apple and Microsoft fall in the same category. Both Apple and Microsoft have claimed that Motorola and Google have been using these patents as weapons, and seeking injunctions barring products using related standard technologies.

Google’s use of Motorola’s standards-essential patents has also drawn the attention of regulators: The Federal Trade Commission has been seeking information from Google, Motorola, Apple, and Microsoft since at least June. And even as it approved Google’s acquisition of Motorola, the U.S. Justice Department noted that Google never promised it wouldn’t use standards-essential patents to keep rival’s products out of the market.

In a statement via email, Google wrote “We take our commitments to license on fair, reasonable and nondiscriminatory terms very seriously, and we are happy to answer any questions.”

And how is Google using Motorola patents to keep Apple at bay? Back in August, Google filed a complaint with the U.S. International Trade Commission claiming Apple was infringing on seven Motorola patents; last week, FOSS Patents’ Florian Mueller noticed Google had quietly withdrawn the complaint — and there’s no settlement or agreement between the companies. Maybe it will come back again soon in another form, but for now Google and Motorola’s strategy seems inconsistent at best.

Upshot

Google seems intent on returning its Motorola unit to profitability. The company has put long-time Google exec Dennis Woodside in charge, and is streamlining the company to focus on high-end (and presumably high-margin) smartphone and tablet products, while at the same time jettisoning employees and portions of the business Google doesn’t need. From a purely fiscal perspective, these move haven’t yet borne fruit, but seem sound. If Google can sell Motorola’s home division (in whole or in part), the revenue should easily give Motorola’s handset division a chance to turn around.

However, Google’s real interest in Motorola was in patents. Those patents are no doubt bringing Google healthy royalty revenue, but so far Google’s efforts to assert Motorola patents against rivals like Microsoft and Apple — and protect Android — have not produced results. In fact, Google’s use of Motorola’s patent portfolio is drawing negative attention from judges and regulators. By acquiring Motorola Mobility, Google may have turned the patent fight between high-tech companies from a high-stakes bouts to an old-school, 40-round, bare-knuckle brawls — and that’s pretty much the opposite of what patents are supposed to do.

[Image via Shutterstock / Palto]

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