Quick Thoughts: Hello Moto
Google’s $12.5B acquisition of Motorola Mobility was a jolt on what would have otherwise been a typically sleepy mid-August trading Monday. While the all-cash price tag seems hefty at first look, MMI’s balance sheet is strong with $3B in net cash and the likely long term benefits of inoculating the Android ecosystem against intellectual property assaults and gaining a foothold in the living room via Motorola’s set-top-box business are considerable. At the same time, Google must quell any budding concerns by ecosystem partners that the acquisition will put them at disadvantage vs. the in-house licensee. We believe that Google takes these concerns very seriously, and that the company will go to lengths to avoid any appearance of favoritism, even if it means creating disadvantage for its newly acquired hardware operation. While Google has faced anti-trust investigation around its dominant search franchise, this deal does not appear to have even a whiff of anti-competitive implications that might draw unusual government scrutiny. In the end, we see this acquisition as sensible on a tactical basis, and given the $2.4B in net deferred tax assets and meager alternative returns on cash, believe Google’s assertion that it will be near term accretive.
Patents. Like many Silicon Valley firms, Google has had a short lifetime to file patents, which can take years to be granted, and a culture that was not focused on maximizing the size of its portfolio. As such, it currently holds just 1,000 total patents, most likely tied to search technology rather than mobile devices. In contrast, the wireless industry has a long history of IP confrontations, with Qualcomm, Nokia, Ericsson, and others vigorously pressing their patent portfolios to gain royalty income and competitive advantage. According to its 10K, Motorola Mobility holds 17,000 patents worldwide, with 7,500 more pending approval.
Importantly, Motorola holds a critical slice of those patents deemed essential to the workings of all 3G and 4G wireless standards, as well as significant IP underlying the way modern handsets are designed, including user interfaces and power management. Motorola is the 4th largest holder of 3G essential patents and the 6th leading holder of 4G LTE patents. Furthermore, a deeper examination of 4G patents suggests that the quality of Motorola’s holdings is very high, with 60% of its claims deemed as likely to be established as “essential” vs. just 33% for the full population of LTE patent claims. Indeed, Motorola’s published royalty rates for handsets, 2.25%, are second only to Qualcomm amongst wireless IPR holders. The size and quality of this portfolio vaults Google far ahead of its most vigorous challengers – Apple and Microsoft – in the IP scrum, despite their recent participation in the $4.5B purchase of 6,000 aging Nortel patents.
While the owners of other patents relevant to mobile handsets are still free to claim infringement against Google and its partners, Google now has the wherewithal to counter with claims of their own with the threat of “mutually assured destruction”. At the very least, the Motorola IP firepower should bring most of those who would threaten the Android ecosystem to the negotiating table, and could yield licensing revenues and greatly reduced legal expenses. This will, in turn, make Android (and Google’s desktop challenger ChromeOS) more attractive to OEMs, who will be less likely to be threatened by potential legal actions by Google’s rivals.
Android. Google will operate Motorola’s handset business as a separate division, with a pledge that it will treat outside licensees on equal footing. It is very much in Google’s interest to make good on this pledge, and we do not anticipate major objections from the big Android device makers – Samsung, HTC, and LG. If anything, Google will likely favor its licensees to avoid the appearance of favoritism. The intellectual property air cover is a far bigger benefit to handset OEMs than is the possible threat from Google branded handsets.
Adding Motorola’s hardware engineering expertise could also help Google tie its software more closely to reference hardware designs speeding the adoption of advanced capabilities by the whole Android ecosystem. It could also help rein in the fragmentation of Android, absorbing MotoBlur into the generic release, and giving greater strength to Google’s efforts to discourage ambitious customization by its licensees, a substantial boon to App developers.
Media Streaming. Google has designs on the living room television set. Its YouTube business is the largest streaming video provider in the market and is widely available via connected home electronics, such as video game consoles, TVs and Blu-Ray players. However, its efforts to provide an integrated on-line video portal – GoogleTV – were hamstrung from the gate by traditional channelized media players distrustful of the company’s intentions. Motorola Mobility is the world share leader in digital set top boxes, and a leading supplier of headend technology for cable operators.
In this, the acquisition gives Google substantial new technical capability in the arena of managing digital video that could be leveraged into future products aimed at the living room video experience. Google also has a hardware platform that could be a new foothold in extending the Android cloud experience beyond portable devices. We believe that the future will require seamless interface and application integration across venues, including the living room big screen – think of smartphones and tablets tasked as TV remote controls with the ability to deliver cloud-based applications and content onto any screen in the house. The key, of course, will be managing this development without scuttling supplier relationships with distrustful Cable MSOs.
Regulatory Scrutiny. Unlike Google’s highly scrutinized acquisitions of ITA and DoubleClick, the MMI deal does not appear to threaten competitive balance. Both ITA and DoubleClick were closely tied to Google’s dominant search business, prompting the more vigorous anti-trust attention (although both were eventually approved). Motorola has less than 10% of the US handset market and has obviously vigorous competition. We believe this deal would be approved quickly.
Summary. Net of cash on Motorola’s balance sheet, and not counting a $2.4B deferred tax asset, this is a $9.5B deal that nets Google a trove of 24,500 patents and applications that dwarf the Nortel portfolio acquired by its rivals in both scope and quality. Short circuiting the aggressive intellectual property warfare that would siphon resources and executive attention at both Google and its partners is itself a worthy goal. Arguably, Motorola is the best possible solution, given that an acquisition of Qualcomm, Ericsson or Nokia would be expensive, hostile and ill fitting. In addition, Google gets a reasonable business on the cusp of profitability, with strong engineering talent in areas highly complementary to Google’s long term strategic objectives. We do not believe that this deal will weaken the commitment by Google’s partners in the Android ecosystem, and see opportunities to strengthen the company’s ChromeOS and GoogleTV programs as well.