On the surface the Google HTC acquisition sounds absolutely absurd when you remember they just sold their Motorola investment to Lenovo for a whopping 9 billion dollar loss in 2014.
Google HTC Context
To put this purchase into context we need to examine some background information first. On August 15, 2011 Google announced they agreed to acquire Motorola Mobility. Motorola was a strong supporter of Android and built great phones, but the underlying need for the deal was their patent portfolio.
As stated by Google at the time:
We recently explained how companies including Microsoft and Apple are banding together in anti-competitive patent attacks on Android. The U.S. Department of Justice had to intervene in the results of one recent patent auction to “protect competition and innovation in the open source software community” and it is currently looking into the results of the Nortel auction. Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.
Microsoft was openly extorting companies developing and selling Android products on the premise they were confident there was something in the Android code which violated one or more of their patents. If these companies would just sign a licensing agreement the risk of arguing this issue in court would go away. How successful was this practice? How about 2 billion dollars annually in 2014.
On another front, Oracle was suing Google for using the Java API they acquired with their purchase of Sun Microsystems in 2010. Some may remember the days when Sun was king of the data center with their hardware and software portfolio which contained Sun (Unix) OS and the Java development platform. Long story short, Sun’s demise came at the hands of Linux and Oracle purchased what was left with the intent of monetizing the use of the API. In the case of Oracle vs Google, Oracle would agree to overlook Google’s use of the API if Google paid them 8.8 billion dollars and agree to their licensing terms. After six years of deliberations a jury ruled in Google’s favor on May 26, 2016.
In these troubled waters Google struggled with the Motorola acquisition as they were concerned some manufactures like Samsung might abandon Android in favor of an in-house solution like Tizen. Hence the decision to keep the patents and sell everything else to Lenovo.
The sale wasn’t all bad for Google as illustrated by the following quote by Forbes columnist Jean Baptiste Su.
On the face of it, that’s more than $9.5 billion for a collection of patents that has not proven to be very effective, especially against Apple, Microsoft or even Nokia.
However, on the bright side, when Google acquired Motorola it also inherited a cash pile of $3.2 billion, as well as $2.4 billion in deferred tax assets, for a net acquisition cost of $6.9 billion.
Google then sold Motorola’s set-top box business to Arris Group ($2.3 billion) and its factories to Flextronics ($75 million), further reducing the total acquisition cost to $3.85 billion.
Net-net, after the Lenovo deal closes, Google spent less than a billion dollars for patents that it originally estimated was worth $5.5 billion, plus some valuable insights in running a large hardware company (mass layoffs, razor thin margins, ultra competitive market…) – and the realization that its not what they want to be doing in the long run.
Admittedly, Motorola also ran up close to $2 billion in operating losses, but that still leaves Google with a $3 billion profit!
Moving to the present the patent wars have subsided and Google’s largest competitors Apple and Microsoft have adopted a holistic approach of designing and building hardware to support their software and services. To be honest, this has been Apple’s approach all along but a change for Microsoft. Google has been slowly testing this approach over time with the introduction of the Nexus and now Pixel product lines.
How do you get back into the game quickly? Internalize the resources you are already using and that is what the HTC deal is all about.
So what is Google getting for its 1.1 billion dollar purchase?
- 19 years of HTC experience in building cell phones and other consumer related products
- About half of HTC’s 4000 member design and engineering team
- Non-exclusive license for HTC intellectual property
The last item is key. Google doesn’t want a court fight with HTC in the future over some issue as it is inevitable institutional knowledge will come with the HTC employees. How good is the team? Remember the the HTC One? How about the current Pixel?
Missing from this list is a transfer of ownership of any part of HTC’s manufacturing facilities. Perhaps manufacturing of future Google products will come back to HTC or some other manufacturer such as Foxconn, LG, or Lenovo.
More than a crazy idea, history will show the HTC acquisition was a really smart move and will give new meaning to the phrase “Mady by Google”.