Why Google is selling Motorola to Lenovo: Patents

Flip a coin.

In selling Motorola Mobility to Lenovo for US$2.9 billion, Google either just made the most expensive acquisition-related mistake in its history, or the most savvy behind-the-scenes deal in the industry’s history. Don’t be fooled into believing both are correct.

First, the bloodbath persective. Google bought the unit for $12.5 billion in 2011. At the time, it was seen as a direct, if expensive, route to hardware self sufficiency, a way to quickly vertically integrate its mobile offerings, and take on Apple device for device.

Reining in Android

By 2011, Google’s Android ecosystem was well on its way to dominating the mobile industry. But the company wanted to reduce brand-killing fragmentation and more tightly control mobile users’ access to its burgeoning web services empire. Becoming a hardware player would give Google the ability to set the bar high for its Open Handset Alliance partners with reference devices that illustrated the best Android user experience.

Nice in theory, but the numbers tell a different story.

Google took a $9.6 billion bath on the deal, and that doesn’t even take into account the nearly $2 billion Motorola managed to bleed since the deal initially closed. The sting was eased somewhat by the 2012 sale of Motorola’s Home set-top box division to Arris Group Inc. for $2.35 billion, but it was no secret that Motorola was sick when Google bought it, and the patient only got worse after the ink had dried. Even drastic job cuts – Google slashed over 80 per cent of Motorola’s 20,000 staff – couldn’t stanch the bleeding.

It was all about the patents

The second perspective, the one revolving around intellectual property, more closely reflects what Google had in mind from the beginning.

Google may indeed be losing a bundle, but it isn’t going home empty-handed. The sale to Lenovo lets Google retain approximately 15,000 of the 17,000 patents it acquired when it bought Motorola Mobility. Motorola, the company, was never the target in the first place, otherwise Google wouldn’t have followed a seemingly schizophrenic product roadmap that saw it hand development of its flagship Nexus smartphones to HTC, LG, and Samsung, and tablets to Asus, instead of its in-house Motorola baby.

Alongside last week’s announcement of a 10-year patent cross-licensing agreement with Samsung, it’s clear the Motorola-Lenovo sale is part of a larger agenda. By seizing the technology licensing high ground, Google now has a degree of freedom to out-innovate its competitors, who will increasingly have to pay licensing fees to the now IP-dominant Google.

Cutting its losses

Motorola Mobility, despite its legacy as a storied American brand, had become a perennially money-losing dog and, with losses of $248 million in the last quarter compared to $192 million in the year-ago quarter, the bloodbath was only getting worse. Intensifying competition would have forced further losses thanks to Motorola’s inability to truly innovate or leapfrog a market it once owned.

Lenovo, which successfully used its 2004 purchase of IBM’s Personal Computer unit to become the world’s leading PC maker, now has a clear shot to repeat the feat in the handheld space. After a failed bid for BlackBerry last autumn, Lenovo is in a better position to fix what Google could not – and in doing so become another strong contributor to Google’s Android ecosystem. Last week’s purchase of IBM’s low-end server division gives Lenovo another anchor as it bolsters its mobile and back-end offerings to hedge against eroding PC sales.

It may be easy to fault Google for losing a boatload on a botched acquisition, but as the dust settles on its hardware experiment, the patent-rich company is in a stronger position than ever to control the mobile market from the place it knows best. Forget the coin toss: Google planned this all along.