Thursday, October 20, 2011

Maybe it was all about the patents after all

There was a short article today in the Wall Street Journal that touches on Google's use of Android to compete with both Apple (in terms of Music and Media and a new pricing structure) and Facebook (better integration with Google+) with their latest Android phone offering improvements through their new Ice Cream Sandwich software.

What I thought was interesting was near the end of the article, where Andy Rubin, Google's chief of mobile technology, reiterates that Motorola would continue to be run as a separate entity, and they would not give special treatment to Motorola phones over Samsung or others. So it looks like this acquisition was all about the patents after all, while giving Google an in house R&D facility with Motorola to test out their products without unveiling and leaking what is in their pipeline.

1 comment:

  1. The popular argument in the blogosphere that patents were NOT the only real reason to buy motorla mostly depend on an inaccurate understand of the nature of vertical integration...

    We learned in Corporate Strategy earlier this semester that the popular motive for VI is thought to be some variant of changing the power structure of an industry (i.e. buying hardware to ensure software compatibility, buying manufacturing to raise barriers for entrants or prevent suppliers from backward integrating, etc...). These plans don't often pan out, and neither do the supposed synergies, mostly because high costs of acquiring and managing parts of the value chain that are less profitable, and the burdens of corporate overhead on already difficult business models.

    To put it more plainly: Experienced managers don't rush into vertical integration just because its a no brainer, and with the number acquisitions Google does every year, there's no reason to think they are unexperienced.

    The only knockout reason that contemporary companies vertically integrate is to move downstream, closer to the customer, so that they can better design products and services based on user preferences and behavior. The MMI acquisition is a move UPstream!

    There is the possibility that Google is trying to integrate R&D to drive more differentiation, but this theory loses steam when you read all of the articles insisting that MMI will remain separately managed, MMI won't get any special treatment, and when you realize how overmatched Libertyville, IL is compared to user-centered innovation capabilities in Silicon Valley (AAPL) and the firm-centered (i.e. manufacturing/process) innovation capabilities of East Asia (HTC, Samsung, et al...)

    So what is the motivator? There can be no doubt that is is the patent. Setting aside the fact that the 12.5B pricetag happens to be 750k per patent, it's obvious looking at the timing and the negotiations process that this is what Google was looking for...

    MMI was first approached by the wireless division at GOOG right after the Nortel deal had closed, putting lots of patents into the hands of Google's direct competitors (AAPL among them). This is at the same time that Samsung and Apple were filing suits all over the globe, each claiming that the other had violated their patents.

    The problem was that without their patents, MMI would not be able to compete as a stand-alone company, which is why the scope of the negotiations broadened, and ended with the acquisition of the entire division from Motorola.

    The full story of the transaction is well described here, and is based on regulatory filings:


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