By ditching Motorola, Google frees Android from distractions

Google paid more than $12 billion for Motorola Mobility and sold the handset business for less than $3 billion. It sounds like a crushing loss -- unless you're Google.

Google CEO Larry Page shakes hands with Lenovo CEO Yang Yuanqing on the $2.91 billion sale of Motorola Mobility. Google

Common wisdom tells you that unless we're talking about brand-new cars, selling something for just one-quarter of what you paid is a bad deal. It's even worse when the numbers are in the billions of dollars. But if we're talking about Motorola Mobility and Google, the "common" wisdom is wrong -- yet again.

In a surprise move Wednesday, Google unloaded Motorola Mobility's handset division and around 2,000 patents to Lenovo for what sounded like a fire sale price of $2.91 billion. Google had shelled out $12.5 billion, or about one-quarter of its 2012 annual revenue of $50 billion, to acquire Motorola in the first place.

While it's true that Google did spend a lot to get its hands on the extensive Motorola Mobility patent portfolio, it wasn't money for nothing. Those patents gave Google the breathing room to build the Android operating system into the dominant force that it is today. It had no choice but to spend the money to shore up the foundation of Android's profitability, because at the time, Google had a patent portfolio that could be charitably described as "anemic."

"We believe we'll be in a very good position to protect the Android ecosystem for all of our partners," David Drummond, Google's chief legal officer, said when Google announced the Motorola deal in 2011.

It wasn't easy, but Google would say that the bet has paid off, as it lightens its load in several ways and at a cost to the company of less than you'd think. In reality, Google has spent -- at the very least -- more than $3 billion to shove Android into the limelight. You may see that as change from under the couch cushions for Mountain View's biggest brains, but it's actually in the range of a quarter of 2013's profit for the company.

In his blog post announcing the Lenovo deal, Google Chief Executive Larry Page noted that its own acquisition of Motorola Mobility had served to "supercharge" Android by protecting the intellectual property needed to keep the operating system out of legal entanglements.

There's little doubt that Android going into 2014 is in far better shape than it was in August 2011, when Google announced its intent to buy Motorola. (The deal didn't actually close until May 2012 after a long period of regulatory review around the world.) As reluctant as Google may have been to get into the patent game, given its weak state at the time, large patent portfolios like the one that came with Motorola Mobility are rare, and Google was fortunate to have acquired them. Only a handful of companies had patent portfolios like Motorola's, which topped 17,000 patents and another 7,500 pending at the time that Google swooped in.

"The key is that Google does maintain patent protection for Android and is divesting itself of a sub-par asset that didn't jive with its core competencies," said Mark Mahaney, an analyst at RBC Capital Markets, in his analysis of the deal.

Following Google's purchase, Android's market share skyrocketed. While it held around 50 percent market share at the end of 2011, Android now makes up more than 80 percent of the smartphone market, thanks in large part to its partnership with Samsung and its Galaxy line.

That leads to an important benefit of ditching Motorola Mobility. Google can now stop angering its partners: Google without the Motorola handset business is a company that doesn't compete directly with other Android manufacturers.

Look no further than last weekend's patent deal between Google and Samsung and Samsung's announcement that it will back off Android customizations as evidence of how quickly Google will be able to resume full diplomatic relations with companies it had been competing against. It's hard to imagine those deals going through without Samsung's knowledge of the impending Motorola sale.

And as the New York Times' DealBook noted, Google sacrificed less cash overall than you'd expect. Motorola came with around $1 billion in tax credits and $3 billion in cash, and then Google sold the Motorola Home set-top box business to Arris for around $2.35 billion and a large minority stake in the company. Throw in the $2.91 billion that Lenovo forked over, and Google paid roughly $3.24 billion for Motorola Mobility.

That's still a lot, but it's not as shocking as a $9.5 billion loss. Besides, Motorola was never profitable for Google, suffering hundreds of millions of dollars in losses for every quarter that Google played around in the handset business.

Handing those losses to a manufacturer that wants to partner with Google and Android while leaving Motorola's intellectual property-protecting patents in Mountain View must have sounded like a dream come true to Google's bean-counters and geniuses alike. And it's not as if Google is handing a barely breathing Motorola to Lenovo. Under Google, Motorola had its first two smartphone hits in years, the Moto X and the Moto G.

A side benefit of the deal is that Google gets to keep the advanced research and development arm of Motorola. Led by former DARPA head Regina Dugan, the research team has investigated future tech such as authentication powered by electronic tattoos and microchip pills. A Google representative told CNET that Dugan and her team will work under the aegis of Android.

And finally, by selling off Motorola, Google's leadership is demonstrating to investors that it doesn't have to turn a short-term profit on every purchase before sending it off. While the Motorola sale is almost assuredly going to come up in Google's earnings call later today, investors and analysts probably will laud the move as a smart one.

Given Google's investment in the enterprise as well as diverse fields like Google Fiber and Google Glass, "we may start to see revenue growth acceleration, margin stabilization, or both, which could prove a material driver of stock price appreciation," said Mahaney.

So Lenovo is happy because it gets a big boost to its fledgling smartphone business in regions where it doesn't yet have a toehold. Samsung is happy because it feels like it can deal with Google more equitably. But by far, Google is the happiest, coming out of the Motorola deal with a beefed-up Android, investor credibility, and proof that it can play the patent long game.

 

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