Motorola Mobility buy not delivering for Google

Google Inc.’s $12.4 billion purchase last year of mobile-phone pioneer Motorola Mobility Holdings partly for its trove of more than 17,000 patents is showing signs it wasn’t much of a bargain.

A federal judge last week said Microsoft Corp. owes only pennies in royalties per sale of each Xbox video-gaming system and Windows operating system instead of the potential billions of dollars Google sought in a patent-infringement case. Four days earlier, the Google unit lost another patent case against Apple Inc.

Google, owner of the most-used search engine and the Android operating system for wireless devices, estimated in regulatory filings that $5.5 billion of the purchase price for Libertyville-based Motorola was for patents and developed technology. Chief Executive Officer Larry Page in August 2011 said Motorola’s patent portfolio would “help protect Android from anticompetitive threats from Microsoft, Apple and other companies.”

“It wasn’t an irrational decision at the time but they’ve gotten nothing but heartbreak for that money,” said Rodney Sweetland, a patent lawyer with Duane Morris in Washington who has watched the legal disputes over smartphones. “Should they have bought? Not at that price.”

While the acquisition may have deterred Apple and Microsoft from filing new patent lawsuits against it, Mountain View, Calif.-based Google hasn’t won a decisive legal case with a big payoff — such as a lucrative licensing deal. Motorola’s patents also opened up the company to increased antitrust scrutiny, leaving Google to face legal battles in Europe and the U.S. with patents that may not be as valuable as investors thought.

Since Google acquired Motorola Mobility in May 2012, most of the company’s efforts to limit sales of Microsoft’s products in Europe have been averted, a U.S. judge in Chicago threw out claims Apple and Motorola Mobility lodged against each other, and a U.S. trade panel rejected claims against Apple over wireless technology.

“They just keep striking out when they have all this ammunition allegedly behind them,” said Will Stofega, a program manager at Framingham, Massachusetts-based researcher IDC. “They don’t have any home runs to show for it.”

U.S. District Judge James Robart in Seattle on April 25 released his decision that Google’s Motorola unit isn’t entitled to royalties of 2.25 percent of retail sales it sought for Xbox and Windows, which Microsoft estimated would cost it $4 billion. Instead, Robart put the value of patents for video-decoding and wireless technology at a few cents per unit, equal to about $1.8 million, according to Microsoft.

Long-term Investment

On April 22, the U.S. International Trade Commission in Washington invalidated Motorola Mobility’s patent on a phone sensor in a case that could have limited Apple’s ability to ship Chinese-made iPhones into the U.S.

“We acquired Motorola to level the playing field in patent attacks against Android and draw on Motorola’s long history of innovation,” said Matt Kallman, Google’s spokesman, in an e- mail. “In just under a year they’ve accomplished a lot, with impressive velocity and execution. We’re excited about Motorola’s future.”

The greatest value to the patents so far is in what didn’t happen, Sweetland said. The patents didn’t fall into the hands of a Google rival, nor did Motorola Mobility become like Ericsson AB or Nokia Oyj, using litigation to try to recoup the billions they spent on wireless research.

Handset Help

When Google announced in August 2011 it was going to buy Motorola Mobility, it was being criticized by handset makers for not helping them fight off patent lawsuits over phones running on Android, the most popular operating system for mobile devices.

Google at the time had fewer than 1,000 of its own patents, most related to search. The company needed to bolster its negotiating position for a licensing deal that would protect all Android customers because in a typical patent dispute, competitors assess each other’s patent holdings, with net licensing fees going to the company with stronger patents.

“It definitely has taken a lot of pressure off Android,” said Colin Sebastian, an analyst with William Baird & Co. “There was the appearance of multiple storm clouds in the patent litigation for Android until they closed this acquisition.”

Apple, which contends that Android phones copied the look and features that made the iPhone so popular, brought cases against Motorola Mobility, HTC Corp. and Samsung Electronics Co. Microsoft, whose Windows operating system dominates on personal computers, likewise demanded royalties from companies that made products using Android.

Even as it fights in courts with Motorola Mobility, Microsoft has been landing patent agreements with manufacturers that use Android software, such as Samsung, HTC and ZTE Corp.

Portfolio Value

Given the results of the litigation, “the perceived value of the portfolio is clearly less” than what Google paid, said Erin-Michael Gill, managing director of MDB Capital Group LLC, a Santa Monica, Calif.-based investment bank that specializes in patent issues.

The Motorola Mobility unit generated $4.14 billion in revenue last year, about 8 percent of Google’s total sales, and had about $1.1 billion in losses, according to data compiled by Bloomberg.

Page is streamlining the unit to bolster efforts in the smartphone and tablet market. The Motorola Home set-top box division was sold for about $2.35 billion, and more than 5,200 jobs are being cut. Stofega said investors are looking for new devices or innovations to come out of Motorola Mobility, perhaps at the Google I/O 2013 meeting in San Francisco next month.

The $12.4 billion price Google paid reflected in part the market at the time, when smartphone companies were driving patent prices into unheard-of levels. Two months before, a group led by Cupertino, California-based Apple and Redmond, Washington-based Microsoft beat out Google to buy patents owned by Nortel Networks Corp., paying an unprecedented $4.5 billion.

Motorola Mobility, like Nortel, was involved in the earliest development of wireless technology. Motorola Inc.’s $3,995 DynaTac, the brick-sized first commercial wireless phone, was made famous in the 1980s by corporate raider Gordon Gekko in the movie “Wall Street.” In buying Motorola Mobility, Google’s thinking was that Apple and Microsoft would reach reasonable licensing deals with companies making Android phones.

“They’re clearly in the position of weakness,” Gill said. “With each of these setbacks, the risk of having to enter into a materially negative licensing agreement is only increasing.”