It’s the patents. That was the near-unanimous response to Google’s acquisition of Motorola Mobility for $9bn (net of cash); Motorola’s patents will allow the search giant to build an intellectual property fortress around its Android operating system. But Google is buying something more: a cheap option on the future of mobile computing.
Google is willing to pay up for the IP to protect the profitability of the handset manufacturers that deploy Android. Last quarter, 47m Android smartphones were sold, according to Gartner data. Say the manufacturers were ultimately forced to pay just a $5 royalty per handset – HTC is reportedly already paying that much to Microsoft – to various patent holders. That would amount to $1bn of pure profit taken out of the Android market annually. Put a growth-company multiple of (say) 25 on those profits (Android unit sales rose more than 300 per cent last quarter) and the value of what is at stake is clear. A stronger patent portfolio would allow Google to reduce the royalty burden using cross-licensing agreements. That would protect its own slice of the profits, which it realises through its mobile advertising unit. Google says this unit has a revenue run rate of more than $1bn.
One should not, however, forget the potential value to Google of having a captive handset manufacturer (one that also makes television set-top boxes). As large as Google’s mobile ad business is, Apple’s integrated hardware/software business is still bigger and growing fast. Considering that Apple sold $13bn worth of iPhones last quarter, and that there is no faster-changing market than mobile computing, it makes sense for Google to broaden its exposure. No one knows whether the open Android or the integrated Apple model – or a combination of both – will have superior economics. Google now has a foot in both camps.