This is an extract from a report by Arete Research, a Telco 2.0TM partner specalising in investment analysis. The views in this article are not intended to constitute investment advice from Telco 2.0TM or STL Partners. We are reprinting Arete’s analysis to give our customers some additional insight into how some investors see the Telecoms market.
|This report can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service using the links below.
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A New IPR Cold War Begins
When we [Arete Research] published Software IPR: Into the Trenches (Nov. ’10), we emphasized how legal battles around software patents applied to handsets could radically alter a decade-old stable IPR landscape of a few wireless giants (Nokia, Ericsson, Qualcomm). Since then 1) a consortium of Apple, RIM, Ericsson, Sony, Microsoft and EMC paid a staggering $4.5bn for 6,000 Nortel patents, 2) an ITC judge ruled in Apple’s favour in its case against HTC on patents that we thought were too broad to be defended, and 3) after renewed interest in monetising Motorola’s patents, Google bid $12.5bn for Motorola ($9bn net of cash), further escalating the legal spat between three rival gangs: Apple, Google/Android and MSFT/Nokia.
In this note we lay out implications for the mobile device space and try to clarify some misunderstood issues around Google/Motorola, Nortel, and Nokia. We see this as the start of a long Cold War, where all parties are heavily armed, and risk destroying each other (and themselves) with overly aggressive legal actions.
Can Go-Mo Really Go, or Generate Mo?
Google’s acquisition is firstly a tacit admission, in our view, that the project to rescue Motorola Devices failed: despite extensive restructuring and its Android efforts, Motorola Devices could not make money due to a poor track record in execution and reaching scale. In 2Q11 it sold 4.4m Android devices vs. 11m+ for HTC and 18m+ from Samsung. Google has little experience bringing devices to market (see the NexusOne), and cannot change MMI’s cost structure while it runs on an “arm’s-length basis.” It is not clear what returns MMI is expected to deliver.
Contrary to the deal-related rhetoric, we do not think Google wants Motorola to increase its scope at the expense of other Android partners. Instead, we think Motorola will be used to pioneer new concepts like a Google+ phone (like HTC did with Salsa/Cha Cha Facebook models).
Google’s aim for Android is the widest possible search and advertising penetration; this will not be realised if Google aggressively competes with other Android OEMs: Samsung, HTC and Huawei all told us directly they do not expect Motorola to receive preferential treatment. We see little prospect of improvements in Motorola’s low market share or lack of profit. Google needs to avoid any perception of favouritism to prevent Samsung from further efforts in Bada, or HTC to toy around with MeeGo or focus design innovation on WinPhone. Any new Motorola design cycle with closer Google input would only come in 2013, assuming the deal closes in early ’12.
Motorola’s IPR portfolio is clearly the bulk of the $9bn implied enterprise value: 15,000 wireless patents, another ~6,200 pending, and 3,000 granted or pending patents in Home. Google had the chance to assess both Nortel and MMI’s portfolios and how widely they were licensed. Now Google will own essential IPR – currently being asserted against Microsoft and Apple in multiple jurisdictions – to support all Android vendors, a point made to us in the last day by HTC, Samsung and Huawei.
How might this work in practice, and why did Google need to own a handset OEM, and not just IPR to support Android? This IPR would allow Google to directly negotiate cross-license deals with vendors like Apple on behalf of Android OEMs. It could offer them pass-through rights (PTRs) to Motorola’s IPR for Android devices (but not for WinPhone, Bada, etc.). Qualcomm similarly offers PTRs to vendors that use its chipsets; and MSFT justifies the licensing cost of WP7 as an insurance against IP infringement claims. This could even be a precursor to an Android patent pool – making a NATO-like alliance – in which all licensees share patents for mutual benefit.
Depending on Google’s policies, Android licensees could also save costs from not paying royalties to Motorola; Google cannot charge royalties for Android itself and also claim it is “free,” but may more strictly oblige vendors to use Google services, which it only does on “Google Experience” devices. Since vendors like Nokia and Ericsson license IPR only at the device level, Google has to be an OEM to negotiate directly with them, Apple and Microsoft. Some will argue against OEMs using Google’s “passed-through” IPR in cross-licensing, but Google can also assert Motorola’s non-wireless patents not covered by FRAND, notably in video. There is a lot of legal hard work ahead for Google, but at least it shored up its own weak patent position, and we believe Google has given assurances, if not outright indemnities, to Android vendors to support them.
There are other benefits for Google to realise: Motorola has large NOLs, largely on-shore cash, and Google will get a large video infrastructure installed base with $4bn of Home sales to bootstrap a weak Google TV business. It should help integration of Android tablets and smartphones in the living room. Motorola must show its separation was not done with a sale in mind for its shareholders to avoid tax liabilities (though in our initiation note, Motorola Mobility: Finally Moving Out [Jan. ’11], we said MMI would need a partner, seeing Huawei as a logical choice). Yet the principal benefit is to bolster Google’s own weak IPR position, not by buying a weak portfolio such as IDCC (see InterDigital: Tulip Mania?, Aug. ’11).
To read the Briefing in full, including in addition to the above analysis of:
- Apple: Realpolitik
- Making sense of Nortel
- Nokia: tied up in alliances
- Microsoft: no need to buy
- RIM: not an IP superpower
- Diplomacy or Total War?
- New rules of engagement
- The cost of war is always high
…Members of the Telco 2.0TM Executive Briefing Subscription Service can download the full 7 page report in PDF format here. Non-Members, please see here for how to subscribe. Please email firstname.lastname@example.org or call +44 (0) 207 247 5003 for further details.