What a difference a month makes. Our last issue of Pointers in early July analyzed the mega-patent sale of the Nortel portfolio for the unprecedented sum of $4.5B. by what appeared at that time a Microsoft led consortium and declared Google the major loser of the auction, as it left it and the whole Android ecosystem even more vulnerable to patent tax and litigation.
Deconstructing the Nortel deal
Some of the backroom deal making aspects of this auction are fascinating and show how competitors will gang up against a common enemy (here Google) when it is in their interest to do so. The auction lasted 3 days and saw 19 rounds of bidding! There were 4 initial bidders, including one non-practicing entity (NPE), i.e. RPX (bidding as ‘Norpax’). Intellectual Ventures was conspicuously absent because many of the bidders have funded IV and are therefore in large part shielded from litigation should IV have bought the Nortel portfolio.
The opening bid was actually based on Intel’s tender (most people didn’t know Intel was even in the mix). As the 5th round opened, "Rockstar" (the Microsoft/RIM/ Erikson/Sony and EMC group) did not place a bid and therefore was actually out of the picture. But then, Apple which was bidding against Rockstar up to that point, asked and obtained permission to join forces with Rockstar and the new ‘friends’ used the Rockstar vehicle for the rest of the auction. The auction went for another 2 rounds before Intel bailed out, but the same phenomenon happened and Google asked and received permission to team up with Intel. There were thus only 2 bidders left and they exchanged bid for another 12 rounds by $100M increments! (One would think it must be a lot of fun raising the paddle like this when it’s not your money). After 19 rounds, Apple/Rockstar placed a bid for $4.5 B and the Google/Intel group finally gave up (which means they went as high as $4.4B contrary to what was initially reported).
Now that the dust has settled a bit on that transaction, although it faces antitrust review in Canada and the US, we know from their SEC filing that Apple paid the lion’s share of the money ($2.6B), followed by RIM ($770M) and Erikson ($340M). This means that Microsoft, Sony and EMC will be splitting the rest of the tab, a paltry $900M. The big difference however is ownership. Not surprisingly, Apple gets full ownership of the 6000 or so patent it bought, and the other companies get a royalty- free (at least you’d hope) license. In other words, this deal was so strategic for Apple to protect its “ifranchise” against the Android based devices that it was ready to forego enforcement (and associated revenues) of those patents against 3 direct competitors in the phone business in order to block Android makers such as Samsung and HTC around the world (which it was done with some success lately in Europe and Australia).
Google’s pay to play moves
Google didn’t take time to go to Plan B. Actually, part of Plan B was already in place, but we only heard about it later. A couple of weeks after they missed out on the Nortel deal, Google announced it had acquired over 1000 patents from IBM, for a sum still undisclosed, but which is estimated to be in the $1B to $2B range. Someone actually went to the USPTO database of assignments and studied those patents carefully: conclusion; most of them are directed to and most probably read on some Apple products. You can’t fault Google for not learning fast…
Fast forward to this past week and the whole patent world is upside down once again with the announcement of Google’s acquisition of –so far unprofitable- Motorola Mobility for $12.5B. Pretty much everyone involved and every analyst concur that the main driver for the deal (and the 63 % premium on Motorola’s shares) is Motorola’s 17,000 strong patent portfolio, mostly around new wireless technology such as LTE. As one analyst was quoted, “Patent is Power” and Google, after clamoring for years that patents are worthless, has now agreed to pay, in matter of weeks, no less than $15B simply to earn the right to enter the sandbox and flex their own IP muscles.
The Motorola deal, if approved by regulators, is likely to create a couple of parallel and apparently conflicting phenomena: a decrease in law suits between the main protagonists and an increase in NPE based litigation.
On one hand, now sitting on close to 20,000 issued patents (it had fewer than 1000 a month ago!), Google has the war chest required to retaliate and force Apple and others to enter into cross licensing discussions. So no one should be surprised to read that some of the ongoing litigation has been quietly settled this way. This could take between 1 and 2 years however, as normally difficult negotiations and valuation issues are compounded here by the sheer number of unfamiliar patents to review. In the meantime, it should not be lost on anyone either that Google, who has never been a plaintiff in patent cases, inherits dozens of ongoing litigations between Motorola and Apple where Apple is on the receiving end. This must feel good to Google’s patent lawyers who have only been playing defense so far.
On the other hand, these recent deals should only accelerate the appetite for NPEs to acquire more patents in the mobility space, either to protect their members by taking these patents off the market (this is RPX and AST’s model for instance), or to resell or license them to the companies above at what should now be much higher “multiples” per patent family. This should also have a trickle effect on other areas of technology as well and the average price per patent family should be significantly higher than it was a year ago as a result of these recent deals. However, this could also mean that there will be less money available for acquiring patents outside of the most active fields, as companies will tend to keep their dollars for strategic portfolios a they have all reached critical mass in terms of patent quantity. Finally, I think it is inevitable that Google will start offering IP indemnificaiton to its OEM, either in its agreements or by making sure any settlement or cross license extends protection to its channel. The other question everyone should ask themselves as whether they will have to start charging for its OS, like others do. Now that they have reached 43% of phone OS penetration, it would be tempting to try to recoup some of this $15B...
What about me?
What does this all mean to us, simply mortals who don't have billions to spare? For one, if there was ever a business owner or investor still doubting the strategic importance of IP in modern business warfare and the high price late comers to the game must pay in order to protect their franchise, seek no more a more tangible proof.
For those of you who are fortunate venough to be sitting on some patents that may read on a smart phone, tablet or other large volume devices, you should pay your maintenance fees to avoid losing any rights and probably start exploring ways to capitalize on what is likely to be a cyclical bubble.
And if you happen to broker patents like I do, it has been a very busy summer! ;-)