Google has announced a plan to sell Motorola to Lenovo for just under three billion dollars. Google paid more than twelve billion only two years ago, and many commentators have declared that this is Larry Page’s first big bet, and potentially his first big experiment to go sour.
Even the best reporters characterize the strategy incorrectly, however, and forget the motivation. The best recognize that the acquisition had several motives, but still use wishy-washy language to discuss the priorities. Here is the language of the New York Times, for example:
“The deal is not a total financial loss for the extremely wealthy Google, which retains patents worth billions of dollars, but it is a sign of the fits and starts the company is experiencing as it navigates business in the mobile age, which has upended technology companies of all types.
In addition to using Motorola’s patents to defend itself in the mobile patent wars, Google pledged to reinvent mobile hardware with Motorola’s new phones, and directly compete with Apple by owning both mobile hardware and software.”
I have a bone to pick here. Even the best reporters are not recalling the sequence of events. Public policy shares some of the blame, and viewed from that perspective, much of this looks like a waste of resources. Let’s get that interpretation on the table by doing a bit of a flashback, shall we?
More than two years ago the bankruptcy court held a bidding war for the patents held by Nortel. You might recall Nortel. Until recently they were one of the largest telecommunications equipment firms in the world, along with Lucent, Alcatel, Cisco, and Motorola. Cisco is a new comer, put together through mergers. The others were organized along traditional lines, with large, productive, and engineering-driven R&D departments spread throughout the organization.
More to the point, those R&D departments made a lot of patents, sometimes in order to protect products and services offered by the firms, and sometimes as a by-product of explorations that did not work out. In some years these companies would make it to the list for the top twenty patenting firms in the US. Here is the bigger point: These patents accumulated, routinely, and over many years. The collections became large, and covered many aspects of basic communications equipment.
When Nortel went bankrupt the bankruptcy court did what it always did: it looked to maximize the value of the assets it could sell. It determined that the maximum value of these patents could be achieved by keeping all the patents together and bidding them out all at once. That resulted in the potential sale of the largest collection of patents ever.
Let’s repeat that. Largest. Ever.
Let me rephrase that in economics-speak. The patents are a right to exclude. They achieved their maximum value by allowing a single commercial entity to bid to own all of them, and achieve a monopoly in the market place. Monopolies are worth more money to firms than any other market structure, such as, oh, duopolies or competitive conditions.
Make no mistake, however, about what sort of competitive conditions benefit users, either in the short run or the long run. It is not monopoly. Lawyers and lobbyists are paid to make arguments about why this is NOT obvious, about why monopoly might be ok, about why this market might be different than any others, etc., but don’t be fooled. It is as obvious as it looks. Selling the entire Nortel patents as one group was not in anybody’s interest except the holders of Nortel’s debt.
The court then held a bidding contest for those patents in July of 2011. To the delight of some commentators, and to the groan of many others, instead of monopolies bidding, we got something just as bad. We got consortia, organized around the platforms for smart phones. Firms met with others firms to bind together to exclude other sets of other firms. In other words, the firms not affiliated with Android got together to bid against the Android firms.
A consortium led by Apple and Microsoft won the war (also benefitting were RIM, EMC, Sony, and Ericsson). The losers were a consortium led by Google and Intel (and RPX). The patents sold for $4.5 billion.
Look, this was like selling a tank to a bunch of parties in the fistfight. This was a bad public policy decision.
Preserving the competitive health of the smart phone market should have trumped any other consideration, and antitrust intervention was precisely the mechanism for expressing that concern. Antitrust regulators should have stepped in and stopped the sale of a monopoly, or, at a minimum, enforced a covenant for the new owner, who would have been mandated to offer reasonable terms for compulsory licensing and at non-discriminatory terms to any and all buyers.
Alas, antitrust looked at it and decided not to do anything. Nothing happened. It was obvious at the time that somebody was going to pay the price for letting the concerns of Nortel’s debt-holders trump every other concern. Two years later we now can say who did: In this case, it was Google.
At the time, that concern was no secret. Look at the paragraph in the Wall Street Journal:
“Judges in the U.S. and Canada Monday gave the nod to a $4.5 billion patent sale that marks a shift in the balance of power in the technology wars over mobile applications…”
Larry Page read those headlines too. His view, quite sensible at the time, was the following: he lost the bidding, and needed to acquire a lot of patents and very quickly. The biggest and fastest growing market for his firm’s services – in the mobile segment – was at risk. He had a lot of cash on hand, so if he could buy his way out of the problem, then it was a good strategic step.
