Motorola Mobility: Has there been an impairment of goodwill in Google's acquisition of its patent portfolio?

When companies face a decline in the value of a certain asset, they may find it necessary to write down the goodwill value of that asset to reflect such impairment. One need look no further than such august companies as News Corp. and Tata Steel. Thus News Corp., in what was described as a "goodwill impair charge", recently announced a write-down in the value of its Australian and US publishing assets in the amount of $1.4 billion, here. As for Tata Steel, it announced in mid-May that it was taking a write-down of $1.6 billion largely in connection with the commercial challenges in connection with its takeover six years ago of Corus, a British steel maker, here. Technically, since goodwill is the excess paid for an asset over its book value, it can be argued that the write down of the goodwill is a mere bookkeeping technicality since it is in effect a non-cash loss. Perhaps. But such write downs by high visibility companies attract media attention.

I thought of the issue of goodwill write-downs in reading a report about the most recent decision of the U.S. International Trade Commission (ITC) regarding the patent wars between Google and Microsoft, here. In particular, the ITC ruled that Microsoft's Xbox device did not infringe a patent belonging to the Google subsidiary, Motorola Mobility. Initially, Google alleged infringement by Microsoft of five Motorola Mobility patents. Four of these patent claims were dropped (including two patents that were deemed essential to a standard and which Google choose not to continue to assert against Microsoft), leaving the one patent at issue in the current ITC decision.

Readers will likely remember that, to great media fanfare, Google acquired the Microsoft Mobility patents in an amount described in excess of $12 billion,here. Later reports lowered the amount attributed to the patents. As reported on c/net on July 25, 2012, here, "[t]he search giant yesterday filed a document with the Securities and Exchange Commission (SEC) outlining how it valued its $12.4 billion (not $12.5 billion it originally reported) acquisition of Motorola Mobility. Google says that $2.9 billion of the purchase price accounted for Motorola's cash, while $730 million went to customer relationships and $670 million to other net assets.The largest percentage of Motorola's value, according to Google, was the $5.5 billion in "patents and developed technology." The remaining $2.6 billion went to goodwill, or the company's value above and beyond its assets."

Either way, this is an extraordinary amount to pay for a patent portfolio. How was Google intending to benefit from this acquisition? Did the amounts paid represent, in whole or in part, a good-faith estimate of an income stream that Google hoped to generate from receipt of payment of patent royalties? (This rationale has been mentioned as the basis for the initial and ultimately widely over-optimistic valuation placed on the Kodak patent portfolio at the end of 2011).  Or was the portfolio intended to provide Google with a ready arsenal of patents that it could threaten to use, or actually rely upon to extract a favourable cross-licensing arrangement (in that wonderful phrase taken from the Cold War, "mutually assured destruction"), should it be sued by a competitor? Or was the portfolio, or at least select patents within it, intended to provide offensive legal firepower, ideally serving as the basis for obtaining a court-ordered ban against sales of product by competitors?

It appears, at least until now, that the third alternative has become front and central in the exploitation of the Motorola Mobility patent portfolio. If so, then I wonder what happens to the valuation of the patent portfolio, or at least those patents that form the basis for an infringement suit, when a court or administrative agency rules that no infringement has taken place. By analogy to the write-down of the goodwill of other corporate assets, does there come a time when a company acquiring a patent portfolio has to write down the goodwill value thereof? In particular, what is a company to do when it acquires a patent portfolio, on the basis of which the company then sues upon and expends significant sums in the maintenance of the law suit, ultimately to be rebuffed by the courts? Has there been a material impairment of goodwill that should be recognized (to extent that the accounting principles of the jurisdiction recognize goodwill in a patent in such circumstances)?

Any readers who might have insights into how a company should properly value a patent portfolio, especially following an acquisition, and whether such valuation is subject to change based on the fate of the exploitation of the patents, are invited to share their insights.

