Google-Motorola Deal: Implications for Apple, RIM, Microsoft

Google Inc. has agreed to buy Motorola Mobility Holdings Inc. for $12.5 billion or $40 a share in cash, valuing each essential patent at about $20 million, to defend its Android ecosystem.

RBC Capital Markets said the deal value of $12.5 billion equates to 0.7 times trailing twelve months (TTM) of equity value-to-sales. In RBC Capital's view, rising intellectual property (IP) threats to Android (and its original equipment manufacturers) from Microsoft Corp. and Apple Inc. were the major driver of the acquisition.

"Google gets Motorola Mobility's portfolio (17,000 patents), and while this deal may not necessarily mitigate some of the intellectual property (IP) wars under way (e.g. Apple and Motorola already suing each other), it may position Google to defend itself against more fundamental IP attacks, and increase counter-threat and leverage in global patent negotiations and litigation," said Mike Abramsky, an analyst at RBC Capital Markets.

Implications for Apple

Apple's smartphone patents relate to multi-touch, object-oriented operating systems, and user interface -- so this may not necessarily mitigate some of the IP Wars currently underway (Apple was suing Motorola Mobility for patent infringement -- and vice-versa -- already so this unlikely to change).

However, Google's acquisition of more fundamental wireless patents may avoid deeper threats from Apple, Microsoft and also offer Google/Motorola Mobility leverage in cross-patent licensing negotiations, Abramsky said.

Abramsky said Google may in time need to assert some fundamental patent and/or trade lawsuits against Apple and Microsoft using the Motorola Mobility portfolio in order to rectify the balance.

In the longer term, this combination could offer more competition to Apple in Smartphones, depending if Google can leverage Motorola Mobility and the control over hardware/software together to further new innovations, Abramsky said.

Abramsky said Google/Motorola Mobility may reduce Android fragmentation and improve software/hardware integration, so Google/Motorola Mobility may become a better competitor to Apple at the high end of the market.

However product, market and organizational integration between Google/Motorola Mobility may be disruptive in the near term, and may offer Apple some interim competitive advantages, especially with iPhone 5 and iOS 6 due out in the Fall.

From a developer perspective, this may throw some Android developers a curve ball as they try to figure out how this all sorts out for them (regarding original equipment manufacturers versus Android/Motorola Mobility, platform roadmap, etc) and they may even focus efforts around iOS in the meantime.

Apple may de-emphasize some Google services on iPhone given Google is now a direct hardware competitor. The proposed acquisition may give a boost to Google TV, as Motorola also makes set top boxes, and Google TV could become integrated into those devices.

Implications for RIM

Abramsky said the proposed acquisition at 0.7 times TTM of equity value-to-sales equates to $14.4 billion equity value for Research In Motion (RIM) or $33 per share or 34 percent premium.

From an industry consolidation perspective this may make RIM more interesting, but from Google's perspective, Motorola Mobility using Android made it a better fit (they may have already talked to the BlackBerry maker) plus of course Google wanted the Motorola Mobility patent portfolio.

Abramsky said RIM's focus on its own OS, its proprietary message-centric hardware, enterprise focus, its mobile data sync-oriented patent portfolio, and its recent struggles may have made it a less favorable takeout versus Motorola Mobility.

However, for some possible acquirers including HP, IBM and Android original equipment manufacturers (OEM) like Samsung, RIM could be viewed more attractive in light of pending industry consolidation.

Abramsky said the deal highlights and perhaps elevates the value of RIM's patent portfolio. In a takeout, it suggests RIM's patents could be worth 2-3 times his prior estimated value ($2-$3 billion), perhaps $4-$6 billion.

However, Google would be paying top dollar for Motorola Mobility's patents, and its unclear if other buyers would be equally motivated.

According to the United States Patent and Trademark Office, RIM has just over 2,300 U.S. patents (excluding international), smaller than Motorola Mobility, but more important for Smartphones (covers mobile data sync - email and other data).

Also, RIM is not being sued by Apple, who may see RIM's patents as valuable, and some of Motorola Mobility's portfolio may already be widely licensed on FRAND, i.e. licensed to the industry on a fair and reasonable basis as required by standard-setting organizations.

In addition, RIM and Motorola settled all patent lawsuits in 2010 and agreed on cross-licensing agreements (2G, 3G, 4G, 802.11 and wireless email).

Mixed implications under competitive landscape -- positively, this deal highlights the value of an integrated software/hardware platform (like RIM has) for competitive advantage, Abramsky said.

However, this may put additional pressure on the success of RIM's pending QNX Super phones strategy, if Google/Motorola Mobility is able to leverage tight hardware/software integration to increase innovation.

If Microsoft were to formally acquire Nokia Corporation in response, the resulting consolidation would further limit the future candidates for 3rd platform (after Apple and Android), Abramsky said.

However, the Google/Motorola Mobility takeover may give RIM an advantage (if QNX is successful) over Android OEMs (Samsung, HTC) who may be left to seek their own software solution.

Implications for Microsoft

Abramsky said the proposed deal shows that Microsoft and Apple have to-date had some success pressing their IP attacks on Android.

While Google/Motorola Mobility deal was appropriately positioned by Google as strengthening and protecting their mobile strategy, in Abramsky's perspective Apple/Microsoft also forced Google to disrupt its OEM model for Android, creating potential channel conflict with its OEMs, and become directly involved in the hardware business.

While the proposed deal may not be positive for Microsoft, IP strategy (licensing Andriod OEMs and developing a revenue stream), it may force OEMs to adopt Microsoft WP7 (Windows Phone 7, Microsoft's Mobile OS) alongside or even as an Android alternative.

Abramsky said the proposed deal may raise the possibility of Nokia being bought by Microsoft -- however Microsoft now de facto oversees Nokia's software and internally Microsoft typically shuns acquisitions (Skype the exception) if it can achieve its goals via partnership, also Microsoft likely wouldn't want to disrupt the current OEM relationships it has, like Google has done.

Abramsky said possible Google/Motorola Mobility integration challenges (similar to what Nokia/Microsoft went through) could offer some competitive distraction, helping Microsoft in the near-term.

Abramsky said Microsoft would now be the only leading non-Android OEM software vendor (versus Apple, RIM, Google) that does not own hardware, which -- if this becomes the standard for user experience -- could present a challenge (he doesn't consider MeeGo, backed by Intel, or WebOS/HP as yet mainstream, although they too could get an OEM boost from this deal).

As well, Google is likely to press its ad-supported-business model into Smartphones further, which may be disruptive to Microsoft.