Friday, April 26, 2013

Court rules Google will get Motorola's $12.5B price back from Microsoft if it waits almost 7,000 years

In the previous post I published and reported on Judge Robart's historic FRAND rate-setting decision in the Microsoft v. Motorola FRAND rate-setting case in the Western District of Washington. After I did this post (I started at 4 AM my time) I went back to sleep again, but then I came up with the idea for this quick post.

There are many ways of looking at FRAND rates. There are numerous parameters. Judge Robart's findings of fact and conclusions of law span 207 pages. Expert reports in these cases are sometimes even longer.

One way of looking at it is, of course, Google's return on investment (ROI). Based on Motorola's original demand of more than $4 billion per year from Microsoft, it would have taken only about three years' worth of royalties for Microsoft to pay the $12.5 billion purchase price Google paid (in fact, way overpaid) for Motorola Mobility.

According to a chart Microsoft provided to AllThingsD and other media, the court-determined standard-essential patent (SEP) royalty rate for Motorola's H.264 (video codec) and IEEE 802.11 (WiFi) patents means an annual payment of slightly below $1.8 million.

At this level, it would take approximately 6,950 years -- almost seven millennia -- before Google's SEP royalty income from Microsoft would have paid for the overpriced, wasteful purchase of Motorola Mobility. Seven millennia. Not three years.

Of course, it will never happen with these patents, which will expire in a matter of years.

Apart from expiration, the discrepancy is even wider when considering the time value of money (a payment you get in the future is worth less than one you get today). Over the course of three years, financing costs would be negligible, especially in the current low-interest environment. But over the course of roughly 6,950 years, that factor does play a role in any amortization calculation. But I wanted to keep things simple, especially in the headline.

I have another perspective. Microsoft's position at the November 2012 trial was that Google can ask for $1,238,000. The court rate now comes down to an annual payment of $1,797,554. That's a differential of $559,554. This "upside" of 560 grand is certainly just a tiny fraction of what Google spent on this FRAND litigation alone. It will also take Google many years' worth of royalties (it won't have too many due to expiration) just to pay for this lawsuit -- and if Motorola is found to have breached its FRAND contract, which is a foregone conclusion the way I see it, it will be liable for damages that will add to (and probably exceed) its own litigation expenses.

It can, of course, appeal from a final ruling by the district court. The Ninth Circuit backed Judge Robart's approach last time (in connection with his preliminary injunction barring Google's Motorola Mobility from enforcement of SEP-based patent injunctions in Germany).

There's unanimous consensus in the media that Microsoft won and Google lost. Here's an overview of the reports I've seen so far (in alphabetical order):

  • AllThingsD: "Court Denies Motorola the Billions It Wanted From Microsoft for Standards-Essential Patents"

  • ArsTechnica: "Court shreds power of Motorola’s standard-based patents"

  • BBC: "US judge slashes $4bn Google royalty claim on Xbox" "Google's claim that Microsoft owes it billions in patent payments has been rebuffed by a US judge."

  • BusinessInsider: "Microsoft Slapped Google Around In Court, And It's Becoming Clear Google Overpaid For Motorola"

  • CNET: "Court sides with Microsoft over Motorola patents used in Xbox" (it's not just about the Xbox, and the article itself does mention Windows)

  • Dow Jones Newswires/Wall Street Journal: "Seattle Judge Rules in Microsoft's Favor in Patent Suit Against Motorola" -- "Microsoft Corp. (MSFT) won a victory over Motorola Mobility Thursday [...]"

  • Engadget: "Washington court rules Motorola can get millions, not billions, from Microsoft for its patents"

  • Financial Times: "Microsoft wins round in Google patent fight" "A US judge has sided with Microsoft in the first round of a patent dispute against Google that is seen as having far-reaching implications for how technology companies put a price on innovations used by the rest of the industry."

  • IDG News Service: "Microsoft prevails in Xbox patent rift with Motorola Mobility" (it's not just about the Xbox, and the article itself does mention Windows)

  • PC Magazine: "Microsoft Wins Latest Round in Patent Royalty Fight With Motorola" "Google's Motorola was dealt a setback this week in its bid to land major royalty payments from Microsoft for sales of Windows and the Xbox."

  • Reuters: "Microsoft gets upper hand in first Google patent trial"

  • Slashgear: "Judge to Motorola: You're asking too much for patents"

  • TechEye: "Microsoft pays pocket change in Motorola patent dispute" "But district judge James Robart said a more appropriate payment would be $1.8 million, practically nothing [...] and much closer to Microsoft's calculation"

  • "Google loses out as Microsoft fends off Motorola patent claims" "Google's purchase of Motorola for it[s] arsenal of patents continues to appear a wasted investment after Microsoft fended off a challenge from the subsidiary in a Washington court, according to widespread reports."

  • The Verge: "Judge rules that Motorola's patents aren't worth the $4 billion a year it demanded from Microsoft"

  • ZDNet: "Microsoft, Motorola ruling: Google patents not worth billions" "A judge found in favor of Microsoft in a patent spat with Motorola, indicating that Google grossly overpaid for the smartphone maker, despite the patent protection it was given." "For the search turned mobile giant, it's a huge blow. It puts the company that Google bought for $12.5 billion — which has since increased to about $13 billion with restructuring costs and suchlike — worth a lot less than what it shelled out for back in 2011."

Finally, I'd like to mention that Apple, too, implements the standards in question. In addition, it will at some point get a license to Motorola's cellular SEPs. Those are obviously very different from the types of patents at issue in the Seattle case, but it's becoming clearer by the day that excessive royalty demands don't work if an implementer of a standard enforces the patentee's FRAND licensing commitment.

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