Google buys up Modu's Patents

Modu was a small Israeli telecommunications company which attempted an IPO on the Tel Aviv stock exchange (see report here) but collapsed a few days later when the IPO failed, apparently USD 130 million (according to the report here). The 2008 investment round placed a valuation of USD 150 million on the company.

Modu made tiny little handsets which were no bigger than a credit card. Not much use either without a keyboard, but they were designed to be fitted out with jackets to add the functionality. Well it appears that the lack of a keyboard was their downfall since the company went out of business.

And their biggest asset left? Well apparently the patent portfolio, as Google came in at the last minute to pick up around 100 patents for a price of USD 4.9 Million. Quite a price for a bunch of patents - but probably only the cost of one saved litigation if the patents ended up in the wrong hands. I've no idea how many litigations Google have pending related to their Android-based telephones. It's probably into the tens and it would not surprise me if the fees were beginning to have an impact on the bottom line of the company. Google has never been a particularly aggressive company in asserting its patent rights and so these IP rights will probably end up in a dusty box somewhere in a lawyer's office (or since it's Google out in the big wide cloud) until the opportunity comes to defend itself.

 

 

 

 

Technorati Tags: Telecommunications, Google, Modu, Patent Sale

Latest on the Nortel bidding war

The deadline for submitting bids for the Nortel patent portfolio is clearly drawing near and "informed" leaks are appearing. Presumably intentionally to drive up the price. The latest leak is reported on the fierce wireless website and lists Apple, Google as well as the Chinese companies Huawei and ZTE as potential bidders. Nothing surprising there. The Nortel portfolio includes a number of gems which any company operating in the wireless space would love to have - if only to act as a bargaining chip in licensing and negotiating deals. Neither Apple nor Google have an extensive telecoms patent portfolio and so they would love to build the portfolio. Huawei and ZTE are starting to build massive portfolios, apparently subsidized by the Chinese government. Indeed Huawei is now one of the bigger PCT patent filers and ZTE claims to hold 10% of the essential LTE related patents. However, whilst they have many pending patents, their granted portfolio is much smaller.

Intriguingly two consortia including patent licensing firms are also in the running. One consortium apparently consists of Intellectual Ventures and InterDigital. IV is known for its accumulation of patents, whilst InterDigital possesses several patents that are relevant to mobile telecommunications standards (but has also lost some court disputes). The other consortium includes RPX - a patent aggregator that acts on behalf of several major companies to take patents "out of the market". RPX is currently planning its IPO as reported here and here. Will it be using some of the proceeds to purchase the Nortel portfolio.

These two consortia could clearly push the price of the portfolio up tremendously. Neither has much interest in cross-licensing since they do not actually make any products as such. RPX is aiming to buy up problematic patents to support their membership base (as explained here). No doubt having a ripe bag of telecoms patents will "encourage" a few more companies to sign up and help the IPO on its way. IV has until recently not been known for enforcement of its patent rights, whereas InterDigital has been active. So it will be interesting to see how that works out if they win the pot of gold. Both companies will have an interest in "monetarising" their new assets.

The sheer sums of money here are just mind-boggling. The size of the mobile telecommunications market is clearly massive, but it is also going to take a major investment for any company to justify the figures that are being talked about. It will not be unnoticed that none of the established players such as Nokia, Ericsson or Alcatel figure among the potential acquirers. They all have substantial portfolios of relevant patents - but then Nokia is known to be a backer of RPX and Ericsson purchased the LTE assets of Nortel some months ago and presumably got a license to the relevant IP thrown in with the deal. So they don't need the rights. Has this all been factored in? The IAM blog was sceptical about whether the bond purchasers who have pushed up the value of the Nortel bonds really understood the process.

Let's hope nobody has to see his car because of his Nortel patent portoflio.

Technorati Tags:
Nortel, Telecommunications

Nortel's Patent Assets

We've reported from time to time on the planned sale of Nortel's patent assets which have attracted the interest of a number of companies, particular the portfolio related to the sale of the assets related to the forthcoming LTE (long term evolution) and SAE standards. Reports indicate that Nortel may have seven patents of the 105 declared relevant patent families.

