Google's Motorola Acquisition: the Anniversary Assessment

by Mark W. Hibben
5/4/13

A Mobile Phone Business for Free

May 22 will mark the one year anniversary of Google's purchase of Motorola Mobility for $12.5 billion in cash. Already we're beginning to hear rumbles in the business/tech media that Google paid too much for Motorola. In this article I'll discuss Motorola's value to Google, its continuing problems and the path forward.

At the time the acquisition was announced, this observation was offered by analysts at Frost & Sullivan and quoted in the Economist:

“Using one of the industry's recent patent auctions as a baseline, in December of 2010, Novell sold off its portfolio of 882 patents for $450 Million. A simple division calculation leads us to a value of $510,204.08 per patent. Why not round that figure off you ask? Well, let's look at the patent value of the Motorola acquisition.
Forgetting that Motorola also makes mobile phones, let's say the entire value of the acquisition was in their 24,500 patents and applications. At a $12.5 billion price tag, that equates to…drum roll please…$510,204.08 per patent. Can anyone guess what heuristic they used in the board room in valuing the deal?
In the Motorola acquisition, Google bought a patent portfolio and got a mobile phone business thrown in for free."

The mobile phone business for free? Well, not quite, given that the Motorola division has posted an operating loss every quarter since the acquisition was final. GAAP operating losses, which include restructuring charges for Motorola, totaled $1.38 billion through Q1. Less the amount Google received from the just completed sale of Motorola's Home division, Google has spent a total of $11.53 billion on Motorola.

Interestingly, Google provided in their 2012 10K an upper bound to their valuation of the Motorola IP in the form of patents and developed technology. As of 12/31/2012 Google gives the value of all intangible assets in the form of patents and developed technology as $5.987 billion vs. $0.753 billion for 12/31/2011. If all the difference were attributable to the Motorola acquisition, which is unlikely, then Google values Motorola's IP at $5.234 billion, far short of the purchase price.

Recent legal setbacks in defending some of Motorola's patents also call into question the value of the portfolio. Florian Mueller has documented the status of recent Google patent battles on his blog. Of the eleven legal proceedings he describes, seven were major defeats for Google or Motorola. The most important defeat, delivered on April 19, was a push back on a royalty demand of $4 billion per year from Microsoft (Nasdaq: MSFT), which would have had Microsoft paying the entire purchase price for Motorola in a few years. In question were Motorola patents pertaining to HD video and WiFi. The court reduced the annual royalty to just $1.8 million per year. The unanimous consensus is that this was a big win for Microsoft.

Even if we assume that Google correctly valued the Motorola IP at $5.23 billion, that implies the valuation of the company at $6.3 billion. Is Motorola worth that? It seems doubtful, given that Motorola is still losing money, and most of the restructuring Google has done has amounted to closing Motorola manufacturing facilities and outsourcing production. Presumably there's still some R&D, engineering, marketing, and supply chain management functionality that's carrying the ball forward for the Motorola brand which has some value, but I think the answer is that yes, Google overpaid for Motorola. Google investors should be concerned about this, since it speaks to the judgment and maturity of Larry Page and his management team.

Motorola's Path Forward

But not overly concerned. More pressing is what Google intends to do with Motorola going forward. I've heard various interesting theories, including that Google intends to use Motorola as a club to beat unruly Android partners, such as Samsung, into line. In Q1 2013 Samsung shipped 70.7 million smart phones, according to IDC, for a total revenue in its mobile device division of $28.9 billion. We don't know how many smart phones Motorola shipped last quarter, but with total revenues of just $1.02 billion, Motorola hardly seems adequate to the task of threatening Samsung.

In fact, Samsung is probably the main reason Motorola isn't doing better. While Samsung pushes the Android world forward with 4 and 8 core mobile processors and massive 1080p screens, Motorola seems stuck with last year's products: dual core processors and 720p screens. Motorola's product offerings are at best commodity level in a crowded commodity market, and the lack of new exciting products almost a year after the acquisition says that they really didn't have anything that was new or exciting in their product pipeline when Google took over.

Does it make sense to continue Motorola as a subsidized commodity Android phone maker? I doubt that Google's Android manufacturing partners think so. Google needs to salvage the valuable parts of Motorola and quickly jettison the rest. Motorola had R&D and engineering expertise that could be put to work on more advanced projects within Google. Perhaps some manufacturing expertise could be retained for limited run boutique items that mainstream Android manufacturers wouldn't be interested in, but I don't think cranking out more Droid Razrs is worthwhile.

I question whether the brand name itself is worth saving. It has an archaic quality that harkens to a bygone era of vacuum tube electronics. It doesn't really fit in with the digital age.

Q2 Earnings Report Prospects

With an entire year having elapsed, hopefully Google will drop the excuses for the continuing Motorola losses, or preferably, not have any more losses. A year of restructuring should be enough. If Motorola is to continue as a hardware brand, I would also look for new product announcements that actually lift Motorola above its Android brethren. Most importantly, Google needs to articulate a clear strategy for Motorola, rather than comforting platitudes about synergy between hardware and software.

If Google management don't deliver the above at a bare minimum, then investors should question Google's ability to make effective use of Motorola and call for shutting down Motorola and simply assimilating its remaining assets and personnel.

In fact, I consider this the most likely outcome, following a couple more quarters of Motorola muddling through with continuing losses and unremarkable products. Shutting down Motorola is likely to occur by Q4. This will dampen investor enthusiasm for Google in the short run and induce a pull back in share price. Since Google's advertising business continues to grow on the strength of burgeoning mobile ecosystems, I expect any pull back to be temporary. Motorola will not have been a disaster, merely a missed opportunity.