Friday, February 14, 2014
Video Summary: Why did Google Buy and Sell Motorola?
You're invited to read my two part blog posts below- remember to check out the pie chart (not included in video!).
Part II. Why did Google buy and sell Motorola?
In Part I, I introduced what happened in Google's acquisition and sale of Motorola Mobility and gave the basic reasons behind these two transactions.
Through simple subtraction, it appears that Google had taken a $9.5 billion hit from the price difference. However, breaking down the parts of the initial acquisition and changes that happened in the past two years leading up the sale tell a different story about how much Google had actually lost or, in fact, strategically gained.
Breaking down Google's acquisition cost of $12.5 billion, we see the actual cost of acquisition boils down to $1.5 billion assuming the following figures for Google's gains through the transaction, as illustrated in Figure 1, my back-of-the-envelop pie chart, below:
$3 billion from Motorola's cash on hand
$1 billion from Motorola's tax credits
$2.4 billion from the sale of Arris, Motorola's set-top business
$2.9 billion from the sale of Motorola Mobility this year
$1.7 billion as a minimum valuation of Motorola's patents in hindsight, although Google initially valued them at well over $5 billion in 2012
... which totals to $11 billion. Therefore, the cost of acquisition was essentially $12.5 - $11 = $1.5 billion. Whether this is a good deal could be too early to tell, but it's certainly a totally different number from $12.5 billion.
Figure 1.
If I assumed Google's optimistic $5.5 billion valuation of Motorola's patents, Google would actually be making a gain on the buy and sell.
Of course, I recognize that my numbers are prone to error, and that this summary of items through addition may not be the most accurate way to dissect the change in worth for Google and Motorola, but it provides fundamental insight into alternate sources of revenue that compensate for the high price Google paid two years ago.
Not to mention, Google reaps strategic benefits from the deal because it has locked up vital patents to defend its Android ecosystem.
To cap it off, Google took advantage of significant tax benefits, up to $1 billion immediately and $700 million tax deductions a year through savings from tax deductions for future profits and Motorola's net operating losses both domestically and abroad. I did not take this into account in the pie chart but I would comment that it has been a smart way to save on taxes.
I am curious to see Lenovo and Motorola's progress, especially given optimistic views grounded in Lenovo's successful past upon acquiring ThinkPad.
Through simple subtraction, it appears that Google had taken a $9.5 billion hit from the price difference. However, breaking down the parts of the initial acquisition and changes that happened in the past two years leading up the sale tell a different story about how much Google had actually lost or, in fact, strategically gained.
Breaking down Google's acquisition cost of $12.5 billion, we see the actual cost of acquisition boils down to $1.5 billion assuming the following figures for Google's gains through the transaction, as illustrated in Figure 1, my back-of-the-envelop pie chart, below:
$3 billion from Motorola's cash on hand
$1 billion from Motorola's tax credits
$2.4 billion from the sale of Arris, Motorola's set-top business
$2.9 billion from the sale of Motorola Mobility this year
$1.7 billion as a minimum valuation of Motorola's patents in hindsight, although Google initially valued them at well over $5 billion in 2012
... which totals to $11 billion. Therefore, the cost of acquisition was essentially $12.5 - $11 = $1.5 billion. Whether this is a good deal could be too early to tell, but it's certainly a totally different number from $12.5 billion.
Figure 1.
If I assumed Google's optimistic $5.5 billion valuation of Motorola's patents, Google would actually be making a gain on the buy and sell.
Of course, I recognize that my numbers are prone to error, and that this summary of items through addition may not be the most accurate way to dissect the change in worth for Google and Motorola, but it provides fundamental insight into alternate sources of revenue that compensate for the high price Google paid two years ago.
Not to mention, Google reaps strategic benefits from the deal because it has locked up vital patents to defend its Android ecosystem.
To cap it off, Google took advantage of significant tax benefits, up to $1 billion immediately and $700 million tax deductions a year through savings from tax deductions for future profits and Motorola's net operating losses both domestically and abroad. I did not take this into account in the pie chart but I would comment that it has been a smart way to save on taxes.
I am curious to see Lenovo and Motorola's progress, especially given optimistic views grounded in Lenovo's successful past upon acquiring ThinkPad.
Part I. Why did Google buy and sell Motorola?
In Part I, I'm going to outline what happened and the basic whys. In Part II, I will delve into more analysis on the strategic thought and financial reasoning for these transactions.
What
Google acquired Motorola Mobility for $12.5 billion in August 2012 and sold it to Lenovo for $2.91 billion in January 2014.
Why buy
From Google's fact page, the two main benefits were:
1. Faster innovation through the marriage between Google's software expertise and Motorola's device advantage to develop better phones at lower prices.
2. Possession of Motorola's patent portfolio to manage competition in the Android ecosystem.
Larry Page, Google's co-founder, called the move "supercharging the Android ecosystem" through the two means described above.