An exclusive report in Reuters indicates that the sale should be completed in the next few weeks. Front runners include both Apple and Google who are probably looking to build up their telecommunications-related patent assets as a bargaining chip to gain access to patent essential to the operation of mobile telecommunications. InterDigital is apparently also interested, whilst Reuters could not elicit a comment from Canadian telecommunications company RIM which had apparently previously a view that the patents were a national asset to Canada.

The value of the patents to newcomers in the telecommunications field, such as Apple and Google, is clear. Apple will be budgeting for licensing fees for access to essential patents to be able to implement telecommunications standards. Any patents they obtain can then be thrown into the pot to reduce the payments. Google are presumably currently relying on HTC for the IP rights - but would no doubt welcome access to a larger telecommunications portfolio in the mid-term to reduce any payments for cross-licence agreements to which they might need to sign up. No doubt a number of patent trolls or NPEs will sniffing around to see whether the portfolio has sufficient value to be able to make a return on the investment, as Joff Wilde has reported here.

Reuter's reports that Nortel's 4000 patents have been split up into different packages covering different technologies, including wireless handset and infrastructure, as well as optical networks, Internet advertising and computers. Given the need for interoperability in the telecoms field and Nortel's possession of seven highly relevant patents, it seems that these seven patents may be highly valuable. However, purchasers may be disappointed if the patents are ever litigated, as there may be potential prior art not considered by the patent office which could severely damage the value of the patents as both IP.COM and InterDigital have had to learn over the years. Both have had to live with patent rights that have been limited after a court action.

Technorati Tags:
Patent Sale, Standards, Telecommunications, Nortel

Software Patents: Are They the Real Threat to the Smart-Phone Industrry?

It is seldom that I focus on a Letter to the Editor. But I cannot resist the letter from Joshua Bloch, who is identified as Chief Java architect at Google, which was published in the November 6 issue of The Economist. The background to Mr Bloch's letter was an article that appeared in the October 23 issue of the same magazine. Entitled "The Great Patent War: Smart-Phone Lawsuits", here, the article discussed the various strands of the increasing reliance on patent litigation by the various actors in the smart-phone industry. So first a word about the article.

The article pointed to the change of the composition of patent litigants in this space, changing from patent trolls and patent owners from other industries (e.g., Kodak) to the handset manufacturers and developers of software for the smart-phone industry (e.g., Microsoft, Nokia, Apple and HTC). If all the various patentees with a possible claim with respect to the smart-phone industry check in with a lawsuit, we could reach the situation described by sometimes IP- skeptic professor Josh Lerner of the Harvard Business School, whereby '[i]f 50 people [each] want 2% of a device's value, we have a problem."

Not for the first time, Google's position would appear to be idiosyncratic, because its business model focuses on making its Android software available to manfaucturers for free, and then garnering revenues through advertising activities by users of the smart-phones. As such, Google may be a less appropriate object for suit because, in the words of the article, Google "will be hard to pin down. Google does not earn any money with Android, which makes it difficult to calculate any potential damage awards and patent royalties" -- although, as also noted, Oracle has filed suit against Google regarding the use of Java by the Android system (for more on this lawsuit, see here and here .)

My immediate interest is not to comment on the article itself, but to focus on the letter from Mr. Bloch, who wrote as follows:

"Your article on the patent wars in the smart-phone market left out one key player: the consumer ("The great patent battle", October 23). The flourishing competition among mobile platforms, devices and applications directly benefits consumers. In contrast, exploiting vague software patents to try and block open-source innovation neither helps consumers nor promotes the development of new technologies.

Innovation and competition, not ligitation, are the keys to providing the new generation of products and services that is changing the lives of billions of people around the globe."

So what do we make of these comments? Let me suggest the following:

1. Mr. Bloch's comments refer only to software patents. I am bit puzzled about this.
If Google's interest is promoting "innovation and competition [that] are the keys to providing a new generation of products and services" on behalf of consumers, should not his concern be with the applicability of the patent system generally in the context of a product and eco-system such as the smart-phone industry? After all, to recall Prof. Lerner's concern, it does not matter what party of the smart-phone device--hardware or software--is subject to the "50 times 2%" nightmare. Lockup is lockup, and 100% is 100%, whatever the source.

