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"The whole idea of the Google-Motorola deal was to buy patents in order to sue others over them, hoping that this would bring about a stalemate -- a strategy that has been an utter failure. Compare this to Microsoft's focus on licensing patents in order to avoid litigation from being brought in the first place".
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Google – Motorola vs. Microsoft – Nokia: Utter Failure vs. Smart Acquisition? Explanations.
Thomas Dubuisson, LL.M, J.D., LL.B
http://www.d-is-freshinteresting.blogspot.com/[email protected] Follow me: @tdubuisson
I. The Parties
Google's innovative search technologies connect millions of people around the world with information every day. Founded in 1998 by Stanford Ph.D. students Larry Page and Sergey Brin, Google today is a top web property in all major global markets. Google's targeted advertising program provides businesses of all sizes with measurable results, while enhancing the overall web experience for users1.
Microsoft is an American multinational software corporation that develops, manufactures, licenses, and supports a wide range of products and services related to computing. The company was founded by Bill Gates and Paul Allen on April 4, 1975. Microsoft is the world's largest software maker measured by revenues2. At Microsoft, they're motivated and inspired every day by how our customers use their software to find creative solutions to business problems, develop breakthrough ideas, and stay connected to what's most important to them.
II. The Acquisitions
On August 12, 2011 Google Inc. (NASDAQ: GOOG) and Motorola Mobility Holdings, Inc. (NYSE: MMI) announced that they have entered into a definitive agreement under which Google will acquire Motorola Mobility for $40.00 per share in cash, or a total of about $12.5 billion3. It was the company’s biggest deal ever, far exceeding previous big buys like YouTube for $1.7 billion and DoubleClick for $3.1 billion.
Google clearly explains on its website why they decided to buy Motorola Mobility:
‘Google and Motorola Mobility together will accelerate innovation and choice in mobile computing. Consumers will get better phones at lower prices [for instance, the Moto X is coming very soon]. Motorola Mobility’s patent portfolio will help protect the Android ecosystem (emphasis added). Android, which is open-source software, is vital to competition in the mobile device space, ensuring hardware manufacturers, mobile phone carriers, applications developers and consumers all have choice. Motorola Mobility’s full commitment to the Android operating system means there is
1 http://investor.google.com/releases/2011/0815.html2 http://www.microsoft.com/about/companyinformation/en/us/default.aspx and http://en.wikipedia.org/wiki/Microsoft3 http://investor.google.com/releases/2011/0815.html
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a natural fit between our companies. Google is great at software; Motorola Mobility is great at devices. The combination of the two makes sense and will enable faster innovation. Motorola Mobility has a long history of innovation in communications technology and the development of intellectual property’4.
On September 3rd, 2013 Microsoft acquired “acquire substantially all of Nokia’s Devices and Services business, including the Mobile Phones and Smart Devices business units as well as an industry-leading design team, operations including all Nokia Devices & Services-related production facilities, Devices & Services-related sales and marketing activities, and related support functions”5.
Microsoft also explained why they decided to buy Nokia’s devices & services business:
‘Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s Devices & Services business, and EUR 1.65 billion to license Nokia’s patents, for a total transaction price of EUR 5.44 billion in cash. Microsoft will draw upon its overseas cash resources to fund the transaction. The transaction is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders, regulatory approvals and other closing conditions. Building on the partnership with Nokia announced in February 2011 and the increasing success of Nokia’s Lumia smartphones, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing. For Nokia, this transaction is expected to be significantly accretive to earnings, strengthen its financial position, and provide a solid basis for future investment in its continuing businesses’6.
As I already mentioned two times, Microsoft ‘only’ bought Nokia’s devices & services business; not the entire Nokia Company (I lately read some mistakes on the internet). Nokia still has two major and important businesses: networking and mapping. In fact, Nokia networking business, which includes equipment it sells to telecom operators to run their wireless networks, brings in the majority of the company’s annual revenue7. Nokia’s maps technology has a valuable global database of geographical information. It ‘provides GPS services to dashboard navigation systems in many car models. The unit, which generates around $1.3 billion in annual revenue, plans to sell GPS and entertainment services to companies that do not want to build them from scratch’8.
