joe moon

Google, Motorola, and Patents

Google is buying Motorola Mobility for $12.5 billion. It's Google's largest acquisition ever. And it's clearly about patents. But before I go into the issue of patents more broadly, let's take a quick look at what Google is buying exactly.

Motorola Mobility (MMI), which was the handset and cable box division of Motorola, spun off early this year. Motorola obviously has a long history in the mobile industry (they own the now expired patent on the cell phone) and have a deep and presumably strong patent portfolio. This includes about 14,300 patents, and 6,700 patents pending. According to this, in July they also had $5.5B in cash and deferred tax assets.

So, without going into the issue of patent quality, we can broadly compare this deal in terms of patent acquisition with the auction of the Nortel patent portfolio that Google lost in July to a consortium that includes Microsoft, RIM, and Apple.

Nortel: $4.5B / 6,000 patents = $750k per patent.

MMI: ($12.5B − $5.5B) / 14,300 patents = $489,510.49 per patent.

Plus 6,700 patents pending.

Plus a hardware company.

Plus, as Nilay Patel notes, a very strong patent creation engine.

So a cursory examination suggests it's a pretty good deal for Google.

Motorola

From MMI's perspective, it's hard to see this as anything less than a huge win. Despite its success with its Droid handsets, MMI hasn't been profitable and has in fact been looking for a buyer since at least last year. They clearly saw Google's (specifically Android's) recent patent problems as an opportunity and seized it. MMI CEO Sanjay Jha's recent public statements about suing Android manufacturers over IP were probably part of the negotiations.

The recent escalation of the tech patent war was quite a boon for MMI. Ars Technica estimates that Google could have bought MMI last year for $6B less.

Android

What does this mean for Android?[^1] Google has somewhat contradictory things to say about the acquisition.

"Together, we will create amazing user experiences…"

And:

"We will run Motorola as a separate business."

While maybe not directly self-contradictory, the announcement of the deal exposes the inherent cognitive dissonance in being a company that both makes hardware and licenses its software to other hardware makers. There are directly conflicting incentives set up now, which can't help but cause friction.

One rising sentiment is that this is good because now that Google owns the software and hardware, they can make a vertically integrated product of much higher quality, able to compete more directly with Apple. But it's not that simple. Apple products aren't good just because they're vertically integrated. And Google has no experience making vertical integrated products.

It's also misaligned with Google's ultimate incentive of commoditizing everything that comes between a user and the Web.

For the other Android manufacturers, HTC and Samsung being the most relevant, it's a bit complicated.[^2] On the one hand, it must certainly worry them for Google to be joining the hardware business. On the other, the growing litigiousness of the industry was starting to make Android licenses more costly both in terms of IP royalties and the litigation itself. So Google joining the patent fight on the side of Android may be a welcome development. Seems like a net wash to me. And it's not like there are many alternatives to Android, anyway. Windows Phone 7 is faltering in the market, while Android has become the leader in terms of market share.

Patents

Ultimately, Google is only in this position because of patents. Just in the last few weeks, about $17B have changed hands over tech patents. That's a lot of billion dollars.

That's money that could have gone into research and development. Not that all of that money just disappeared, but there must be a significant transactional cost. It's also that much more money that's now in some sense 'invested' in the patent system. If the patent system were to be abolished immediately, all that would immediately become a wasted investment. As the industry players continue to pour money into patents, the system only becomes more entrenched.

Which puts Google in an especially crappy position. Google believes patents are a tax on innovation. And Google wants to encourage innovation, if only because that further eliminates barriers between users and the Web. But in the current environment, Google can't not play the game and hope to get anywhere. So it has to work both sides. It has to acquire patents to defend against patent litigation, while at the same time fighting on the PR front and lobbying in Washington for patent reform.

Not only that, but Google handicaps itself by only using patents defensively. To my knowledge, Google has never used patents offensively. (Yet.) You can interpret that as self-interest or as admirable ideological consistency. I see it as both.

And further, the mechanics of the patent system favor large companies with large patent portfolios, because it both gives them the ability to sue new upstart companies for patent infringement and protects them from small companies with 'legitimate' patent suits. Incumbents love the patent system. Since Google's business model disproportionately benefits from universally increased innovation, it alone among big, wealthy, influential companies has any incentive to fight for patent reform.

It's Google versus the World on two fronts.

World War G

On the surface it seems like a good deal for Google. But I think it's a sign of bad things coming for Google, for innovation, and for the world. I think what people lose sight of is that some (breathtaking, well crafted, seamlessly designed) innovations change the world for rich people (that's you and me). Others simply change the world.

A class of people this is great for? Lawyers.

Notes

[^1]: In the short term, this is probably good for Android users. As a Motorola Droid X owner, I've had to go to great lengths to remove Motorola's frankly terrible customizations of Android. It's easy to imagine that Google will nix all that and maybe even use the acquisition to push the entire industry into a less fragmented ecosystem.

[^2]: Their public statements are basically meaningless PR speak, which journalists seem to be interpreting according to their respective prejudices. I don't think there's any information you can really get out of them.