2. Indeed, judged by his silence, Bloch's implication seems to be that that patents are okay, and may even contribute to innovation, unless they are being employed against open-source (read Android) software. After all, doesn't Google also own patents in various areas? As long as the patent owners are suing the makers of smart-phone manufacturers and, presumably, developers of proprietary operating software for smart-phones, such as Microsoft, innovation and competition are fine. It is only when "vague software patents" are brought to bear against the open-source community that there is reason for concern.

3. We understand why Google is better off if no one person controls the smart-phone operating system in the manner in which Microsoft controlled the operating system for the PC world. With no single person able to control the operating system, the source of profts in the smart-phone industry can be enjoyed by others, including Google, it as the leading purveyor of online advertisements.

4. There is nothing wrong with Google, or any other person, earning profits in the smart-phone space. What is a bit troubling, however, is the attempt is to couch one's business model within an appeal to consumer welfare, competition and innovation. After all, even if we solve Google's problem and free its operating software from the threat of software patents, we still have the proverbial 50 other patentees, each still seeking to obtain its 2% interest in the device. If Google really wants to contribute to consumer welfare, competition and innovation in this industry, it should offer a solution for that problem.

AP-Yahoo Deal: A New Beginning or More of the Same?

An end-of-year discussion in the December 19th-January 1st issue of The Economist ("Newspapers and Technology") contained a useful summary of the challenges facing the newspaper business. First the good news from the summary (at least from 39,000 feet) : "The internet may kill newspapers; but is not clear if that matters. For society, what matters is that people should have access to news, not that it should be delivered through any particular medium; and, for the consumer, the faster it travels, the better."

Now for the less good news (from ground level): "The trouble is that nobody knows how to make money in the new environment. That raises questions about how much news will be gathered."

Staying at ground level, there was an interesting announcement on Monday, February 1st, regarding an agreement that had been reached by Associated Press and Yahoo regarding the licensing terms by which Yahoo will pay AP for the right to continue to post AP contents on the Yahoo site.The terms of the arrangement were not revealed. AP has yet to reach a parallel licensing agreement with either Microsoft or Google,and it appears that Google has for the moment suspended posting new AP contents on its site, pending the conclusion of a renewed licensing arrangement with AP.

First a word about AP itself. In its own words:

"AP operates as a not-for-profit cooperative with more than 4,000 employees working in more than 240 worldwide bureaus. AP is owned by its 1,500 U.S. daily newspaper members. They elect a board of directors that directs the cooperative. AP supplies a steady stream of news around the clock to its domestic members, international subscribers and commercial customers. It has the industry's most sophisticated digital photo network, a 24-hour continuously updated online news service, a state-of-the-art television news service and one of the largest radio networks in the United States. It also has a commercial digital photo archive, a photo library housing more than 10 million images."

The most useful summary of the new AP-Yahoo deal that I found is the news report ("Yahoo Keep AP in its Contents Corner with New Deal) provided on February 1st by AP itself. The following points made are worth mentioning:

The Background-- Yahoo, rather than Google or Microsoft, has the largest Internet audience for news (as opposed to social networking or Internet search). AP has providing contents for Yahoo since 1998. That said, AP is the not the sole source of news contents for Yahoo, which also makes use of contents from Reuters as well as from Yahoo's own news staff. Nevertheless, in the words of the AP report, "[t]he formula has worked well for Yahoo...."

The Challenge-- The problem for AP is that a material portion of its revenues has come from the print media and broadcasting. AP has yet to find the financial structure that can compensate for the loss of revenue from these traditional sources of income in an age of the migration of news to various on-line platforms. Hence, the importance of reaching financially satisfactory licensing arrangements with the leading on-line platforms for the distribution of AP-generated contents (in the words of the report, finding ways to "pump..." internet companies for more money"). That said, Yahoo is less financially robust than either Google or Microsoft.

