So, Monday was an interesting day.
Google announced that it had reached a firm deal to acquire Motorola Mobility for $12.5 billion in cash: a 60% premium of $40 per share), with a $2.5 billion insurance plug in place for Motorola should FTC approval prove non-existent and the deal go south. Google’s motivations in this deal have already been discussed ad nauseam all over the damn place. My healthy appetite for wit and pithy one-liners makes MG Siegler’s piece my favourite. So – before launching into the conspiracy theory at the heart of this article – I’ll provide only a cursory review of the situation.
If you find yourself wanting a deeper analysis before continuing, and are also fond of pithy sarcasm, I suggest visiting the link above and placing your tray tables and seat-backs in their upright and locked positions.
Situation (skip it if you already know what happened)
Google has always “taken the high road” when it comes to patent protection; meaning that, in the land of Microsoft, Apple, and Oracle – which all have aggressive IP strategies – Google uses its own for strictly “defensive” purposes. Recently, however, their high-mindedness has caught up with them. They’ve been facing increasing legal pressure on their Android OS, and have been unable to shore up their defences through purchase of additional patents. Their last chance evaporated a few weeks ago, when a consortium of Microsoft, Apple, RIM and others, bought a trove of 7,000 Nortel patents in an exciting high-stakes auction.
Around the same time as the auction was beginning, Google got wind that Motorola (which has over 17,000 patents, and 25,000 pending) was in acquisition talks with various parties including Microsoft. So, when Apple and the Microsoft-led-consortium broadsided Google’s auction ship, and swiped the 7,000 defensive patents GOOG was confident about getting, Larry Page’s only choice was to go on the offensive and outbid Microsoft for Motorola. Which it did.
Assuming the FTC clears the acquisition, Google will find that it’s grown an unseemly anchor where its ass once was: employee numbers will double – Motorola has 19,000 -, net income will decline – Motorola lost money last quarter on revenues of $3 billion-, and it will have placed itself in direct competition with partners Samsung and HTC. Oh yea, and in addition to decreased income and the logistical nightmare of absorbing a hardware business, Google will have lost a third of its $36 billion cash reserves.
So you see, it’s one thing to own 10s of thousands of patents and not be belligerent with them, but when you own less than 2,000 while your largest competitors (Microsoft and Apple) have around 20,000 and 10,000 respectively, principled idealism becomes imprudent naïveté.
Okay, now for the conspiracy theory.
Microsoft engineered this whole damn thing from the beginning, and if that’s true, then this is possibly the most brilliant strategic maneuver in the history of the technology industry.
Microsoft’s position in the smartphone marketplace is weak, and Google’s is strong: Android devices made up 48% of all smartphones shipped in the second quarter of this year, while Microsoft devices accounted for only 1.6%. So how does Microsoft, which is partnered with Nokia, compete against Google – with its powerful OS and strong partner OEMs?
Transform Google into a company that it can compete with. How?
The past 5 years have seen Microsoft dramatically increase the size and scope of its IP holdings. Between 2009 and 2011 alone, its patent assents doubled and its portfolio’s strength rose to a first-overall ranking according to the IEEE. While amassing this IP-trove, it began attacking Samsung, HTC, and Motorola – three key providers of Android-smartphones.
A. In April of last year, while HTC was being sued by Apple, Microsoft reached a licensing deal with them, providing the Taiwanese company with “the right to use Microsoft’s patented technologies in phones running Google’s Android Operating System.” Essentially, Microsoft lent HTC IP support in their legal battle with Apple, which was contingent upon their paying out royalties.
B. Six months later, in October of 2010, Microsoft sued Motorola over their use of “Microsoft patented technology in phones running Google’s Android OS.” Motorola has countersued but, hm, isn’t that an interesting similarity…
C. This July, just after the close of the Nortel auction, Microsoft put the screws in the key GOOG OEM by placing licensing pressure on Samsung. The company is currently trying to negotiate a lower royalty fee than the $15 per Android phone demanded by Microsoft – hardly a positive attitude.
Note on strategy at play: Margins are tight in the mobile phone business, and by implanting licensing fees on Android devices, Microsoft aims to squeeze the net income of GOOG’s key OEM’s – forcing them to become interested in a Windows 7 operating system.
Google, meanwhile, realizing the need to beef up its IP shield, buys 1,000 patents off IBM, and then makes the stalking horse bid at the Nortel auction. For its plan to work, Microsoft knows it has to prevent GOOG’s acquisition of these patents, and in an awesome feint, drops out of the auction only to team up with Apple and win the patents.
Months prior to its play in the auction, Microsoft has used its legal stance as leverage and approached Motorola re: acquisition – knowing that Google will find out (presumably through Bill Hambrecht – the legendary banker who engineered the Google IPO, and who sits on Motorola’s board), and be forced to acquire the company after it loses out on the Nortel patents.
All goes according to plan, and Google is forced to acquire Motorola after losing the Nortel patents – bloating the company, reducing net income, eliminating 1/3 of its cash reserves, and placing it in direct competition with its already squeezed OEM partners. Microsoft has gained the opportunity it planned for:
“Investing in a broad and truly open mobile ecosystem is important for the industry and consumers alike, and Windows Phone is now the only platform that does so for all partners.” – Andy Lees, President Windows Phone Division
Man, now doesn’t that sound like someone from a company that engineered this all along…and is fairly happy with how things are unfolding?
Update: Bill Hambrecht has since resigned from Motorola’s board, and Stephen Elop – CEO of Nokia (in Microsoft’s pocket) has spoken out against Apple saying “If I happened to be someone who was an Android manufacturer or an operator, or anyone with a stake in that environment, I would be picking up my phone and calling certain executives at Google and say ‘I see signs of danger ahead.’” How very interesting