In the weeks since Google’s proposed purchase of Motorola Mobility was made public there has been much comment about the very large patent portfolio that comes as part of the package. Although the company’s chairman recently stated that there was a lot more to the acquisition than the patents, there is little doubt they were a major motivating factor. However, some have stated that on this front Google may have wasted a lot of money. For example, David Martin, the founder and chairman of consulting firm M-Cam, has said that Google has made “an immense mistake”. What they got they hands on, he said, “is crap”.

Of course, expressing such opinions is a good way of getting media coverage, but that does not necessarily make them right. To get an idea of the quality of what Google is purchasing I got in touch with Art Monk, Vice President of US patent brokerage at UBM TechInsights, who previously wrote about the results of the Nortel patent auction for the IAM blog. In contrast to Martin, Art is in no doubt that, pound-for-pound, in terms of patent quality the Motorola purchase is much more cost-effective for Google than the Nortel portfolio would have been. And, it is worth noting, with Motorola Google gets a whole lot more than a set of patents. For a start, as Art points out, it gets a lot of the people whose inventions led to their creation in the first place.

Anyway, here’s what Art has to say:

Much has occurred since our last discussion. Of interest is how well Google has crafted its strategy to acquire needed IP so they have the stature to push back against adverse parties. Without a volume of quality patents they would never be in a position to level the playing field for cross-licensing discussions.

One interesting computation followed on from the Nortel sale where, as I noted in my last email, one often uses a 3% factor to estimate the number of really valuable patents in a large portfolio and in my prior note I made a rough guess that there were 60 truly valuable patents in the Nortel estate and that these would be patents essential to wireless communications standards like LTE and UMTS. I wasn’t far off. The real answer is 107.

To tie this down I accessed the June release of the ETSI Essential IPR Database which contains the details for 109,128 patents that have been declared essential to wireless standards based on ETSI’s rules. The following tables show the essential patent counts for both Nortel Networks Ltd and Motorola Mobility Inc. This comparison is of interest because it is quite rational for defensive purposes to assign the value of a portfolio to the essential patents within it.

Nortel Networks Ltd

Total declared essential US patents in portfolio: 107

Essential to LTE: 75

Essential to UMTS: 5

Portfolio cost ($mm): 4,500

Cost per essential US patent ($mm): $42.1

Motorola Mobility Inc

Total declared essential US patents in portfolio: 1,369

Essential to LTE: 686

Essential to UMTS: 509

Portfolio cost ($mm): 12,500

Cost per essential US patent ($mm): $9.1

I have shown just the US patents in the chart but one could go further and do a family structure analysis to assign value solely on the basis of patent families. I don’t expect that the relative results would be much different. On a worldwide basis the Motorola portfolio far outclasses Nortel with 4,561 essential patents to Nortel’s 583. Note that in both of the recent major transactions (Nortel and Motorola) it is believed that such patents served as an anchoring point for constructing bids.

In terms of the acquisition cost per essential patent Google’s acquisition of Motorola is four times better than the Nortel deal, and the Motorola transaction included (i) just over $3 billion in cash on Motorola’s balance sheet; and (ii) the engineering staff responsible for patenting the inventions covered by the portfolio so that open patent applications could easily be prosecuted through the USPTO and other patent authorities. This was a great deal and one might wonder if Google was well down the road with Motorola at the time of the Nortel auction and their task in the auction, as we noted then, was to be sure their adversaries paid the “tax” to acquire the Nortel patents.

Some pundits have slammed the Google/Motoola deal because it makes great sound bites and they appear to be authoritative when they do so. The support for their case is usually a lot of hand-waving and fancy landscape charts without getting down to what actually happens in a wireless patent negotiation and how important it is to have essential patents to counter the assertions of adversaries when they come knocking. Based on just the essential patents alone, the Motorola portfolio is far from “crap” as some have opined.

Here’s why essential patents are crucial to the dialog between wireless industry adversaries:

• Infringement is a given if you practice a mandatory standard.

• Evidence of use is immediately at hand without extensive reverse engineering.

• No work-around is possible since non-infringing standard-compliant products are not feasible.

• There are accurate forecasts of shipments for the infringing products and thus royalty revenues can be estimated rather well.

Google has clearly built the stature it needs to walk into broad cross-licensing negotiations which will likely be the end game in all of this as it was in the semiconductor manufacturing industry in the late ‘70s and early ‘80s.

It will be truly fascinating to see how matters evolve from here. Next up appears to be Kodak … but they aren’t anywhere on the ETSI list so don’t expect high valuations in the wireless space.

Just a couple of things to finish off with. First of all, it is difficult to imagine that a deal of this size could have been put together in the six week period after the Nortel auction was concluded. At the very least Google must have been looking closely at Motorola Mobility for quite a while. If that is the case, as Art says, Google’s actions during that auction become much more understandable – it knew it had a fallback position, and a powerful one at that.

Second, in light of the high valuations that have been placed on the portfolio that Kodak has put up for sale, the last sentence of Art’s piece is well worth reflecting on. As I have stated before, the patent market is one that few mainstream investors and company boards understand. For the market’s long-term sustainability, that makes expectation management crucial. Not every patent transaction will generate Nortel and Motorola sized returns. In fact, the vast majority will not. Who outside the IP bubble actually appreciates that right now? Not as many as should is my guess.

Sectors

Licensing, IP litigation, Patents, IP business, IP valuation