CompStrat Final Exam Submission

12 Dec 2011

DUKE UNIVERSITY

Acknowledgement
I would like to thank Professor Hopper whose dedication and command over the Competitive Strategies course ignited in me the passion to probe deep into the realms of strategy involved in executive decision making of high tech companies.

(Ashank Gupta)

Contents
The History .................................................................................................................................................... 3 The Acquisition ............................................................................................................................................. 3 Business Models............................................................................................................................................ 5 Possible reasons for the Acquisition: ............................................................................................................ 6 The Future ..................................................................................................................................................... 7 The History .................................................................................................................................................... 8 The Deal ........................................................................................................................................................ 8 AT&T Perspective .......................................................................................................................................... 9 T-Mobile Perspective .................................................................................................................................... 9 Market Perspective ....................................................................................................................................... 9 The Business Model .................................................................................................................................... 10 The Future ................................................................................................................................................... 11 Role of Globalization in Tech Industry ........................................................................................................ 13 Role of Intellectual Property in Tech Industry ............................................................................................ 15

The History Motorola Mobility Holdings, Inc. (MMI) was a spinoff of Motorola Inc. in Jan 2011. It is comprised of two industry-leading global technology businesses: 1. The Mobile Devices business - an innovative provider of smartphone devices designed to fit every lifestyle. 2. The Home business - one of the largest providers of digital set-top boxes and end-to-end video solutions. 1 Google acquired Android Inc. in August 2005, making Android Inc. a wholly owned subsidiary of Google Inc. Key employees of Android Inc. stayed at the company after the acquisition. Android Inc. was not a famous company at the time of acquisition and the deal did not gain much limelight as Google is known for its M&A. But many assumed that Google was planning to enter the mobile phone market with this move. 2 The Acquisition Google bought Motorola Mobility in August 2011. The deal is slated for approval and the schedule for regulatory filings may lead to the deal being consummated in early 2012. Google acquired Motorola Mobility for $40.00 per share in cash, or a total of about $12.5 billion, a premium of 63% to the closing price of Motorola Mobility shares on Friday, August 12, 2011. The transaction was unanimously approved by the boards of directors of both companies. 3

1 2

http://mediacenter.motorola.com/Press-Releases/Motorola-Mobility-Launches-as-Independent-Company-352b.aspx http://en.wikipedia.org/wiki/Android_(operating_system) 3 http://investor.google.com/releases/2011/0815.html

Is it Leverage My Business Model (LBM) acquisition? No, because Google has planned to run it a separate business and not to amalgamate it into the parent company. Then is it Reinvent my Business Model (RBM) acquisition? No, because Google has shown high growth in recent years and its current business model of advertising has not faded. Further neither does MMI have a disruptive innovative product in its arsenal nor is Google buying MMI to decommoditize its line of products. This type of acquisition is a Leverage Buy Out (LBO). It is because the main motive of the acquisition is to diversify its extant patent portfolio to protect the manufactures of Android handsets like Samsung, Htc etc. (its key partners) from the onslaught of patent lawsuits from Apple, Microsoft and Oracle. Google offered to pay shareholders $40 a share plus extra cash or securities for a 63 percent premium for Motorola Mobility. From a patent perspective, the Motorola acquisition provides a sizable portfolio of both issued and pending patents. Currently Motorola has about 17000 patents in its arsenal with about 7500 pending approval. Using the rule of thumb that typically 3% of patents in any portfolio feature real value, one can assume that Google has acquired more than 500 high-value (possibly essential to standard) patents. Google has demonstrated an aggressive patent acquisition strategy in the past, just recently coming up short in a bid to acquire Nortel's patent portfolio to a consortium of industry leaders such as Microsoft, Apple, RIM, Sony, and others. With this recent acquisition, Google strengthens its own patent portfolio while acquiring the assets and engineers of Motorola, although at a cost much higher than the bids it submitted to Nortel. Google has understood that patents are necessary to prevent frivolous lawsuits which result in drainage of cash and efforts which could have been channelized towards better products. This is the classic buy v/s build decisions dictated by the time and resources available that many established companies have already faced. Google fits the mold of a company at which revenue growth has outpaced its ability to generate its own patents and therefore has been forced to buy aggressively until its internal efforts catch up. This could explain its recent aggressive strategy to acquire Nortel's patent portfolio and the acquisitions of IBM and Motorola Mobility patents 4

http://www.edn.com/article/519354-Google_and_Motorola_A_match_made_in_patent_heaven_.php

