Google’s Motorola Acquisition: A Billion Dollar Blunder or Brilliant Move?

The Motorola Disaster

Remember Motorola? At one point, they were selling network equipment, signal amplifiers, and even digital video recorders. But, likely the product that they’re most well known for is cell phones and particularly this one: the Motorola Razr. Back in the early 2000s, this phone was ubiquitous, and you can’t forget about the nostalgic ringtone either.

There was something about the sleek look of the phone and the premium build that people just couldn’t get enough of. You could even argue that it was the status symbol of the time, given that it wasn’t cheap, having launched for $500 or the price as the original iPhone. Nonetheless, Motorola went on to sell 130 million units during their heyday. To this day, the only iPhone that has sold better is the iPhone 6 and 6+ as a combination.

The bad part about the Razr for Motorola was that it was basically their peak. While they had a substantial business outside of cell phones, their cell phone business was what was really iconic. And as we saw the introduction of BlackBerries and smartphones, Motorola’s phones quickly fell out of favor.

They tried to pivot to the smartphone market themselves, but this wasn’t all that successful. That brings us to early 2011. To most, it seemed obvious that Motorola was on their way out and that their fate was similar to that of BlackBerry. Yet, there was one person willing to take a gamble on Motorola: Google.

In August of 2011, Google agreed to pay $12.5 billion in cash to acquire the waning company. As you would guess, critics and investors were rather skeptical, with many predicting that it would be a colossal disaster. And as fate would have it, that’s exactly what happened. Less than three years after the purchase, Google would end up selling Motorola to Lenovo for just $2.9 billion.

On paper, this was clearly a massive loss, having cost Google $9.6 billion plus the cost of running Motorola. Time would declare that Motorola was a gargantuan mistake that only Google could afford to make, and there were several similar articles mocking Google for their seemingly apparent incompetency.

But with time, people started to see a different side of the picture and realized what game Google was really playing. So, here’s the story of Google’s “worst acquisition” that actually turned out to be their best.

Launching Android

Hearing that Motorola may have been Google’s best acquisition is probably hard to believe at first glance. After all, Google has had so many successful acquisitions, and most people would point to YouTube or Android as being Google’s best acquisition, especially given that both of them cost substantially less than Motorola. But, the thing to note is that Motorola actually played a massive role in Android’s success.

To really understand this, we’ll have to take a look back at the origins of Android. The story starts in October of 2003, well before the launch of the iPhone. At the time, Android wasn’t even being developed for smartphones. It was actually being developed for digital cameras.

But, the founders quickly realized that the smartphone space had way more growth potential, and they would pivot, which attracted the interest of Larry Page of Google. Page could see that the mobile industry was gaining a lot of steam, and he wanted Google to be very much involved.

But, Google and Android had a major problem: they didn’t have any hardware. Neither of them had any experience building any hardware, and while they tried, it became clear very early on that they wouldn’t be able to compete with Apple.

After the iPhone announcement, the focus of Android could surely not be about the underwhelming Google phone. Rather, the focus of Android had to be about how it could power thousands of different phones, unlike Apple. And to make this a reality, Google needed phone manufacturers on board.

Cue in the Open Handset Alliance in November of 2007. This alliance connected network operators, software developers, component manufacturers, and device manufacturers who would all support and embrace Android. As you might’ve guessed, one of the device manufacturers on board was Motorola.

The Motorola Droid would become the first phone that ran Android 2.0 out of the box, but they were by no means the last. All of Google’s partners would launch phone after phone running Android, and given that these phones were generally cheaper and more customizable than their Apple counterparts, many would choose Android. By 2010, Android would overtake iOS in terms of total installations.

Meanwhile, Google was pumping out update after update as there were simply so many features to add. Eventually, they would even come out with their own smartphone: the Google Nexus. But, while Android was a massive success in terms of adoption and popularity, there were two massive clouds looming over the project: Apple and Microsoft.

These two had dominated the OS space for decades on the computer side of things, and they very much wanted to extend this monopoly into the mobile space. So, they would leverage all the patents that they had accumulated over the decades and start suing the hell out of Google.

Legal Onslaught

Google didn’t really have an easy way out of these lawsuits. The truth was that Google probably was infringing on a bunch of patents from Apple and Microsoft. And the fact that Android was open source just made it easier for these companies to scour through the code and pinpoint infringements, and that’s exactly what they did.

This quote from Steve Jobs is probably all you need to understand Apple’s stance on the situation: “I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.”

While Microsoft approached the situation more professionally, I’m sure they had similar beliefs internally, given that they would also sue Google. At first, Google and their partners tried to countersue Apple and Microsoft and win in court. After all, it’s not like they didn’t have resources themselves. But, this didn’t turn out all that favorably for them as juries would start ruling against them.