Microsoft’s rationale for buying these Nokia’s Devices & Services business was also explained in a PowerPoint presentation (what else!)9. In the intellectual property (IP) context, two
4 http://www.google.com/press/motorola/5 http://allthingsd.com/20130902/microsoft-explains-the-rationale-behind-the-nokia-deal/6 http://www.businessinsider.com/microsoft-buys-nokia-devices-2013-97 http://www.nytimes.com/2013/09/04/technology/shedding-handsets-nokia-looks-to-the-future.html8 Id.9 You can find the presentation (strategic rationale) at: http://www.docstoc.com/docs/160532498/StrategicRationale
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slides describe and detail why these intangible assets, more precisely patents, are important elements of the smart devices business:
III. The Comparison
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Although Google has admitted to focusing more on innovation than patent protection, let’s be honest, the only reason why Google bought Motorola was for the patent parts. It’s a non-negligible portfolio of 17,000 patents with many of which are directly applicable to mobile technologies10.
Microsoft just acquired over 8500 design patents but not Nokia's utility (technical) patents; in other words, a 25-year registered monopoly right which describes a new, original and ornamental design for a manufactured object, broadly half-way between a patent and a copyright. They are called registered designs in Europe and most parts of the world, but design patents in the US11. The Company also has been granted a ten-year license to use the Nokia brand on feature phones.
Besides the number of patents, what’s the difference then? Florian Mueller (FOSS Patents12) intellectual property expert describes the situation as follows: “the whole idea of the Google-Motorola deal was to buy patents in order to sue others over them, hoping that this would bring about a stalemate -- a strategy that has been an utter failure. Compare this to Microsoft's focus on licensing patents in order to avoid litigation from being brought in the first place”13.
As you know, the value of intellectual property rights is dependent on the possibility of enforcement. As explained by Mr. Mueller, there are two ways in which you can leverage out of a patent portfolio:
To obtain injunctions (the most important one) To seek monetary compensation
After almost three years of litigation, Google-Motorola has won zero enforceable injunctions against Microsoft and it just lost the only injunction it has been enforcing recently against Apple 14 . In other words, Google completely overpaid for Motorola's patents and, at this point, probably wasted a lot of money.
Another difference pointed in this article was that the "Googlorola" break-up fee was $2.5 billion, reflecting desperation as well as concerns over antitrust approval. By contrast, Microsoft's announcement said that
‘[t]he transaction is subject to potential purchase price adjustments, protecting both Nokia and Microsoft, and a USD 750 million termination fee payable by Microsoft to Nokia in the event that the transaction fails to receive necessary regulatory clearances’.
This is ‘a pretty standard level for such a fee, especially relative to deal size, while, compared to transaction value as well as in absolute terms, the Google-Motorola fee was extraordinarily high. There can be no doubt that today's deal is one of the most pro-
10 http://www.digitaltrends.com/mobile/is-googles-acquisition-of-motorola-working-out/11 http://www.bbc.co.uk/news/technology-2367338512 http://www.fosspatents.com/13 http://www.fosspatents.com/2013/09/microsoft-nokia-deal-results-in-cost.html14 Id.
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competitive M&A deals in the history of the information and communications technology industry: consumers, wireless carriers, app developers and other stakeholders don't want the smartphone business to become a duopoly’15.
IV. The Conclusion
Two years ago, before the deal with Motorola, Google Inc. owned hardly any patents. Today, with a portfolio of more than 17,000 patents, the situation is not really different. At this point, Google-Motorola has won zero enforceable injunctions against Microsoft and Apple. We never know what tomorrow brings, but that’s not really promising for the future.
On the contrary, before the deal, Microsoft already had an extremely strong patent portfolio. Now, with an addition of 8500 design patents, Microsoft just demonstrated that the Company is increasing its commitment to the mobile devices and services business; that it will make hardware along with the software16. Will Microsoft really have the most cost-effective patent arrangements for smart devices? Only time will tell whether they made the right decision.
15 http://www.fosspatents.com/2013/09/165-billion-euro-patent-licensing.html16 For some people, this transaction means that Windows is dead: “Windows Is Dead, Google Killed It”, available at: http://www.businessinsider.com/windows-is-dead-2013-9
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