In other words, it was no surprise that he took action a few months later. Long story short, he decided that his best option was acquiring Motorola. At the time nobody had any doubt that a huge fraction of the deal’s value had to do with the patents.
Indeed, Google is retaining all the patents after its sale of Motorola. That is no surprise, since the consortia that bought the Nortel patents filed its first suit this fall. Google will need those patents for its defense and countersuits.
Let’s recap the big lessons. What have we learned from this announcement? Markets just restructured a firm, Motorola, as a byproduct of the Nortel patent sale two years earlier. Does anybody think the costs of the transactions involving Motorola are good for their employees, for their long term strategy, and for the health of the organization? How about the time and trouble that Larry Page has been put through? Again, those are real costs. What about the fees going to all those bankers and lawyers who restructured the firms? What about all the patent lawyers taking each other to court? The creditors to Nortel don’t care, but these are real costs, and a big waste of resources. More to the point, it could have been prevented.
19 Replies to “Google and Motorola in the Wake of Nortel”
Note that if you go through the numbers, Google made a much smaller loss on the deal: Motorola had $3billion cash in hand at time of sale, plus a stack of past tax credits that Google can use to reduce future tax payments by ~$6billion IIRC. They also sold off the set-top box business for $1.x billion, and have the cash from the sale of the remainder of the business to Lenovo. So it’s no-where near as bad a deal for Google as the raw figures make out, especially once you include the value of the patents that Google has retained.
Agreed, plus Lenovo are likely to go for ‘mad volumes’ under the Moto brand, thereby increasing the royalties flow back to Google.
Excellent post! This leaves me with a larger question that is hinted in the article: Is it possible in the current corporate/financial environment for any ‘modern’ company to create the organizational base to carry out on-going R&D. Competitive markets and management screw-ups have repeatedly battered once strong companies and then the financial engineers and lawyers have systematically dismembered them, destroying the technical foundations, the capacity to innovate, as well as jobs. Think of the following list of companies:
Bell Labs – Lucent
RCA – GE
Each one has a unique and probably justifiable story……but was it worth it to the society as a whole?
IBM has consistently held the top spot for patents awarded, year in year out. By market capitalization it’s America’s fourth largest company, globally in the top ten. It is right about the worst example you could give of a company that supposedly has had its capacity to innovate destroyed. IBM gave up on consumer electronics, which is why it lacks the visibility of companies such as Apple, but it remains a titan of business machines.
Lol a titan of business machines that doesn’t sell any! IBM is busy imploding itself so it can reach an artificial 2015 stock valuation. At best IBM is middling consultancy at worst a victim of its own CEOs and executive’s greed.
As with what Phil says. My best guess (and it is a guess but reasonably informed) is that Google made a profit on the deal and got the patent stash for free.
$3 billion in cash in Motorola, $2.3 billion from the set top boxes to Arris, $2.9 billion from Lenovo, $6 to $7 billion in tax write offs. Quite how much of that last they’ll be able to use is arguable but absolutely some of it and maybe all of it.
Do also note Google’s bidding behaviour at Nortel. Weird numbers (maths constants weren’t they?) and no real apparent attempt to win. And Nortel was a) Canadian and b) bankrupt meaning that there were no tax allowances available to a US based firm like Google.
They might well come out ahead in cash terms given that tax situation.
Yes, I think they bid π billion $ at one point Tim!
Great article, and whether or not Google made a profit couldn’t be more irrelevant. I have no idea what those making comments quibbling about the profit or loss on the deal read.
The US patent system is an utter and disastrous mess.
It’s always something…
The US and other nations patent systems are indeed an utter mess. But only to those who refuse to acknowledge the rights from the work of others. That would be Google, who has promoted this bogus line calling for taking other people’s work whenever they feel like it.
Has anyone objectively assessed the worth of the Moto patents? I understood they were worth zip. Sources?
I don’t recall the dollar amount, but it was perhaps 10 or 20% of what Google claimed the Motorola patents were worth. The Motorola patents were always promised to be licensed at reasonable terms, which in court cases have been found to be a tiny fraction of what Google claimed.
“The patents are a right to exclude.”
Goodness! Why would the writers of the Constitution, concerned with We The People, create such a dangerous weapon?
This article fails to note that America’s history is profoundly about experimentation, discovery and individuals’ right to their own destiny. Nortel’s engineers worked long and hard on them, under contracts that included pensions to be paid out of the accumulated worth of the firm. Grinding them into dust would confiscate a fair part of their hard work.