Why sell
Larry Page breaks it down like this: the smartphone market is super competitive. You gotta be all-in to be the leader in making mobile devices. Google is seeking new opportunities in the emerging wearable and home markets. So distinct are these market dynamics from the smartphone business that Google felt Motorola would be better served by Lenovo, the largest PC manufacturer in the world, in order to better serve smartphone users and to concentrate Google's efforts in their new focus on smart Android devices.
In hindsight, there are far more reasons at play...
By simply doing the math, Google appear to have lost $12.5 - $2.91 = a $9.5 billion loss. However, we need to look deeper to determine what value had been gained or lost beyond the dollars.
Check out my back-of-the-envelop bar chart and accompanying analysis in Part II (video included!) to see what Google had really lost and strategic benefits reaped from this recent transaction.
What
Google acquired Motorola Mobility for $12.5 billion in August 2012 and sold it to Lenovo for $2.91 billion in January 2014.
Why buy
From Google's fact page, the two main benefits were:
1. Faster innovation through the marriage between Google's software expertise and Motorola's device advantage to develop better phones at lower prices.
2. Possession of Motorola's patent portfolio to manage competition in the Android ecosystem.
Larry Page, Google's co-founder, called the move "supercharging the Android ecosystem" through the two means described above.
Why sell
Larry Page breaks it down like this: the smartphone market is super competitive. You gotta be all-in to be the leader in making mobile devices. Google is seeking new opportunities in the emerging wearable and home markets. So distinct are these market dynamics from the smartphone business that Google felt Motorola would be better served by Lenovo, the largest PC manufacturer in the world, in order to better serve smartphone users and to concentrate Google's efforts in their new focus on smart Android devices.
In hindsight, there are far more reasons at play...
By simply doing the math, Google appear to have lost $12.5 - $2.91 = a $9.5 billion loss. However, we need to look deeper to determine what value had been gained or lost beyond the dollars.
Check out my back-of-the-envelop bar chart and accompanying analysis in Part II (video included!) to see what Google had really lost and strategic benefits reaped from this recent transaction.
Monday, February 10, 2014
Friday, February 7, 2014
Cross-Licensing Explained
Earlier today, I typed "patent war" into Google Search News and I hereby present you the most recent news: HTC settles patent dispute with Nokia, signs cross-licensing agreement
As far as I gather, these two smartphone companies have agreed on some form of settlement called cross-licensing. In other words, giving HTC and Nokia's layers a rare vacation from the slew of patent law suits between them. The deal is as close to collaboration as it gets when two companies head-butt over intellectual property.
What is a cross-licensing agreement?
This legal agreement grants company A's the right to use company B's patents and vice versa. Essentially both companies win because they can perform R&D and sell new products without worrying about infringing each other's patents. This can a multi-lateral agreement between multiple companies.
Implications
This leads to a couple of implications. Company can forgo royalties mandated by standard patent licenses BUT gives up its right to collect royalties on its own patents too. So, companies now weigh the cost of a lawsuit in the absence of cross-licensing to the cost of giving up its royalty income. Usually cross-licensing is most valuable for large corporations because a smaller firm will not have enough products to license to the other firm as incentive.
What I found most interesting was how regulators view cross-licensing agreements to be a form of antitrust- think of it as several people teaming up to monopolize the markets and one up their rivals. When tech giants in the industry sign cross-licensing agreements, they agree not to sue each other but can continue to sue new competitors.
HTC, Apple, and Nokia
HTC has not only shaken hands with Nokia about its LTE patents as of today (February 7), but also made a similar cross-license with Apple to settle litigation between them. The details are pretty confidential to the average college observer like myself, but it would fascinating to study how cross-licensing as a strategy changes the inflows and outflows of cash within these participating smartphone giants.
As far as I gather, these two smartphone companies have agreed on some form of settlement called cross-licensing. In other words, giving HTC and Nokia's layers a rare vacation from the slew of patent law suits between them. The deal is as close to collaboration as it gets when two companies head-butt over intellectual property.
What is a cross-licensing agreement?
This legal agreement grants company A's the right to use company B's patents and vice versa. Essentially both companies win because they can perform R&D and sell new products without worrying about infringing each other's patents. This can a multi-lateral agreement between multiple companies.
Implications
This leads to a couple of implications. Company can forgo royalties mandated by standard patent licenses BUT gives up its right to collect royalties on its own patents too. So, companies now weigh the cost of a lawsuit in the absence of cross-licensing to the cost of giving up its royalty income. Usually cross-licensing is most valuable for large corporations because a smaller firm will not have enough products to license to the other firm as incentive.
What I found most interesting was how regulators view cross-licensing agreements to be a form of antitrust- think of it as several people teaming up to monopolize the markets and one up their rivals. When tech giants in the industry sign cross-licensing agreements, they agree not to sue each other but can continue to sue new competitors.
HTC, Apple, and Nokia
HTC has not only shaken hands with Nokia about its LTE patents as of today (February 7), but also made a similar cross-license with Apple to settle litigation between them. The details are pretty confidential to the average college observer like myself, but it would fascinating to study how cross-licensing as a strategy changes the inflows and outflows of cash within these participating smartphone giants.