Business Models

It is evident from the business models of the two companies that they share very few things in common, if any. They cater to different users and have completely different value propositions and product offerings. They have very different cost structures. Moreover, investing in an unattractive hardware manufacturer may slow down the growth rate of Google. Although the deal was approved by 99% of Googles shareholders, future investors may become cautious due to the bulkiness of the firm. All the Android handset manufacturers who are now potential competitors have issued statements supporting the acquisition. 5 Apart from the main reason of protecting its partners from patent infringements, there may be several other reasons for the acquisition. Possible reasons for the Acquisition: 1. Google may be trying for a vertical integration in the value chain by becoming an integrated manufacturer of hardware and software to give head on competition to Apple. Although this is unlikely as it may upset the existing relationships with Android handset manufacturers like Htc, Samsung, and Sony etc. Google agrees that the main problem with Android is its fragmentation which is not an issue with iOS since Apple has sole control over its development. By acquiring a handset manufacturer, Google may be able to consolidate Android and have more control over its development. 2. Google TV released in May 2010 has not received good response in the market. By July 2011, commentators were saying "Google TV is sinking" and that it was "on its last legs" as launch partner Logitech slashed the price of its Revue (from $249 to $99) to clear unsold inventory. Further, the company revealed that returns from Distributors and Retail exceeded the number of units sold in Q1 2011. As of August 2011, Sony reduced the prices on its Google TV-powered HDTVs to capture more of the market. 6 With the acquisition of MMI, Google may look into reviving its video solutions business as MMI has a strong foothold in this home entertainment field. Further, Googles YouTube and other video software can be seamlessly integrated into the hardware now. 3. This could also have been a planned exit strategy for Motorola from the loss making hardware business. Motorolas divestiture interests were apparent when Motorola was split into Motorola Mobility and Motorola Solutions. The next step in the process is selling the unprofitable unit which was done within 6 months of the split. 4. The Google attainment could aid Motorola in the pre-paid smartphone market. One in five handsets purchased in the second quarter were pre-paid and those carriers that
5 6

http://www.greensheet.com/emagazine.php?story_id=2638 http://en.wikipedia.org/wiki/Google_TV

present pre-paid plans saw increase in the last year. In Q2, 22 percent of pre-paid phones were smartphones, up from 8 percent last year. Google could possibly acquire a network operator in future. 7 The Future Since the main motive of the deal has been to leverage the current portfolio of Googles weak patent line, it shall not be advisable to operate MMI has a separate entity over the long run. Moreover, hardware manufacturing has not been a very lucrative business. 99% of Googles revenues are from advertising and hence any M&A must over the long run focus on abetting its current business. Thus for the deal to be successful, Google should sell off MMI manufacturing facilities to other mobile hardware firms like Sony, Htc etc. Therefore, conversion of the LBO acquisition into a LBM acquisition by shutting down the original business of MMI and integrating its resources into Google shall pave the way for long term success.

http://www.symbolstechnology.com/google-gets-patents-what-does-motorola-obtain.html

The History AT&T Inc. is currently the largest telephone network provider in USA having a market share of 31.9%. Verizon which has nearly the same market share comes in 2nd. The current AT&T was formed when in 2005 SBC Communications acquired the parent AT&T and took on its name and branding. 8 T-Mobile International AG is the international arm of German Deutsche Telekom AG's which operates all its ventures outside Germany. Globally T-Mobile has about 150 million suscribers. The Deal In Mar 2011, AT&T proposed to buy T-Mobile for $39 billion. After the acquisition, AT&T would have 43% of the market share making it a duopoly. According to AT&T, the deal was about capacity. By acquiring T-Mobile, with its parallel spectrum holdings, identical network technology and the complementary cell tower placement, AT&T is favorably poised to defend its network from the onslaught of mobile data consumption. 9 The proponents of the deal, who are lobbying hard to convince FCC, say that the acquisition will provide 4G access to 97% of the American population including 55 million rural subscribers and shall not stifle the competition. AT&T also bolstered it argument by saying the merger would create jobs by expanding broadband access. AT&T tried to coax the
8 9

http://en.wikipedia.org/wiki/AT%26T http://www.wirelessweek.com/Articles/2011/31/Status-Update-ATT-T-Mobile-Mega-Merger-Business/

Department of Justice to approve the deal by promising to spend an additional $8 billion to grow its wireless broadband network in rural areas. The company also promised to bring 5,000 wireless call center jobs back to the United States if regulators allowed the deal to go through.
10