Take Apple’s case against Samsung, for example. The jury ended up awarding Apple $1.049 billion in damages. Meanwhile, Samsung’s counter lawsuit was awarded $0 in damages. This was a massive win for Apple. Apple won more money from Samsung than Equifax had to pay for leaking the social security numbers of 140 million people. That’s definitely quite messed up, but Google wasn’t even worried about the financial consequences.

If Apple or Microsoft were willing to settle for $5 or $10 billion, Google probably would’ve taken the deal. But, the problem was that Apple and Microsoft didn’t care about the cash either; they had plenty of cash themselves. They were in it for the market share. Their goal was to shut down Android by suing Google. And given that courts were starting to side with Apple, this made Google very nervous.

Clearly, Steve Jobs wasn’t willing to meet in the middle, so Google only had one option: fight fire with fire. Instead of focusing on how they could defend Android, Google would shift their focus onto how they could attack Apple. And very quickly, one option became very clear.

You see, while Apple was creating all this commotion about Google ripping off iOS with Android, they themselves had a history of ripping off other companies and were dealing with lawsuits themselves. One company that had a bunch of dirt on Apple was Motorola. Over the years, they had accumulated 17,000 patents relating to wireless communications, networks, antennas, cellular communications, and who knows what else. They also had 7,500 patents pending. On top of this, Motorola was already suing Apple on several fronts, and they were winning. One victory even allowed them to prevent Apple from selling iPhones in Germany until they removed a wireless feature from the phone. For Google, this was a grand slam, and they were willing to pay any monetary price.

Defending Android

Motorola knew what Google was trying to do, and they weren’t exactly against it. The truth was, while they were pulling off some victories against Apple, their business was dying, and they were very much ready to cash out. They very much knew their worth, though, and played hardball with Google. At first, Google was looking to buy the company for high $20 per share, but Motorola would work them up to $40 per share. This was way more than the business was worth, and that’s why Google received so much heat for this.

But, as we discussed, Google couldn’t care less about Motorola’s business. They were interested in their intellectual property, and this is what they would keep. When Google sold Motorola to Lenovo, they would keep all but 2,000 patents. This is when Apple and Microsoft finally realized that Google wasn’t going to let go either.

Just three months after Google sold the remains of Motorola, Apple would settle with Google, and the duo would agree to drop all patent litigations against each other. Microsoft would hold out for quite a bit longer, but they too would eventually come to their senses.

If Google was able to just save Android by flipping Motorola for a $9.6 billion loss, that itself would’ve been worth it, given that Android is now the most popular operating system in the entire world. But it gets even better for Google. You see, the $2.91 billion sale to Lenovo wasn’t the only sale that Google was able to make with Motorola.

They were also able to sell Motorola’s set-top box unit to Arris for $2.35 billion, reducing their total loss to $7.24 billion. But it doesn’t stop right there either. Right after Google bought Motorola, they were able to roll over a bunch of Motorola’s previous losses onto their financial statement, yielding them a tax benefit of $6.6 billion.

So, really, Google’s total out-of-pocket cost to acquire Motorola’s entire patent library and defend Android was a mere $640 million. For perspective, Google made about $79 billion in the last 12-month period. So, the whole Motorola ordeal cost them just 3 days’ worth of net income.

Not to mention, they got to keep 22,500 patents and applications, which works out to less than $29,000 per patent. They can use these patents to not only develop new devices and technologies but also to defend the company and even go on the offensive.

Victory

In the end, while the Motorola acquisition seemed stupid at the time given the company’s fundamentals, there was clearly more to it than just that. Google brilliantly leveraged Motorola’s extensive patent library to protect one of their biggest assets: Android. And they didn’t end up paying all that much out of pocket either at the end of the day.

Critics argue that Google likely could’ve defended Android even without Motorola. While Apple was making some progress against Android, it’s unlikely that Apple would’ve been able to shut down Android altogether. So, maybe the better play was to just let Apple play their games and eventually just settle in court.

But, that likely would’ve been a lot more expensive. If Apple was able to win $1 billion from Samsung, imagine how much they might’ve been able to win against Google. Not to mention, Google wouldn’t have acquired an arsenal of patents for dirt cheap prices if they went that route.

Now, you could definitely argue that Android itself was a better acquisition because if they hadn’t bought Android, there would’ve been nothing to protect in the first place. And while that is true, Motorola remains their biggest acquisition to this day, and it’s by far their most underrated and strategic. And that makes Motorola Google’s most interesting acquisition for me, but that’s just what I think. Did you know about this massive war between Apple, Google, and Microsoft? Comment that down below.