Buying IP Is Not for the Faint of Heart

This month, Microsoft announced that it had reached an agreement to purchase Nokia's handset business for $7.2 billion. Recalling that two years ago, Google purchased Motorola's handset business for nearly twice that much, ($12.5 billion), it seems like Microsoft got a steal of a deal. Or did it?

Having spent a large portion of my career as a development engineer in the telecom industry, I've seen many interesting phenomena: the birth of cellular technology and its explosive growth; the bungled transition from analog to digital in the 1990s, when Motorola lost its top market position; and the ultimate growth curve that added more bells and whistles to this commodity than its little cast-chassis could hold. The cellphone, which was originally a status symbol for trend setters, ultimately became a mere commodity.

Being on an engineering development team, working countless days and nights toward the day when your product finally launches, you always had the vision that you had designed the best device the world could ever see. The marketing launch would be glorious. But then, you'd watch the fanfare quickly fade into absolute oblivion, due to the sheer number of competitors who concurrently developed a closely related offering. That once-in-a-lifetime project for which you missed your kid's birthday and ate cold pizza for dinner four nights a week during tool-release time turned out to be just a tiny, meaningless cog in the gigantic machine called the telecom industry. You had nearly sacrificed your wife and family for what? A crumby commodity, just like corn or pork bellies. So what was the point?

I think Google would say the intellectual property (IP) was the point. IP was the jewel in the $12.5 billion buyout of Motorola -- its IP portfolio. Motorola had amassed a healthy library of very desirable patents over the years, and because of it, it had become well known on the street as a leading technology and innovation company. Motorola management didn't leverage or enforce the patents with any strength, but that's another story. Google owns them now, and it plans to better apply the value proposition of this newly acquired IP.

As I read about the deal between Nokia and Microsoft, I noticed Microsoft paid a very healthy $7.2 billion, but only for the handset business. The deal did not include the ownership of Nokia's patent and IP portfolio. Instead, Nokia agreed to license the IP for Microsoft's use but maintain full ownership of its coveted portfolio. So was this a good buy? Microsoft's stockholders didn't think so, and the NAV of Microsoft fell sharply on the news.

Microsoft's funds would have been better spent if they just stayed in the bank. Handset businesses cost a lot of money to run. Development requires large, multi-disciplined teams of people, all drawing nice salaries, and tooling alone can cost millions of dollars for a mass production launch. The completion is fierce, and losing money is a very realistic scenario. The bank may only pay a 0.9 percent return, but it's guaranteed, and it's positive.

Jim Tracy is the founder of Future Product Innovations. He has worked in the telecom, defense, automotive, and medical industries and is recognized for his achievements in advancing technology.

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