Now that Google is dumping Motorola on Lenovo, we know for certain there was only ever one truth: It bought Motorola in a fit of pique and terror. In July of 2011, it had lost out on a trove of patents that belonged to Nortel, which went to a consortium led by Apple and Microsoft, for $4.5 billion. Google had bid aggressively for those patents, offering billions of its own. When it was defeated, it saw the writing on the wall: Its mobile OS Android, tied up in courtrooms for years to come. The solution? Spend $12.5 billion on Motorola Mobility, acquire the next best batch of mobile patents, and then talk yourself into a bunch of really bad ideas.
We can finally make GoogleTV a hit! Motorola owned a huge piece of the cable set-top box business when Google took it over. It seemed like a golden chance to get the failing GoogleTV interface into millions of homes, right? Wrong. And it surely wasn’t for lack of trying. Google had been working with TV manufacturers for years to get its fancy program guide built in, but integrating it with the cable box never worked especially well. Finally, the problem would be solved. Clearly, the cable guys had a different idea and Google, focused on the more important mobile side of Motorola, dumped the set-top division on Arris in 2012 for $2.35 billion.
It’s never a good idea to compete with your OEMs. From the get go, this transaction had made everyone in the Android world uneasy. When you’re upsetting HTC, a money-losing small player (who does make nice products), perhaps that’s not an important risk. When you’re angering Samsung, which supplies about one-third of the world’s smartphones, it’s a big problem. Rumors have abounded over and again that Samsung would “fork Android,” that is go it alone with a “Samdroid” variant, separate from the main version. Because the core of Android is technically open-source software, this is possible to do. (Amazon’s Kindle has its own Android, which is different from the official Google version).
Had this happened, it would have been bad for everyone, almost certainly including Samsung. But for Google, it would have been a disaster. Apps would have to be created for both Samdroid and Android and rejoining the platforms would be reunifying the Koreas: possibly but unlikely in our lifetimes. Google’s Larry Page always said the right words about not favoring Motorola over other Android partners and Dennis Woodside, who ran the Motorola division, made it clear they weren’t getting special treatment. But the unease was there.
Of course, if you’re buying something, you should treat it right. The lack of special treatment then ended up becoming its own kind of stupidity. The flagship Moto X phone launched without the latest version of Android software, thus being unable to show off Google at its best. Motorola employees were sort of second-class citizens in the Google universe. They didn’t technically work for Google, but instead for “Motorola, a Google company.” And they kept getting laid off. First, it was 4,000, or 20% of the staff in 2012. Then it was another 1,200 (10%), in March of last year. If anything was signally more clearly, “We bought you for your patents, not your people,” the wholesale carnage was surely it.
Patents are not that valuable, by the way. The patent mania of 2011 was ridiculous and although litigation in mobile continues today, we’re perhaps nearing the end. Just days ago, Samsung and Google signed a broad patent-licensing deal that seemed to pave the way for today’s deal. Yes, Google is retaining the patents, which it valued at perhaps $5 billion in the purchase (technically, $5.5 billion was patents and “developed technology,” the latter of which likely wound up in some Motorola phones), but it hasn’t exactly made much from them. In one notable case, it sought $4 billion a year from Microsoft; a judge awarded it $1.8 million. In a sane world, Apple and Samsung will settle the last of their differences and we’ll never hear about these patents again.
The U.S. is not the center of the mobile universe. Motorola ostensibly was going to upend the smartphone industry and its expensive pricing, especially the $600+ category where Apple has generated tens of billions in iPhone profits. The problem with this theory was that outside the U.S. the company has no presence whatsoever and inside it, you can buy that iPhone either subsidized or in monthly installments that make the price easier to stomach. Beyond that, Motorola did nothing radical with Moto X pricing until the phone absolutely failed to catch on with consumers. Only then did it go on sale, for $350 without subsidies.
Motorola did launch a cheaper, $179 model, the Moto G, which relies on pre-4G technology and is an otherwise decent entry-level product. But its desirability here is questionable and in the rest of the world, sub $200 smartphones are not distruptive, they’re already commonplace. In fact, one reason Apple has struggled to expand sales in places like China and India is that it doesn’t offer anything that isn’t much more expensive. Woodside talked of basically wringing the profits out of smartphones but realistically in the low end that has already happened. While it’s possible there’s a reckoning coming on the high end that will squeeze the iPhone and Samsung Galaxy down some, it’s equally clear Motorola wasn’t going to be the one to do it. Especially not from the U.S. and with its low single-digit market share.
It’s good to be rich. In all, this folly didn’t cost Google much. Net out the sale of the set-top division and the $2.9 billion from Lenovo today and you are looking at about $7 billion. But that doesn’t quite tell the whole story. Motorola has posted more than $2 billion in losses through the end of 2013 (unless it miraculously swung to a profit last quarter after losing hundreds of million in every quarter since Google’s purchase). In addition, Google has incurred around a billion in amortization costs and about half that in restructuring charges from the layoffs and facilities closings.
Before the deal closes, those figures will balloon and its very likely the value of what’s left in terms of the patents will have to be written down. Fortunately, Google did get a bunch of cash in the original deal, close to $3 billion. Add in some tax credits it received and that should almost cover the losses and the writedowns. All in, this will have been costly and the $7 billion price tag looks be about right. Given the company has more than $60 billion to work with, it can afford these kind of misadventures now and again. But for a company that has gotten so many acquisitions right — Android, YouTube, Applied Semantics — this was clearly one that went terribly wrong.