Why did Google pay $12.5bn for Motorola? Search me …

Once upon a time, dinosaurs roamed the Earth — huge, dim-witted monsters that spent much of their time savaging one another in tar pits. They were succeeded by mastodons, lumbering giants with bigger brains and huge tusks but not much in the way of IQ. Their spiritual heirs are the vast corporations that spend much of their time slogging it out in a swamp labelled “intellectual property”.

Last month, there was much hullabaloo because Nortel, a bankrupt Canadian telecommunications manufacturer, put its hoard of 6 000 wireless patents and patent applications up for auction. The scent attracted a herd of corporate mastodons — Apple, Microsoft, RIM, EMC, Ericsson and Sony — which eventually won the auction with a $4.5-billion joint bid.

This attracted much attention from the commentariat, which interpreted it as a slap in the eye for Google, perceived as a rogue participant because it had made a series of apparently fatuous bids for the patents. At one point, for example, Google bid $1 902 160 540. At another, its bid was $2 614 972 128. And when the herd’s bid reached $3bn, Google countered with $3.14159-billion.

Commentators were baffled by these numbers until mathematicians came to the rescue. The bids were, in fact, celebrated constants in number theory. The first is Brun’s constant, the number towards which the sum of the reciprocals of twin primes converge. The second was the Meissel-Mertens constant (which also involves prime numbers). And the third, as every schoolboy knows, represented the first six digits of pi. At this point, the penny dropped. Perhaps the Google guys were playing silly buggers — but with a serious motive, namely to inflate the price that the herd would have to pay. And so it proved.

Then, last week, Google dropped a bombshell. It bought Motorola Mobile, a manufacturer of handsets, for $12.5-billion. In the process, it acquired Motorola’s huge cache of 17 000 patents — and 29 000 employees. This was variously interpreted either as a masterstroke or the dumbest move since, well, Rupert Murdoch bought MySpace.

Natural fit
In his blog post justifying the acquisition, Larry Page, Google’s co-founder and now its CEO, wrote: “Motorola has a history of over 80 years of innovation in communications technology and products, and in the development of intellectual property, which have helped drive the remarkable revolution in mobile computing we are all enjoying today. Its many industry milestones include the introduction of the world’s first portable cellphone nearly 30 years ago, and the StarTAC — the smallest and lightest phone on Earth at time of launch.” All of which is true, but is also ancient history. He went on to point out that Motorola had bet its ranch on Google’s Android operating system for mobile devices and that this implied “a natural fit between our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers everywhere.”

Oh yeah? There are several flies in that ointment. First, the price Google paid for Motorola represents roughly the same amount per patent as the inflated price the hapless herd paid for Nortel’s trove. Second, the move puts Google in a business that no sane executive would want to be in, namely the manufacture of hardware, described by one analyst as a “crappy, low-margin commodity business”. Worse still, it puts Google in direct competition with the other handset manufacturers — HTC and Samsung, for example — which have bet their respective ranches on Android. And, worst of all, it means that a software company with 20 000 employees has moved into an area — running a hardware company with a payroll of 29 000 — that lies way beyond its core competency. In the circumstances, it’s not surprising that Google’s shares are down nearly $90 from where they were on July 25.

Some masterstroke, eh? But even if Google’s shareholders are unimpressed, there’s precious little they can do about it, for the same reason that News Corporation’s shareholders can do nothing about Rupert Murdoch’s tendency to run a public company as if it were a family business. Google, you see, has the same shareholding structure as News Corp, one that ensures that only a minority of the shares have voting rights. When they set up the company, the Google guys explicitly stated in the prospectus that they didn’t want mere investors to constrain their freedom of action. They didn’t want their freedom to make bold strategic moves to be constrained by Wall Street jitters. And they got their way. One wonders if they’ve ever heard of that old English adage: “Be careful what you wish for”? – guardian.co.uk

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