Saturday, February 1, 2014

Bob Galvin turning in his grave

Wednesday Google announced it is dumping Motorola by selling it to Lenovo, the same company that bought IBM’s PC business when it decided to exit.

CEO-founder Larry Page wrote:

We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users. … But the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It’s why we believe that Motorola will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world. This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.
Just to be clear, Google is abandoning commodity markets, not hardware:
As a side note, this does not signal a larger shift for our other hardware efforts. The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry. We’re excited by the opportunities to build amazing new products for users within these emerging ecosystems.
This is obviously a big deal for Google, for the smartphone industry — and readers of this blog. There are so many angles that went through my head — but then I went off to spend 36 hours seriously focused on teaching (plus meetings). Fortunately, I can summarize most of the angles from the reporting that’s happened since then.

Google's Losses

Google spent over $12 billion to buy Motorola in mid-2012, and is selling it for $2.9b. Only $0.66b is cash and the rest is stock and IOUs. In an article entitled “Buy High, Sell Low,” John Paczkowski (formerly of the Merc and AllthingsD) wrote “the whole affair is arguably one of the worst investments in Google’s history.”

However, the net is a little better than a $9b loss. Minutes after the announcement, Tom Gara of the WSJ calculated
Google paid about $12.5 billion for Motorola Mobility when it acquired the company in 2012, and that came with about $3 billion of cash. It later sold off the company’s unit that makes cable TV set-top boxes for $2.35 billion. Now it’s selling off much of what’s left for $2.9 billion, but keeping all those patents.
The WSJ reminded us Thursday that “Google had absorbed roughly $2 billion of operating losses through the third quarter of last year,” bringing the net cost to $6b.

Friday, the WSJ had a second-day story “How Google's Costly Motorola Maneuver May Pay Off”. This is a fairly transparent effort by the company (or key executives or allies) to try to put a positive face on their huge loss. While the Google goals (promoting Android, fighting Apple) made sense, the purchase had only a small impact on the industry and was a terribly inefficient way to accomplish these minimal results.

The bottom line is that Google ended up spending more than $6b, and all they have to show for it is the 17,000 patents of MMI. Not only did they overpay, but with the losses this is even worse than what they booked on their balance sheet. As Bloomberg reported last April:
Google…estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology. Chief Executive Officer Larry Page in August 2011 said Motorola’s patent portfolio would “help protect Android from anticompetitive threats from Microsoft, Apple and other companies.”
Of course, Google has had difficulty monetizing these patents — either offensively or defensively — in support of Android. (The one exception was this week’s cross-license deal with its major Android customer, Samsung, on undisclosed financial terms).

Google’s Mobile Patent Strategy

So how’s that investment working out? As with any mobile patent issue, the definitive source is the FOSS Patents blog. Florian Mueller didn’t pull any punches Thursday:
Things haven't been going too well for Google in the patent litigation arena recently.

At the moment Google appears to be on a losing streak in U.S. patent courts, and as I said further above, more bad news is probably coming in the near term. Google's patent infringement issues are definitely a key reason for its push for patent reform legislation, and I doubt that Congress will solve Google's problems anytime soon. There will either be a quick agreement between both chambers of Congress on a targeted and limited reform bill or things will take much longer.
He lists Google patent lawsuit losses to SimpleAir and Vringo, and Samsung’s loss on Apple’s auto-correct patent (presumably signaling future losses by the remaining Android handset makers). In addition, major licensee Huawei settled with the Rockstar Consortium — which suggests to me that Android licensees except Samsung will probably do likewise. (Wikipedia helpfully explains that this patent troll paid $4.5b for the Nortel patents — the largest patent portfolio ever sold — and that Apple, Microsoft and Sony are part-owners.

If that’s not bad enough, Mueller predicts that Motorola is also likely to lose its case to Intellectual Ventures (the Nathan Myhrvold patent troll).

In defense of Google execs, this mobile phone patent litigation among handset makers is relatively new, and it was not obvious how it would turn out. Still, it’s clear Google knew little about this business model, didn’t have a lot of their own patents, and took the shareholder’s cash to buy the biggest stash of patents they could find (valuation be damned).

Greater Fool Theory

Of course, for every seller there is a buyer. Lenovo seems to think that what’s left of the Moto mobile franchise is worth $2.1b in cash and IOUs (plus 5% of their company).

A friend of mine noted that parallels the habit of Asian companies over the past two decades to buy money-losing US PC companies:
  • AST Research: bought by Samsung (1996)
  • Packard Bell: bought by NEC (1996)
  • Gateway: bought by Acer (2007)
  • IBN’s hard disk division: bought by Hitachi (2002)
  • IBM's PC division: bought by Lenovo (2005)
  • IBM’s PC server division: being bought by Lenovo (2014)
So far, it appears that the first two (market-leading IBM businesses) were worth buying. The others (top 10 but not top 3) only transferred value from Asian CEO egos to struggling American shareholders.

Death of an Icon

All this aside, what occurred to me when I heard the news was that the late great Bob Galvin (1922-2011) must be turning in his grave. Here is the an excerpt from the obit I wrote:
Robert Galvin died last week at aged 89. The second of three generations of Galvin CEOs at Motorola, he was clearly the best, guiding the company to its period of greatest success (1959-1997).

In addition to serving as Motorola president, CEO and chairman, Galvin was chairman of Sematech and helped create the Six Sigma movement in the United States. For more than 20 years, Galvin was a Notre Dame trustee and later fellow.
There is a great video on Galvin’s seminal contributions to the wireless industry, prepared by the Marconi Society when they gave him a lifetime achievement award. In that video, I argued that Galvin’s two great contribution was to create the system of competing US licensees in cellphones (something that no other market had yet considered) and to push portability, miniaturization and mobility in cellphones — i.e., to create our modern industry. Yes, without Motorola we would have eventually had such a mobile industry, but the company shape how we got here and got us here sooner.

Bob Galvin spent his last years at Motorola doing two things: fighting against trade barriers for Motorola products overseas (notably in Japan), and promoting a resurgence in manufacturing quality for American electronics to be able to compete with foreign (i.e. Asian) producers. In 1988, Motorola won the Malcom Baldrige National Quality Award for manufacturing in its inaugural year.

His company is no longer the market leader it once was, having come late to the digital era and wasted $7b on Iridium (back when that was real money). Before he died, the company’s decline was palpable and surely known to him. Still, I have to imagine he is turning in his grave.

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