The (Partial) Solution--While the details of the license were not made available, the report did mention the following:

1. In addition to receiving increased revenues, AP wants "greater cooperation" to ensure that its contents are not being used in an unauthorized manner. In this connection, it is reported that AP is working on a tracking system to determine where its contents are being read. Yahoo, for its part, "has pledged to enforce "the strictest standards" to protect AP's contents."

2. AP is contemplating a multi-tiered arrangement (at least in the future) whereby stories containing exclusive contents might charged more than news items, the contents of which are available from other sources as well. Nevertheless, the word is that the agreement reached with Yahoo does not include such a tier-pricing arrangement.

3. Separately, Yahoo has reached agreement with U.S. newspapers that own AP in an arrangement to sell more advertising.

And Then There is Google --The AP report ends with an interesting juxtaposition. On the one hand, the report quotes a statement from Yahoo that the company "... has always recognized the value and importance of original, authoritative news. We are pleased Yahoo and AP will continue that valued relationship."

On the other hand, the report concludes with the following comments about Google: (i) "[M]any publishers believe Google has profited unfairly from their newspapers by drawing upon snippets of their stories to draw traffic ... so it can sell more of its ads ..."; (ii) AP and Google quarrelled for several years about the way that Google summarized AP news items; and (iii) Google believes that it in fact drives traffic to newspaper sites. Reaching agreement with Yahoo is one thing, reaching an arrangement with Google may be quite another.

Final Word-- This is just the beginning for AP, as it fights a declining print media and a challenging online environment as well as sorting its relationship to Google, while Yahoo (with some help from Microsoft) itself seeks to carve out a role for itself in a (still) Google-dominated world. I expect that there will be further posts on this blog that will follow these developments.

So Who Are Apple and Google Really Competing Against ?

Let's be honest: there is nothing better than an epic hi-tech battle. If Gog and Magog were the warriors of choice in Biblical days past and future, then their equivalents today are Google, Microsoft and Apple. In particular, with the recent departure of Google CEO Eric Schmidt from the Apple board of directors in early August, all eyes are focused on the alleged structural conflict between these two hi-tech titans. Even if Apple and Google are notionally allied in common struggle against Microsoft, they will find themselves in direct conflict over supremacy in the high tech world. Or so it is claimed.

One view of this struggle was discussed in an August 17, 2009 article written by Peter Burrows for Business Week and entitled "Apple and Google: Another Step Apart". The focus of the article were the recurrent two-way hi tech struggles, first between Microsoft and IBM (control of the PC), then between Microsoft, on the one side, and Netscape and Sun, on the other (control of access to the internet) and, more recently, between Apple and Google (control of the multiplicity of connectivity devices and platforms).

There is something a bit artificial about the typology--where are Intel and HP, for example? Nevertheless, there is merit in considering what the article describes as the "cultural opposites" -- Apple ("closed, customer-oriented, quality-focused") versus Google ("open, cloud-oriented, quality-focused"). As stated in the article:

"Google is the chief advocate for a wide-open world of Web standards, in which programmers should be able to run just about any software on virtually any computing device ... [including] dozens of Android-based handsets [are you listening, Apple iPhone?]."

On the contrary, we have Apple, with an emphasis on

"applications ... designed to work only on Apple devices. The company's ultimate goal is create an alternative, more exclusive universe, where consumers gladly play by Apple's rules as they use its stylish, easy-to-use products."

From the point of view of innovation, which view is better placed to prevail? Per Professor Henry Chesbrough of University of California-Berkeley, if history is any guide, Google has the upper hand. According to the article, Apple lost out to Microsoft (perhaps more exactly, Wintel, being Microsoft Windows plus Intel chips) in the 1980s because Apple sought to maintain a closed hardware-software ecosystem while Microsoft relied on a legion of independent software developers and PC manufacturers.

