By John Gruber
Journey across Bhutan with Gray Langur. October 16-29, limited availability.
I’m fascinated by Dan Lyons’s take on Google acquisition of Motorola today, “Suck on It, AppleSoft — Google Pulls a Rope-a-Dope”:
Everyone was baffled when Google made those crazy bids for the Nortel patents last month. Remember? They bid things like the distance from the earth to the sun, the number pi, and some other wacky numbers from mathematics. Which led ultra Apple fanboy MG Siegler to crow that Google had got “pi in the face” and was “living in a dream world” and “look like huge asses in retrospect.”
Lyons has always been an ass, but when did he get so bitter? Siegler is one of the top writers on the Apple beat, period. Good sources, smart analysis, and he’s been right way way way more often than he’s been wrong. Calling him an “ultra fanboy” isn’t going to convince anyone who’s actually keeping score that Siegler is an irrational zealot, but it does make Lyons sound like there’s spittle frothing out of his own mouth. More than a little bit of projection, methinks.
And today it all makes sense. Google just sandbagged its rivals. The whole thing was a rope-a-dope maneuver. Google never cared about the Nortel patents. It just wanted to drive up the price so that AppleSoft (those happy new bedmates) would overpay. Today, with the Motorola deal, Google picks up nearly three times as many patents as AppleSoft got from Novell and Nortel.
And they paid… nearly three times as much.
I suppose Lyons’s take is possible — that Google’s bidding for the Nortel patents was just a bit of high-stakes poker. But no one with any knowledge of the bidding is reporting it that way. And Google did bid $4 billion.
Does anyone really believe this $12.5 billion acquisition just got thrown together in the last few weeks as a response to the AppleSoft patent grabs? Doesn’t it seem likely that Google and Motorola started talking long before the Nortel auction?
Actually, yes, some people, who did some actual reporting on the story, do think it was thrown together in five weeks — and that the negotiations thus didn’t start until after Google had lost the Nortel auction. I’m sure Dan Lyons has better sources than Om Malik, though.
As for those crazy bids in the Nortel auction — that was just a way to leave a little “fuck you” in the paperwork for Google’s pals in Redmond and Cupertino to look back upon. That move is pure Larry Page. This is a smart, hyper-competitive guy with a mean streak and a nasty sense of humor. Kara Swisher recently compared him to Bill Gates, and now I see why. Page is turning out to be a better CEO, and more fun to cover, than anyone could have imagined.
I’ll bet neither Steve Jobs nor Steve Ballmer can sleep at night, consumed with rage at those bids of pi or e or whatever-dickety billion dollars. Yeah, Google sure stuck it to Apple and Microsoft with those bids. What sense does this even make? Google made these uneven-number bids to assert how clever they are. That’s it. After bidding over $4 billion for something — anything — you just look childish when, only after losing the auction, you then claim you didn’t really want the thing anyway.
Another way to look at this story, then, is that maybe Google really did want those Nortel patents, and when they didn’t get them, they knew they were in a worse position than ever, patent-wise, with Android. And then Motorola started threatening — publicly, just this month — to wage patent warfare against other Android handset makers. And started talking about support for Windows Phone. We now know that while Motorola CEO Sanjay Jha and badass 11-percent-of-the-company shareholder Carl Icahn were making these threats to wage a patent civil war against other Android handset makers, they were actively negotiating with Google on a buyout. Does anyone, Lyons included, think it’s a coincidence that these stories — not based on speculation but on-the-record statements by the CEO and the company’s biggest shareholder — came out one week before this acquisition was announced?
Look at Google’s financial results. They reported $8.5 billion in net income this year, and $6.5 billion last year. That’s for all of Google. They’re offering $12.5 billion for Motorola. So Google just spent almost two years of its profits to buy a second-rate phone maker that itself is unprofitable,1 almost went bankrupt, and is arguably only the third-best maker of Android devices, behind HTC and Samsung.
Google Inc. agreed to pay Motorola Mobility Holdings Inc. $2.5 billion if it fails to close the purchase of the mobile-phone maker, said a person with knowledge of the situation, a fee more than six times the typical amount.
“A high reverse breakup fee shows the buyer’s confidence of getting the deal done,” said Donna Hitscherich, a senior lecturer in finance at Columbia Business School, who is also a former banker and lawyer. “People don’t do deals to get the breakup fee, they do them to get the deals done.”
Confidence is one possibility. Desperation is another.
All that said, it’s still curious why Google spent the full $12.5b on Motorola, instead of a smaller amount acquiring the rights to Moto’s patents — or the rights to litigate with those patents. (Or even something more like the Microsoft / Nokia deal, which involved patent cross-licensing and joint development by the two companies.) It’s easy to see why Google and Motorola joined forces to make the most out of Moto’s patents — but now they’ve got to explain how they’ll make the most out of what actually matters: Motorola’s products.
Why do Motorola’s products matter? Which one of their products is actually important in the market, and not just another me-too Android handset? The Xoom tablet? If every Motorola product was removed from every store in the world tonight, and replaced by the closest equivalent devices from HTC and Samsung, would the mobile landscape be significantly different tomorrow?
I think Motorola knew they had Google by the balls. Google needed Motorola’s patent library to defend Android as a whole, Motorola knew it, and they made Google pay and pay handsomely. I don’t think it’s curious at all why Google didn’t simply license Motorola’s patents. Motorola held out for a full acquisition at a premium far above the company’s actual value, and threatened to go after its sibling Android partners if Google didn’t acquiesce. Thus the public threats from Jha and Icahn. Thus the high price. Thus the lack of a simpler, cheaper licensing agreement. Thus the unusual $2.5 billion reverse breakup fee.
That’s not to say it wasn’t a bold, brash move, or even to say it wasn’t the right move for Google and for Android as a platform. But that’s all relative to the position Google was in — and that position was a weak one, and to pretend otherwise is to deny the obvious. And don’t forget that it leaves Google in a tenuous situation with the two leading Android handset makers, Samsung and HTC. I think Apple and Microsoft probably feel pretty good, competitively, about having forced Google into spending $12.5 billion for Motorola — a handset maker with rapidly declining sales, no recent profits, and misguided management.