Google values Motorola Mobility's entire hardware business at $670 million

FierceWireless reports that in an SEC filing, Google detailed how it valued the $12.4 billion that it paid to acquire Motorola Mobility. Here's the breakdown:

• $5.5 billion for the 17,000 patents that Google acquired
• $2.9 billion for cash in Motorola's treasury
• $2.6 billion for goodwill (trademarks and intangibles)
• $730 million for customer relationships (Motorola's relationships with telecom, cable and IPTV companies)
• $670 million for "other net assets"

Those "other net assets" include Motorola Mobility's entire phone, tablet and set-top box businesses. It's no wonder that we haven't heard much about Google's plans for Motorola's hardware businesses--Google thinks that they're fairly close to worthless. Google could write off the entire hardware business and take a modest one-quarter earnings hit.

If I worked for Motorola Mobility and I wasn't already looking for a new job, I'd be firing out resumes after Google's SEC filing. Is it possible that Google will invest big bucks to turn around Motorola's hardware business? Sure, it's possible--but not likely.

HP's WebOS opportunity

Update, August 18, 2011: HP just announced that it is discontinuing all its webOS-based hardware devices, including the TouchPad tablet and smartphones. According the The Wall Street Journal, it will hold on to the webOS operating system and will pursue licensing it to other companies.

Google's decision to acquire Motorola Mobility has thrown the Android ecosystem into chaos: Will Google really treat Motorola no differently than any other Android licensee, or will it give Motorola priority for new features and new versions of Android? Will Google be able to stay focused on releasing new versions of Android that are competitive with iOS while dealing with the Motorola acquisition?

Google's acquisition opens the door for Microsoft to become an alternative operating system vendor for some of Android's licensees, but Microsoft's partnership with Nokia has spawned its own concerns: Nokia clearly has "favored nation" status in the Windows Phone ecosystem. As a result, Microsoft may be less able to capitalize on Google's decision than it would first appear.

The company that might have the best opportunity to capitalize on Google's acquisition is HP, if it can execute quickly and decisively (always a big if when talking about HP). WebOS is an excellent operating system, but it's been crippled by HP's indecision in launching new products, and its inability to run an effective developer program. AllThingsD reported yesterday that Best Buy has taken delivery of 270,000 HP TouchPads but has only sold 25,000 of them. Best Buy is reportedly demanding that HP take back its inventory of tablets. Now, HP is launching a new line of webOS-based smartphones in Europe, but the company's chances of success aren't much better in the smartphone market than they are right now in tablets.

A number of observers have suggested that HP should license webOS, but for this plan to be successful, HP has to follow a more radical course. Here's the approach that I believe HP should take:

1. Set up a Mozilla-like organization to run future webOS development, and in particular, run the developer program. This organization would insure that all licensees have a common code base to work from, and that webOS apps work on the widest possible range of devices. One goal would be to avoid the proliferation of versions that frustrates Android developers.
2. Give licensees partial ownership of webOS and the development organization. That would give the licensees a say in the future direction of the operating system.
3. Licensees would invest in the development organization rather than pay royalties. (There could be two classes of licensees: One that owns a stake in the development organization, and another that pays royalties in lieu of investing in the development organization.)
4. Once the development organization is launched and licensees sign on, HP would drop its smartphone line. HP would remain in the tablet business, and could use webOS throughout its product line. The company would have the option to reenter the smartphone business after a number of years.

I have to believe that a joint venture development company, with talent contributed by companies such as Samsung and HTC, as well as HP, could do a much better job managing and promoting the webOS platform than HP alone. You may say, "Isn't this what Nokia tried to do with Symbian?". Yes, Nokia established the Symbian Foundation and open-sourced the operating system, then brought it back in-house and made the license proprietary. The problem was that Nokia wanted it both ways--the company wanted to control the development of Symbian but also wanted its competitors to license it. If HP is to succeed in licensing webOS, it has to truly cede control to a joint venture with its licensees, and it has to (at least temporarily) get out of the smartphone business.