Find the Closed System

Based on this community development model and using history as a guide, Apple would seem to be poised to suffer another long-term defeat. After all, the Android system is all about encouraging a community of developers and device manufacturers to base their developments around the open connectivity operating system, while cloud farms, be they of Google or others, will allow users to store and retrieve gobs of data off-site in a far-away cloud.

I am not totally convinced about this conclusion (although, to be fair, the article does conclude that "for now, at least, there's plenty of growing room for both"). Underpinning the analysis is the larger phenomenon whereby hi tech companies are seeking to integrate and consolidate, where software and hardware are increasingly being brought under one corporate roof (such as Oracle seeking to buy Sun). With respect to Apple and Google, however, this one-stop shop view does not quite ring true.

Apple may find its iPhone threatened by Android-based devices but, at the end of the day, if Apple is to succeed a decade hence, it will have to develop another world-beating device. It is just as likely that the Android threat will not be relevant to the success or failure by Apple of this new device, whatever it is. Google is still about leveraging "search", while Apple is still about the next great device and the software to support it. The ultimate struggle for both is not the existential threat posed by each of them for the other, but the ability of each to build on its strengths and to innovate successfully for another generation.

Something tells me that, no matter how attractive it might be journalistically speaking, to view the enfolding competitive challenges of Apple and Google as an updated two-way struggle redolent of the IBM-Microsoft (or Microsoft-Apple) struggles 25 years ago, the reality is fundamentally different. Success for Google and/or Apple will not be about vanquishing the other, but continuing to innovate in a way that makes sense for each particular company. History is not prescriptive but, at best, instructive. This observation applies equally to the hi tech world.

Hi Tech Consolidation?

Android Takes Form as the H1 Handheld Device is Launched

Nearly a year after the announcement of the Open Handset Alliance, a consortium brought together by Google to advance open source standards for mobile devices, and, in particular, the adoption of the Android software platform, the first mobile handset using the platform has been launched by T-Mobile. Named the "G1" and made by HTC, a prominent Taiwanese manufacturer, the H1 product puts into motion Google's bold attempt to reform the mobile handset market.



Android then ....

The Open Handset Alliance is a consortium of over 30 hardware, software and telecon companies devoted to promoting the open source platform for media devices. The initiative took dead aim at the reliance of proprietary software programs that heretofore controlled the platform for handsets.

The launch of the G1 has been likened to the launch of the Apple iPhone, but the business interests of Apple and Google appear to be quite different. Apple has remade itself into a premier gadget company (I don't go anywhere without loading up at least 10 podcasts on my iPod). As such, Apple will be challenged to continue to come up with new products to maintain its position in the hi-tech marketplace.

Google, by contrast, receives no direct benefit from the sale of the mobile gadgets using the Android program. The common wisdom has been that Google's interest in the Android project is to increase the use of hand-held devices. And why? For the simple reason that Google apparently views the long-term potential for generating ad revenues and the like through the use of Google services on mobile devices to be greater than that of the PC market. If so, for a start, presumably it is Google's hope that other manufacturers and other cell phone operators will join the Android bandwagon.



Android now ...

Some criticism has been leveled at the extent to which the Android platform is truly open. In particular, complaints have been heard that the so-called Software Development Kit for Android applications is not fully open and in fact allows Google some control over the platform. Another criticism heard is that there are certain limitations and restrictions with respect to the use of the Java standard. For someone who last programmed in graduate school using BASIC (that was before Ronald Reagan was elected US President), I am not well-placed to opine on the validity of these claims. That said, they remind me of certain charges leveled against Microsoft regarding the development of applications for its operating software.

More interesting, perhaps, is the extent to which Google intends to enter the mobile handset market itself. There are reports that Google has files for several patents in the mobile telephony area. Further, as I recall, Google expressed an interest in obtaining several access or other rights to broadcasting bandwidth. If so, it will be interesting to see how the broad coalition of companies that have come together in the consortium to promote the open source platform will respond, in the event that Google is viewed as attempting to encroach head-on into their commercial turf.

One thing is for certain. We are viewing only the opening act of the Android saga.