Google is getting out of the phone-making business, but not the patent-owning business. Photographer: Mike Fuentes/Bloomberg
Google is getting out of the phone-making business, but not the patent-owning business. Photographer: Mike Fuentes/Bloomberg

Google Inc.'s $2.9 billion deal to sell the hardware business of phone maker Motorola Mobility, a company it bought for $12.5 billion two years ago, is being described by some as a sign of failure. Is it?

True, there's a lot that looks silly now about Google's effort to enter the mobile-handset market. Instead of making phones itself, Google could have stuck to licensing its software to phone makers -- a strategy that worked well at Microsoft Corp. under Bill Gates, when the company achieved global dominance by licensing its operating system rather than trying to make personal computers of its own. Competing against big phone manufacturers such as Samsung Electronics Co. Ltd., HTC Corp. and Sony Corp., all faithful users of Google's Android operating system, probably wasn't a good idea. The smartphone market may be too mature for Google to make a difference. As Chief Executive Larry Page wrote on the company blog, the market is "super competitive, and to thrive it helps to be all-in when it comes to making mobile devices."

Still, Page does not think Google made a mistake in acquiring Motorola Mobility. The reason can be found in the part of the company that Google has retained -- a portfolio of thousands of patents. Such intellectual property creates value in three ways: It helps develop new products, protects against patent lawsuits from competitors, and generates licencing fees from other companies that use the ideas.

Speaking to investors in August 2011, Sanjay Jha, then chief executive officer of Motorola Mobility, boasted that the company's 17,000 issued patents and 7,500 patent applications worldwide represent "tremendous strength." Many are for tiny individual features. A typical description goes like this: "The '983 Patent generally relates to managing content between devices in various domains and, more particularly, to a system and method for pausing content in one device and resuming playback of the content in another device that may be in a different domain."

Ownership of the patents hasn't delivered Google any big court victories. It demanded $4 billion a year from Microsoft for the use of Motorola technology in the Windows operating system and the Xbox game console, but last April a judge ruled that Microsoft owed only $1.8 million a year. Meanwhile, manufacturers of Android devices are still paying big royalties to Microsoft and Ericsson, which have been very effective in using the courts to monetize their intellectual property. Microsoft claimed last year that 80 percent of Android handsets sold in the U.S. were covered by its licensing agreements.

Could it be that Google did not really have a grasp of what it was buying when it acquired Motorola's patent portfolio? Google Executive Chairman Eric Schmidt, asked by an interviewer in 2012 to comment on the mobile-phone patent litigation, admitted he didn't understand all the details. "These patent wars are death," he complained.

There is some evidence, however, that Google knew exactly what it was doing. Of the $12.5 billion it paid for Motorola Mobility, Google has recouped $5.3 billion from the sale of set-top box and handset operations, and it has kept $3 billion in cash and $1 billion in tax credits. Subtract the $2 billion that the company lost while Google owned it, and the remainder comes to $5.2 billion. That's effectively what Google has paid for a portfolio of patents that, in filings, it has valued at $5.5 billion.

Although the absence of big verdicts in Google's favor suggests the patents might not be worth that much, there are quieter ways to make money on intellectual property. Google's licensing revenues have grown to $1.23 billion in the third quarter of 2013, from $420 million in in the last quarter of 2011. The company does not disclose how much of the money comes from Motorola patents. Google has also used the portfolio to protect itself and its manufacturing partners from patent litigation, firing lawsuits at rivals as warning shots. It's hard to know how much such activity might have saved Google and its partners in licensing fees, but the number is probably greater than zero.

There may also be a different kind of gain in holding the patents. Google uses a taxation scheme known as the Double Irish-Dutch sandwich, which makes use of lenient European jurisdictions to lower companies' tax bills. Intellectual property rights are held by a company registered in Bermuda, a no-tax jurisdiction, and Google's subsidiaries pay royalties for the use of the property. Owning a lot of patents could make it easier to implement the tax strategy and realize bigger savings. Motorola Mobility's losses, too, helped Google save on taxes.

Google gave handset making its best, halfhearted try. It takes the patent cache more seriously. That part of the Motorola deal might not have outlived its usefulness yet.

(Leonid Bershidsky is a Bloomberg View contributor. Follow him on Twitter.)

To contact the writer of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.