The fear among opponents including the 3rd largest competitor Sprint is that this will create an undisputed reign of AT&T in the markets raising prices and limiting the number of handsets available for the consumers. Further, the customer service of T-mobile and AT&T are considered subpar and a merger would only further deteriorate the affairs. AT&T Perspective The sole reason for the acquisition is the increase in customer database to make AT&T a market leader. The stated improvements in network and service in rural areas can be achieved at a fraction of the deal value. From an unredacted letter sent to the Department of Justice (DOJ), AT&T could achieve the same network increase and penetration by investing $3 - $5 billion instead of spending $39 billion for T-mobile. Thus this deal is basically a LBM type since AT&T wants the customer database and telecom infrastructure of T-Mobile. T-Mobile Perspective The deal will result in a huge cash inflow for the parent company Deutsche Telekom (DT). Also the deal would alleviate their woes of not enough spectrum space for LTE. Also the customer database of T-mobile has been predicted to decline to less than 10 million users taking into account the current churn rate 11. Hence an acquisition by AT&T shall be very favorable for DT. Market Perspective There was initially huge support for the deal from various union worker organizations since AT&T employees a large number of workers and T-Mobile has none. Also other ethnic groups, free marketers and 14 governors came out in support of the deal. The main reason for support was a robust and consolidated company would provide better service. Many of the supporters had received charitable donations from AT&T and some had senior management of AT&T as their board members. 12 From the start, there was vehement opposition from Sprint which would become an insignificant player if the deal went through. In May 2011, a couple of State Public Utilities

http://broadband.about.com/od/ma/a/What-Is-At-Stake-In-The-Atandt-Acquisition-Of-T-Mobile.htm http://www.brightsideofnews.com/news/2011/10/24/analysis-att-buyout-of-t-mobile-usa-has-bigproblems.aspx 12 http://benton.org/node/75617

11

10

commission started their own investigations into the deal. In Nov 2011, AT&T filed for withdrawing its application from FCC for channelizing its efforts to obtain antitrust approvals. The stock price indicates these market sentiments. Initially both the stocks showed an increase of 10-15% when the deal was announces in March. Presently, AT&T stock price is same as predeal price while DTs has decreased to about 5% to that of pre-deal price.

The Business Model It is evident from the business model canvas that both the firms have nearly the same components. The only notable difference is in the value proposition. While T-Mobile is known as a low cost carrier, AT&T is known for its larger customer database and hence commands economies of scale. By acquiring T-Mobile, AT&T is trying to acquire its resources namely the telecom infrastructure. However, another incentive is the attached customer database. Thus empire-building may be the chief motive.

The Future Through this deal, major costs are not expected to decrease substantially since AT&T shall use T-Mobiles entire infrastructure but still AT&T is willing to pay goodwill nearly equal to the networth of T-Mobile. As can be seen from the Grand Strategy Matrix, telecom industry in USA is a slow growing one with an average growth of 7-8% compared to worlwide growth of 10%. 13 With AT&T in quadrant IV and TMobile in quadrant III, it is a perfect strategic move to acquire T-Mobile since it is very difficult to gain market
13

http://www.reuters.com/article/2008/02/22/us-telecoms-forecast-idUSN2255854420080222

share in this market through marketing and other technological improvements. Even the sole exclusivity of iPhone on AT&T network could only increase its market share by 4-6% Therefore this LBM type of deal, if approved, may be successful because additional customers are served through the added capacity network and thus the increased revenues can easily offset any increase in manegerail complexity.

Role of Globalization in Tech Industry

Globalization may be referred to dissemination of information, technology, production etc. across borders. Its effect on a technological company is far more pronounced. For instance, a Hindi language newspaper company operating only in North India may be highly profitable but an Indian manufacturer of automobiles will either be internationally recognized or not even gain acceptance in the local market. Due to a large footprint of technological companies on the internet and their ability to reach consumers in all parts of the globe especially for software firms, it is impossible for a startup to remain local and thrive. Also the knowledge of the best technology is easily available to the consumer making the competition intense and global. Hence, for the survival of a technology firm, globalization is of utmost importance. Technology companies rely increasingly on open innovation because they have realized that it is not always possible to produce original ideas and cutting edge research internally. In fact for software companies like Twitter, Yahoo, etc. which focus highly on content co-creation, going global is imperative to their success. A few exceptions like Baidu in China and Mixi in Japan exist but they are no match for the larger players in the market like Google and Facebook. The effect of globalization on porters 5 forces is: 1. Removing / reducing barriers to entry since an already successful model in one market may be emulated in another untapped market with huge success e.g. Flipkart started by former Amazon employees is now the Indian version of Amazon. Amazon did not tap the Indian market for a long time which was huge opportunity for the startup. 2. This causes the threat of substitutes to increase since now lot of companies are inclined to reap profits from an already successful business model. 3. Which results in a decrease of bargaining power of suppliers since more firms offering similar products are available e.g. equipment from Komatsu was initially built on design improvements of Caterpillar equipments 4. The above results in commoditization of the product which causes price rivalry resulting in increase competition among rivals entry of global players caused a PC price war leading to 20% reduction in prices in 2001 5. Thus, the relative buyer power of consumer increases Further due to proliferation of information & technology and increased competition, the rate of change and technological improvements have also increased. An example is of Komatsu which initially produced cookie cutter products but then invested in its own R&D and is now the 2nd largest manufacturer of heavy industrial equipments.