In the long run, if HP establishes webOS as an industry standard for mobile devices, its acquisition of Palm will have been worth it, even if the company gives up a minor revenue stream from smartphones

Google buys Motorola Mobility: More questions than answers?

This morning opened with a bang, when Google announced that it had made a friendly offer to acquire Motorola Mobility for $12.5 billion. The offer caught a lot of people in the industry flat-footed (although not Ben Bajarin, who wrote an amazingly prescient post last week on why Google should buy Motorola Mobility.)

$12.5 billion is a 63% premium over the price that Motorola Mobility's stock closed at last Friday, so why would Google pay so much to purchase the company? The one thing that everyone agrees upon is that Google wanted Motorola's patents, a pool nearly four times larger than the one that the company bid on from Nortel. The question is how valuable those patents will be in protecting Google's Android licensees from patent challenges by Microsoft, Apple and others. Microsoft was suing Motorola Mobility for patent infringement before today's announcement, so the Motorola patent library might not provide all the protection that Google needs. In addition, acquiring Motorola Mobility for $12.5 billion to get the patents prompts the question, in hindsight, whether Google would have been better off staying in the Nortel bidding and perhaps winning exclusive ownership of the patents for $5 or $6 billion. It also begs the question as to why Google didn't simply buy Motorola's patents, not the entire company; the consensus opinion is that Motorola's management refused to sell the patents by themselves.

Google got most of its top hardware partners to sign onto a press release endorsing the acquisition, but you have to wonder what the leaders of companies such as HTC, Samsung and LG Electronics are really thinking. In one move, Google went from being a supplier of perhaps their most critical smartphone technology to one of their biggest competitors. As Henry Blodget points out, hardware is a low-margin, semi-commodity business (for everyone except Apple). It's radically different from the software business, and the Motorola acquisition will increase Google's headcount by 60% overnight.

Google has declared that it will run Motorola Mobility as a separate business, and won't change the way that it runs its Android business. That's what Motorola's hardware partners (and possibly regulators) want to hear, but it creates a dilemma for Google. If the company wants to maximize the value of Motorola, it has to much more tightly integrate Android and Motorola, enabling Motorola to get new features and new versions of Android before other licensees. That, however, would violate its pledge to run the two businesses independently. The second option is to run Motorola so that it doesn't compete with other licensees, but that would cause the company to lose all its good developers, designers and hardware engineers. No one wants to work for a crippled company. The third option is that Google could sell off Motorola's hardware businesses, but to whom? The fate of Motorola's hardware businesses will be up in the air until the acquisition is completed, if not substantially after that.

In addition, despite some analysts' opinions that antitrust regulators won't stop the acquisition, there's substantial reason to doubt that the acquisition will occur without significant concessions by Google. There are so many antitrust investigations of Google underway, from the U.S. Federal Trade Commission to U.S. State investigations, to European Union investigations, that this acquisition can't help but be looked at in the context of Google's overall behavior. At the very least, Google will have to make its "hands-off" approach to running Motorola Mobility a guarantee, and will have to agree to make Android and related products available to all licensees on an equal, non-discriminatory basis. Regulatory agencies may also use approval of this acquisition as a lever to get Google to agree to restrictions on how it runs its search engine, how it integrates its products, and how its services work on mobile platforms.

One final note: Most reports have noted only in passing that, in addition to mobile phones and patents, Google is also getting Motorola's set-top box business. In fact, depending on who's doing the measurement, Motorola is either the world's #1 or #2 vendor of set-top boxes. Historically, customers such as cable and IPTV operators have had enormous control over the design of the set-top boxes they buy, so Google can't arbitrarily add Google TV or the Google search engine to all of its devices. However, this acquisition gets Google's foot in the door with established multichannel video providers in a very big way. At the very least, we're likely to see the next generation of Motorola's set-top boxes and home gateways run Android, even if Google's customers hide the Android layer from end users.

Google's proposed acquisition of Motorola Mobility poses more questions than it answers. We may be waiting for the answers for quite some time.