Smartphones: Let the Law Suits Begin
Food for thought: Smartphone Patent Wars 2012. Looks like Apple is an active participant.
Source: PC Mag
Apple is the king when it comes to its patent portfolio in consumer electronics. Based on statistics in 2010, Apple was granted 566 U.S. patents, roughly five times less than the number granted to Hitachi, Canon, and Sony respectively. However, it is ranked number 1 according to the Institute of Electrical and Electronics Engineers' Patent Power scorecard. (Source: IEEE)
Brief History of Key Law Suits: (Source: cnet.com)
2008: EMG Technology vs Apple
2009: Nokia vs Apple
2010: Eastman Kodak vs Apple, Elan Microelectronics vs Apple, HTC vs Apple, Motorola vs Apple
2011-present: Samsung vs Apple
My question for you is: why are its patents so powerful and what does this imply in today's smartphone patent war? In other words, why does Apple so aggressively engage in litigation? Perhaps one reason is its high rate of acquisition of other companies, hence their patents included. But the patent race does not depend on acquisitions though. Patents incentivize innovation. Comment on what factors you think drive the smartphone patent races!
Apple is the king when it comes to its patent portfolio in consumer electronics. Based on statistics in 2010, Apple was granted 566 U.S. patents, roughly five times less than the number granted to Hitachi, Canon, and Sony respectively. However, it is ranked number 1 according to the Institute of Electrical and Electronics Engineers' Patent Power scorecard. (Source: IEEE)
Brief History of Key Law Suits: (Source: cnet.com)
2008: EMG Technology vs Apple
2009: Nokia vs Apple
2010: Eastman Kodak vs Apple, Elan Microelectronics vs Apple, HTC vs Apple, Motorola vs Apple
2011-present: Samsung vs Apple
My question for you is: why are its patents so powerful and what does this imply in today's smartphone patent war? In other words, why does Apple so aggressively engage in litigation? Perhaps one reason is its high rate of acquisition of other companies, hence their patents included. But the patent race does not depend on acquisitions though. Patents incentivize innovation. Comment on what factors you think drive the smartphone patent races!
IEOR 190G: Why this class?
With an academic background in business, applied economics and policy, I am indeed interested in the costs and benefits aspect of intellectual property. From my basic understanding of technology trends especially in China, innovation is a substantial barrier to developing economies' growth.
Last summer, I read tech company biographer Richard Brandt's book "One Click: Jeff Bezos and the Rise of Amazon." Besides learning about the e-commerce giant's amazing rise from the ground up, I was particularly fascinated by the patent battles the firm had fought against various competitors to maintain its competitive edge, for example, its "one click" button.
While the concept of a "one click" purchase is pretty "duh" obvious, no one's thought of it AND implemented it before! So Bezos, Amazon's CEO, laid claim to it as intellectual property and forced rival Barnes and Noble to settle when it sued B&N for copying them with the "two click" purchase option.
What constitutes a patent? Just how much money is at stake? And how do entrepreneurs and business developers spot the value of these patents before the transactions even occur in the future? These are the questions I hope to think about critically and - through class discussion, Prof Lavian's guidance, and this fun blog - eventually answer, though I am doubtful that a black and white answer will exist.
Anyway, I'm super looking forward to building my knowledge on the technical side of these technologies too and getting a better picture of the patent world through case studies. I'm sure my experience in 190G will be helpful for my future career in business.
About Me
Hi there! I'm Melissa Zhang and I'm a junior double majoring in Business Administration and Environmental Economics & Policy. I've always been interested in a wild variety of things and Berkeley didn't make it any easier to pick my major(s)!
I was born in the Mid-West in China and went to school in Hong Kong before coming to the Bay Area two years ago. I love the sunshine here and endless list of things to do in the outdoors! Let's talk if you're into bouldering, biking, skiing, mahjong, guitar, TechCrunch, or Sherlock. I also love planning for my next trip and meeting new people, and aim to visit 22 countries before I turn 22.
Currently, I'm part of the student organization that manages the Credit Union for Berkeley Students on campus. I'm also excited to be part of a campus marketing team for HTC, so definitely looking forward to starting our discussions on smartphone patent wars! In the future, I want to pursue a dynamic career in finance or business operations where no two days are the same.
I was born in the Mid-West in China and went to school in Hong Kong before coming to the Bay Area two years ago. I love the sunshine here and endless list of things to do in the outdoors! Let's talk if you're into bouldering, biking, skiing, mahjong, guitar, TechCrunch, or Sherlock. I also love planning for my next trip and meeting new people, and aim to visit 22 countries before I turn 22.
Currently, I'm part of the student organization that manages the Credit Union for Berkeley Students on campus. I'm also excited to be part of a campus marketing team for HTC, so definitely looking forward to starting our discussions on smartphone patent wars! In the future, I want to pursue a dynamic career in finance or business operations where no two days are the same.
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