Patent Missile Crisis
The mobile battleground has become increasingly patent oriented. In just the past year, Apple, Microsoft, RIM and others made a collective purchase of 6,000 of Nortel’s patents for $4.5 billion. Notably, Google was outbid in that auction. Also continuing to make news lately is the Lodsys debacle, in which both Apple and Google are fighting off the attacks of another patent troll. The most recent illustration is Google’s $12.5 billion purchase of Motorola Mobility, a 63 percent premium on that company’s closing stock price that week. This acquisition appears, at least in part, to be a strategy for gaining the latter’s considerable catalog 17,000 patents and 7,500 pending patent applications.
Since that announcement last month, there has been a lot of speculation (perhaps because most analysts were caught off guard) as to Google’s motives behind this significant move. After all, Google is not a manufacturer of cell phones; and they have traditionally, until very recently, shied away from building a patent arsenal.
Most analysts agree that Google felt it could no longer play a Switzerland-esque role in the patent war over mobile technology. In fact, by Google’s own admission this deal is about equipping itself for battle on behalf of its Android mobile operating system and to defend itself from what its legal chief, David Drummond, called “a hostile, organized campaign against Android by Microsoft, Oracle, Apple, and other companies, waged through bogus patents.”
As further evidence of Google’s strategic shift, earlier this year they purchased 1,023 patents from IBM, which more than doubled the number of U.S. patents assigned to Google. A review of those patents suggests that they were carefully chosen from among IBM’s tens of thousands of patents in order to be most effective in a patent fight against the other technology giants, particularly Apple.
So what about the patents it acquired from Motorola? A few analysts, like David Martin, the founder and chairman of patent consulting firm M-Cam, state that Google got only Motorola’s “crap patents.” “It’s an immense mistake,” Martin says in an interview on Bloomberg. “So you have this very interesting strategy where Google thought through the present,” Martin continues, “but didn’t actually do its homework on the patents.”
However, I think most people will agree, given Google’s success, that there are a few smart folks working in Mountain View and that they likely did do their homework. “In this increasingly patent-focused environment, it is vital that a technology-based company effectively manage its patent portfolio and track those of its competitors. Patent searching and analysis is a powerful and cost effective method for identifying technological strengths and weaknesses and market opportunities,” says Mark O’Donnell, Vice President of Operations and Director of IP Research and Analytics at IP.com.
Obviously, the point of getting Motorola Mobility’s vast portfolio of 17,000 patents and 7,500 pending patent applications was very much a deterrent strategy about quantity over quality, with the recognition that somewhere in those 17,000 patents was probably something that another company infringed upon. Not altogether different from the cold war build up of the nuclear arsenals of the U.S. AND U.S.S.R. It’s mutually assured destruction (MAD), with patents!
In actuality, Google’s purchase was a relative bargain. Breaking it down, they paid approximately $350,000 for each of Motorola Mobility’s 24,500 patents and pending patent applications. That is much less per patent than the consortium of Apple, Microsoft, et. al. did for Nortel’s patents, which worked out to be approximately $750,000 per patent.
Moreover, there are additional strategic aspects of this deal. It would be naïve of us to think that this deal was all about the patents. First, Motorola also manufactures set-top boxes and DVRs. and Google has its sights on everything that connects to the Internet (e.g. Google TV). Second, it prevents a possible licensing deal between Motorola and Microsoft. Recent SEC filings by Motorola indicated that Motorola Mobility’s CEO Sanjay Jha expressed some openness of exploring Windows Phone 7 during the Google negotiations. Third, Motorola was potentially looking at suing other Android manufacturers for patent infringement. On the same day Jha expressed openness to Windows Phone 7, he also talked of the possibility of collecting royalties from other Android makers. By acquiring Motorola Mobility, Google can prevent these issues from arising while also obtaining a fair amount of patents along the way.
What really turns this deal from good to great are the tax benefits to Google relating to the money Motorola Mobility has lost over the years, according to Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility’s U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.
Finally, one of the most intriguing speculations regarding this deal was made by Tim Worstall for Forbes, who theorized that Google intentionally underbid for the Nortel patents because they were always really interested in Motorola Mobility. Worstall theorizes that by bidding for the Nortel pieces, Google was able to push up the price of Nortel’s patents to its competitors. Then while everyone else had made their moves and committed their cash, Google went off and bought what it wanted all along, including the accumulated losses on future tax bills. Worstall bolsters his assertion by indicating that quite a few people weren’t all that sure that Google was being serious in its Nortel bids, bidding Pi ($3.142 billion) at one point in the negotiations. He further points out that because Nortel was a Canadian company, there were no attractive tax losses that a US-based company could use.
What is clear through these acquisitions is that Google has ended its previous unilateral patent disarmament policy and decided to build a patent portfolio of its own. The number of new patents that Google is receiving each year is increasing at an exponential rate. This rapidly increasing number of native Google patents, combined with the large number of relevant technology patents that Google is acquiring from other companies, together provide a formidable arsenal for Google in this modern era of litigiousness among the technology giants.