Google paid $4B for patents: why the Motorola deal worked out just fine

When Google(s goog) bought Motorola Mobility for $12.5 billion in 2011, many people said it was all about the patents — and they were right. Now, on news that Google sold the device maker for just $2.9 billion, it’s worth examining if the deal made sense, and what role the patents played.

The short answer is that the deal, including the patent part of it, worked out just fine. A look at the math, and the competitive landscape, shows that the purchase and sale of Motorola made strategic sense for Google, even at that $12.5 billion price tag.

The final outcome of the Motorola deal validates Google’s strategy at a time when most patents are business weapons unrelated to actual innovation. It also provides yet another reminder of how badly America needs patent reform.

Google encircled, a controversial counter-attack

Recall that one month before the acquisition, Google’s rivals — including Apple(s aapl), Microsoft(s msft) and BlackBerry(s rim) — had snapped up a coveted patent portfolio at auction, giving them a new stick to pummel Google in a global and ever-sprawling legal battle over smartphones.

The deal, then, gave Google a chance to counter-attack or at least hold its ground thanks to Motorola’s intellectual property, which reportedly amounted to 17,000 issued patents and 7,500 applications. Google has never been a big booster of a patent system that awards patents for inventions like a “method of swinging on a swing” but, given the context, this was a case of if you can’t beat ’em, join ’em.

Or, as programmer Robert Eric Raymond put it at the time:

This is Google telling Apple and Microsoft and Oracle “You want to play silly-buggers with junk patents? Bring it on; we’ll countersue you into oblivion.”

Sure enough, Google went ahead and poured more gasoline on the smartphone patent wars, in part by asking the International Trade Commission to ban iPhone imports because the popular Apple devices infringed Motorola patents. The ITC lawsuit, however, was a flop and some of Google’s other legal adventures with the Motorola patents have outright backfired.

Last fall, for instance, the company sued Microsoft for patent infringement but a jury ordered Google to pay up for fighting dirty with standards-essential FRAND patents, which must be licensed on Fair, Reasonable And  Non-Discriminatory terms. (Google, by the way, is not the only accused of messing with FRAND — the cable industry just sued an Apple-backed group over the same tactic).

The bottom line is that the Motorola patents haven’t always worked out as well as Google might have hoped. But that doesn’t mean buying Motorola was a mistake.

The math of irrational patents and the end of war

Sure, Google bought the company for $12.5 billion and sold it for around $3 billion, but that doesn’t necessarily mean it was a bad deal from a patent perspective. While the spread suggests Google lost its shirt, the amount it will actually spend on Motorola at the end of the day is around $4 billion — and it’s keeping the patents.

The $4 billion figure, as analyst Benedict Evans, the New York Times and Bloomberg noted, results from the fact that Motorola had around $3 billion in cash on hand, and from the $6 billion Google recouped from selling off units of the device maker.

As for the patents, CEO Larry Page had this to say:

Motorola’s patents have helped create a level playing field, which is good news for all Android’s users and partners … Google will retain the vast majority of Motorola’s patents, which we will continue to use to defend the entire Android ecosystem.

Page’s words are a reminder that while some of the Motorola patents didn’t pan out in court, there are still thousands more of them that Google can unleash at any time, including newly issued ones (recall that Motorola had 7,500 applications at the time of the deal). And, at $4 billion, the price doesn’t appear to be crazy, especially when considering that’s less than the amount that Google rivals paid at auction for the patent portfolio of Nortel (which took place shortly before Google acquired Motorola).

More importantly, the Motorola patents don’t stand alone; they are part of Google’s swelling intellectual property portfolio, which now includes access to Samsung’s patents as well as the rapidly increasing number of patents Google is obtaining internally.

All of this means that Google is in position to wage the smartphone patent wars for years to come. Even if the Motorola patents don’t give it a knock-out victory, the patents will allow Google to inflict incredibly expensive litigation on rivals since, under America’s bloated patent system, it can take years to invalidate even the flimsiest patent.

Fortunately, this may not be Google’s goal. According to a person familiar with the company, Google’s patent partnership with Samsung is part of a larger plan to defuse the patent wars over smartphones, and promote industry-wide cross-licensing deals instead. If this is the case, the $4 billion that Google paid for Motorola’s patent will help give it the necessary strength to promote peace.

At the end of the day, the Motorola patent purchase was a sane response to a patent system that is so irrational that all three branches of the US government are now trying to reform it.