Google’s Motorola gambit clouded by Apple
Unclear if patent arsenal is strong enough after Apple’s big court win
By Benjamin Pimentel, MarketWatch
SAN FRANCISCO (MarketWatch) — Apple Inc.’s victory over Samsung has turned the spotlight on Google Inc.’s decision to buy Motorola Mobility, which was widely seen as a major gamble by the Internet giant to boost its intellectual property defenses to its growing wireless business.
Following a major win by Apple (NASDAQ:AAPL) on Friday in a Northern California courtroom in its legal dispute with Samsung, there is now debate on whether the $12.5 billion acquisition announced last summer gave Google enough IP muscle in the face of an aggressive bid by Apple to defend its innovations. Read more about Apple's win over Samsung.
Apple Inc.’s triumph signals serious hurdles, if not a potential dead-end, for Google’s (NASDAQ:GOOG) aggressive bid to defend dominant position in the mobility market with its Android operating system, analysts say. Shares of Google were trading down 1.3% to $670.33 on Monday afternoon.
Google is expected to strike back, using the patent arsenal it acquired by buying Motorola Mobility, a longtime player in the mobile market, to mount a counter-offensive and perhaps strike a patent peace with Apple. But some questions remain as to how relevant those patents might be in the current war over smartphone platforms.
“I think the wild card here is whether Motorola’s patents somehow pre-date Apple’s early wireless development,” Silicon Valley patent attorney Dennis Fernandez said. Such patents, he argued, “could force Apple into a cross-license if Apple’s iPhone and iPad wireless techniques fall within Motorola’s claims.”
In fact, there are raging legal battles between Apple, Microsoft (NASDAQ:MSFT) and Google’s Motorola unit before the U.S. International Trade Commission and a district court in Delaware over Motorola’s patent claims.
Although Apple’s legal offensive was not aimed squarely at Google, it’s widely seen as an attempt to blunt the momentum of Android in the rapidly-growing mobile market. In of the second quarter, Android was the No. 1 operating system in the smartphone market used in 68% of 154 million units sold in the period, according to IDC. Apple’s iOS was at No. 2 with 17% of the market.
Google said early on that it bought Motorola Mobility to beef up its patent portfolio, though the company has also been talking enthusiastically of late about getting into the device business.
Baird analyst Colin Sebastian said the verdict “provides further justification for the Motorola acquisition given a rich patent portfolio and Google’s role now as a hardware manufacturer.” Motorola builds smartphones exclusively for the Android platform.
“If Samsung or other Android manufacturers ultimately suffer as a result of patent rulings, then Google has effectively hedged itself in the mobile market by owning Motorola, and building its own devices,” he wrote in a note to clients on Monday.
Google has recently rolled out its own branded devices, including its recently-introduced Nexus 7 tablet that was built in partnership with Asus.
But in terms of protecting Android’s turf, Google’s Motorola gambit may not be a slam dunk success, some analysts argue.
For one thing, there’s debate on whether some of Motorola’s patents may be considered part of industry standards, an issue highlighted by Microsoft’s legal challenge to Motorola’s license terms for patents related to video streaming and Wi-Fi.
Fernandez underscored this point, saying one potential problem for Google is “it’s not just a matter of owning a cool patent on ‘rubber-banding’ but rather whether the essential patents that cover certain standards are subject to industry-wide licensing.”
He added that “it’s likely that Motorola’s early wireless developments, and patents therefrom, may have been tainted by industry-standard activities touched by Motorola early on, which often would require the member companies to contribute essential patents under standard licensing terms.”
J.P. Morgan’s Doug Anmuth argued in a note Monday that Apple’s victory “may also call into question the patents Google acquired from Motorola and their ability to help protect the Android ecosystem going forward.”
Rob Enderle of the Enderle Group echoed this view, arguing that “if the Motorola patents were any good, they would have used them more strongly in the trial.”
In any case, the Apple ruling “highlights significance of having strong IP in both design and utility,” adding that manufacturers “will increasingly consider the strength of an operating system partner’s intellectual property portfolio,” wrote Jefferies analyst Peter Misek.
Complicating Google’s dilemma is the fact that its rivals have also been beefing up their intellectual property defenses. Roger Kay of Endpoint Technologies Associates cited last year’s move by a consortium that included Apple and Microsoft to buy the patents held by Nortel Networks.
“The Moto purchase was not enough to gain Google a seat at the main table with Apple, Microsoft, and a handful of others with big portfolios of intellectual property,” Kay said.
The Nortel patents, he said, “were keystone patents that could have blocked the others in mobile communications. Moto, not so much.”
The patent battles highlight a problem in Google’s business model, he added. The company gives away its operating system to partners such as Samsung, and makes money from the advertising generated by network traffic.
“Google gives away its software and makes money on the back end through eyeballs,” Kay said. “Microsoft sells software. Apple makes its money on hardware sales. They’re all different business models,” he said, adding that Google has not indemnified its customers and does not collect royalties from them.
“Google needs to grow up and become a real business,” he added. “Just because it makes some software and gives it away doesn’t mean that it doesn’t have to clear the intellectual property rights. Microsoft has chosen to play a licensee fee game, but Apple wants only blood.”
And the victory over Samsung clearly gives Apple a strong upper hand.
In the end, Fernandez argued that cutting a deal with Apple may be the best path forward for Google, saying “If I were Google’s board and management at this time, I’d seriously consider negotiating a reasonable truce with Apple sooner than later.”
If that’s not possible, Kay suggested Google could consider playing the anti-competition card.
“Google can make the case that Apple’s patents are overly broad and should be invalidated,” he said. “They can say Apple is trying to patent the blue of the sky and the warmth of the sun. It’s not right. They can’t claim to have invented ’roundness’ or ‘black.’”
Google’s reaction suggests that may be part of its strategy. In a statement, a company spokesman noted that the court of appeals “will review both infringement and the validity of the patent claims.”
“Most of these don’t relate to the core Android operating system, and several are being re-examined by the US Patent Office,” the spokesman said. “The mobile industry is moving fast and all players — including newcomers — are building upon ideas that have been around for decades. We work with our partners to give consumers innovative and affordable products, and we don’t want anything to limit that.”
