Those were some expensive patents

Google Inc. (GOOG) bought Motorola Mobility back in 2011 for $12.5B USD.  Now it's officially preparing to cut ties with the troubled acquisition, taking a big loss on its investment.
I. Bargain for Lenovo -- Perhaps
Reuters, The New York Times, and the China Daily were among the first to report that deal could be nearing an end with a proposed sale of the phone division of Motorola to the Hong Kong, China-based Lenovo Group, Ltd.'s (HKG: 0992).  Google just made the news official, announcing its intent to sell the unit to Lenovo at a price of $2.91B USD.

For Lenovo the deal makes sense.  Currently the third largest global phone seller, the Motorola unit gives Lenovo multiple options including the possibility of using the relatively well known American brand as a ticket for its upcoming U.S. device rollout.
Lenovo has been on an acquisition tear recently, acquiring International Business Machines, Corp.'s (IBM) server unit for $2.3B USD, a follow-up of sorts to its 2005 acquisition of IBM's personal computer unit for $1.75B USD.
Lenovo CEO Yang Yuanqing comments:

The acquisition of such an iconic brand, innovative product portfolio and incredibly talented global team will immediately make Lenovo a strong global competitor in smartphones. We will immediately have the opportunity to become a strong global player in the fast-growing mobile space.

We are confident that we can bring together the best of both companies to deliver products customers will love and a strong, growing business. Lenovo has a proven track record of successfully embracing and strengthening great brands – as we did with IBM’s Think brand – and smoothly and efficiently integrating companies around-the-world. I am confident we will be successful with this process, and that our companies will not only maintain our current momentum in the market, but also build a strong foundation for the future.

Motorola Mobility's sales aren't great.  Over the six quarters it's been ruled by Google, here are the results...
  • Q2-Q4 2012
    • Revenue: $4.13B USD
    • Operating Loss: $1.05B USD
  • Q1-Q3 2013
    • Revenue: $3.20B USD
    • Operating Loss: $861M USD
Google is set to report its Q4 2013 earnings tomorrow (Jan. 30), but things aren't looking great.  In Q3 2013, Motorola managed to sell only an estimated 500,000 units of its flagship Moto X Android smartphone according to the market analysts over at Strategy Analytics.  Price cuts on the device in Q4 may have boosted sales, but would not necessarily have stopped the bleeding of cash from the unit.
Still, Motorola is the #3 U.S. Android smartphone seller, according to Android's maker Google.  That would indicate it to be around fourth or fifth place (by Google's estimation, at least) in the U.S. market -- not a bad place to start.  Google also estimates Motorola to be the #3 Android seller in Latin America; another market where Lenovo's smartphone push is looking to expand into.
II. Larry Page's First Failure
In retrospect it's hard to deny that the Motorola purchase was a rare slip-up for Google CEO Larry Page, who took over from Eric Schmidt at the start of 2011.

Larry Page
Google CEO Larry Page [Image Source: Emmanuel Dunand]
Back in Dec. 2012, Google sold off the Motorola set-top box division to the ARRIS Group, Inc. (ARRS), for roughly $2.3B USD -- a bit of a refund on the $12.5B USD it paid for Motorola back in 2011.
In total, Google will be roughly $7.3B USD in the hold on the deal, not to mention the roughly $1.9B USD it lost trying to downsize the unit into useful form via expensive layoffs and restructuring.
Under the announced sales agreement Google would keep the majority of Motorola Mobility's estimated 11,000 mobile patents, most of which were filed for in the company's glory days in the 90s and mid-2000s.  Lenovo will get "over 2,000 patent assets, as well as the Motorola Mobility brand and trademark portfolio" -- plus licensing rights to the remaining 9,000 (est.) patents.

Google on Motorola
The Motorola purchase made things awkward for Android OEMs. [Image Source: TechnoBuffalo]

Google CEO Larry Page comments on the deal:

Lenovo has the expertise and track record to scale Motorola Mobility into a major player within the Android ecosystem. This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.

That's about as close to a mea culpa as you get from Google.  Depending on the value of remaining patents, it's likely Google (who makes around $3B USD a quarter in net income) lost about two quarters worth of cash in the deal.  The deal also reportedly created tension between Google and its OEM partners who feared having to compete with their OS provider.
That fear made things awkward for Google and may have held back Motorola from being more aggressive with adopting new hardware.  While impressive in terms of battery life, recent Motorola devices have trailed their competitors in terms of the overall spec.
III. The Rockstar Bidco Factor
Some have long said that Google bought Motorola as a hasty, reactionary move to legal rivals Microsoft Corp. (MSFT) and Apple Inc. (AAPL) (among others) outbidding it for the patent portfolio of the defunct Nortel.  On a per-patent basis, Google's $7.3B USD net payment for ~9,000 patents, isn't that bad considering that the Microsoft and Apple-led "Rockstar Bidco" won the 6,000 patent Nortel portfolio for $4.3B USD.

Given the extra $1.9B USD Google lost from ongoing business running Motorola the deal becomes a bit worse in retrospect.  And factor in that the patent portfolio was heavily encumbered by obligatory licensing and has not been a successful defensive tool for Google in court, and the purchase seems much worse.

That's not to say Apple, Microsoft, and the rest of the "Rockstar Consortium" paid a smart amount for Nortel's patents.  While those companies are attempting to expand into a massive campaign of troll-like lawsuits against cable providers, modem-makers, Android phonemakers, and more, it remains to be seen how much value can really be made without hurting their own relationships with the potential targets -- many of which are also business partners to the owners.

But one thing is for sure -- Google lost some money from Motorola and failed to fully turn around the fallen U.S. mobile giant. However, CEO Larry Page at least deserves credit for having the humbleness to walk away from a losing gamble.  As the old gambler saying goes, "You have to know when to hold them, know when to fold them, know when to walk away, know when to run."

Google is running away from Motorola Mobility, and that may be good news for everyone involved.

Source: Google

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