Larger firms are more easily able to leverage globalization to their advantage than smaller firms since they lack the capital to enter new markets. They utilize open innovation methods like crowd sourcing to continuously innovate which is difficult for smaller companies. Moreover, going global involves considering factors like legal framework, import regulations and political issues. Also each country has its own social norms, culture and preferences. It is not necessary that a product or service famous in one country shall be successful in another also. For instance, Facebook is not in the top 20 surfed sites in Japan because its offering is not suited for Japanese language and culture. Thus globalization plays a major role in transforming a garage startup to a multinational firm. Even established companies cannot ignore its effects on competition and other market forces. To be successful, a firm must understand the implications of going global and must try to do so in the early adopter life stage of a product or service.

Bibliography
1. 2. 3. 4. http://knowledge.wharton.upenn.edu/article.cfm?articleid=2316. (n.d.). http://virtuouscycles.net/env/strgy/porter/porter0408.php http://www.acmoc.org/bb/archive/index.php/t-475.html http://voices.yahoo.com/barriers-globalization-2070111.html?cat=3

Role of Intellectual Property in Tech Industry

In the current market scenario I believe it is necessary to have patents. The market now is driven by innovation and the sheer number of players in the market is huge, since everyday a large number of ideas are tossed in the market and their potential cannot be realized unless they are formally launched in the market place. Patenting makes sure that the concerned group of players reaps the appropriate benefit from their idea rather than having another set of competitors infringing upon their idea and reducing their profitability. One of the defining factors in the current economy is better management of innovation than the competitors. There are many stages involved from the inception of an idea to the full fledged launch as a new product or an improved product, if at any stage in between the idea is leaked then the risk of the concerned party shoots up and this may lead to heavy financial losses. Patenting or IP is a life saver in such conditions and it also furthers a healthy competition amongst the different players. There have been a number of patent related lawsuits where a lot of capital is under concern for example Apple and Samsung lawsuit, the final verdict of which is still awaited. Let us explore this lawsuit further. Apple has claimed various trade dress infringements stating that Samsung Galaxy tried to confuse users by looking like the Apple iPhone. The veracity and credibility of these statements shall be a matter of legal purview but something that is very basic to the design cannot be trade dress infringement. For instance, Ford cannot sue Toyota for making a rectangular shape 4-wheeler having a round steering wheel. This is a standard design much like how a table has 4 legs and a flat top. Other design patents infringed in the lawsuit relate to the method in which the messages are displayed, icons pop control bar and widgets. i Award of software patents must be more rigorous and the idea of invention must be associated with each patent. Frivolous patents like display progress of loaded page or Amazons one click checkout arent exactly breakthrough inventions. ii Many countries including India & China do not have patent protection for software programs per se. Thus firm guidelines must be laid for differentiating obviousness and inventive step to prevent misuse of patents for inhibiting technological development. Another method of misuse of patents is by patent trolls like Intellectual Ventures Inc. Although they say that their main objective is to protect SMB and inventors from patent infringement, investigative journalism has confirmed that their major revenue is from lawsuits or out of court mafia style settlements. iii When the sole purpose of purchasing a patent is to file lawsuits against users and not actually develop on the patent, a whole area of ethics of business come into play. These companies not only hinder further development but also cause phenomenal losses to existing companies who might have unknowingly infringed upon a frivolous patent. Thus the fault lies in the system also which allows such companies to flourish. Extant laws must be strengthened to prevent such firms from harassing actual inventors. There are certain challenges faced by organizations owing IP mentioned as under iv:

1. Inadequate manpower and expertise to undertake the groundwork required for IP acquisition / pre-filing procedures. 2. High cost of patent process including attorney fees. 3. Lack of in-house knowledge about IP infringement and modes of protection If a technological firm has substantial IP, then having in-house IP experts is advisable. To continuously generate revenues from a patent, regular investment in R&D is required to develop new patentable product before expiry of initial patent. In my opinion it is difficult for a technology based company to thrive without patents because the system is quite porous and the market is innovation driven, if there is no law in place to protect an idea from being diluted or copied then the markets would go haywire as a competitor may build upon anothers idea and can push the original idea generator out of business. This obviously wouldnt encourage a healthy system as well as good competition.

http://www.theverge.com/2011/04/19/apple-sues-samsung-analysis//in/2297513 http://en.wikipedia.org/wiki/1-Click iii http://www.thisamericanlife.org/play_full.php?play=441 iv http://www.wipo.int/sme/en/ip_business/acquire_protection.htm

ii