Nortel, as a failing entity, was in no position to insist on payment for Google’s ripoff expropriation (taking property away) of their engineers’ inventions, so they got the next best thing—a flat $4.5 billion from Rockstar.
Of course, Google bid $4.4 billion for these patents but eventually decided that they’d be better off risking suits for their not properly owning or licensing them. That doesn’t look like an awful decision, as they haven’t cost the Android community anywhere near that…yet.
But what really stands out is the ridiculousness of Google’s claims of the Moto portfolio’s $5.5 billion worth in comparison. Google claimed Microsoft alone owed $4 billion (way disproportionate to Microsoft’s fraction of its use of patents that were pledged to be licensed on Fair, Reasonable And Non-Discriminatory terms) but a court found Google’s Fair price a fraction of 1% of that. The combination suggests that Google had utterly zero intent to play by anybody’s rules, other than its own.
At the time of the acquisitions, knowledgeable experts noted the depth of the Nortel portfolio and the shallowness of Moto’s. Google and its fans have waged an aggressive campaign to deprecate others’ rights under US and international laws. That propaganda continues today with claims that the Moto portfolio somehow protected Android partners. Yet since the purchase, Microsoft has signed up almost every Android partner to license Redmond patents, Google continues to strip Apple-patented features from stock Android, and Samsung is still looking at nearly a billion dollars in penalties for abusing Apple’s rights
Well, goodness, Walt. Thanks for your comment, but I do not sense we are seeing eye to eye.
Perhaps I should clarify. I do not have feelings for or against particular players, as you seem to, nor about the true value of the patents. I have nothing against firms that earn their patents through honest R&D, as Nortel’s employees did. That said, I do not entirely see why those aspects of your comment matter for the blog post, which was about using antitrust policy during a sale of patents.
The largest patent transfer/sale in history raises potential antitrust issues because it is a sale of monopoly rights; that is what comes with “the right to exclude.” I am no legal scholar, but I am pretty sure there is a long legal tradition that limits the rights of patent holders in deference to antitrust principles. So the post is on firm legal ground there.
Perhaps I was too abstract with the economics, so let me develop the argument with an illustration. Motorola’s long term health became collateral damage to the lack of restrictions placed on this transfer. Breaking up the patents, or placing compulsory licenses on the bundle, might have cost Nortel’s debt holders a couple hundred million dollars, but it also might have saved Motorola from two major management changes in two years, which surely has cost them stability and employment. What if this instability led to a couple hundred employees losing their job? I think it is a poor policy trade-off to have several hundred more Motorola employees lose their jobs so Nortel’s patent holders could make another hundred million on the transfer. Those are real costs, and all caused by a bad policy decision.
Again, thanks for the comment.
“Make no mistake, however, about what sort of competitive conditions benefit users, either in the short run or the long run. It is not monopoly. Lawyers and lobbyists are paid to make arguments about why this is NOT obvious, about why monopoly might be ok, about why this market might be different than any others, etc., but don’t be fooled. It is as obvious as it looks. Selling the entire Nortel patents as one group was not in anybody’s interest except the holders of Nortel’s debt.
The court then held a bidding contest for those patents in July of 2011. To the delight of some commentators, and to the groan of many others, instead of monopolies bidding, we got something just as bad. We got consortia, organized around the platforms for smart phones. Firms met with others firms to bind together to exclude other sets of other firms. In other words, the firms not affiliated with Android got together to bid against the Android firms.”
From your original post, a biased and incomplete record, omitting mention that Google bid $4.4 billion for this same portfolio BEFORE Rockstar out-bid them.
Of course, Google had formed its own de facto consortium with players that control the overwhelming 80% reported share of handsets.
Patents are encouraged in the Constitution and anti-trust concerns respect the high authority that conveys. Where are anti-trust issues raised? Not on the so-called utility patents that Rockstar has but the Standard-Essential patents that Samsung and Motorola have refused to license to Microsoft and Apple on the FRAND terms that they promised—that the US DoJ and EU Competition Commission require
So you made up an anti-trust concern over a court-approved sale, while ignoring several anti-trust actions against Google and its OHA partners, who have much more power to affect competition adversely. If you are t trying to emphasize Google’s case, you are woefly unaware of the actual facts in this mobile patent war, the history of which goes back at least to Motorola blocking competitors in the 1990s, actions that caused regulators to create the current laws/rules that Google a and it’s allies continue to flaunt.