A long-rumoured Google-HTC deal finally took shape this morning, as the two companies announced a $1.1 billion “cooperation agreement”.
Predictions had ranged from an outright acquisition of HTC by Google to a strategic investment, but the actual arrangement looks to be somewhere in between, with a smartphone R&D team moving over to the US company in exchange for a cash infusion. Notably, it does not look like Google will be acquiring any HTC IP outright, but a licence agreement between the companies is put front-and-centre in the announcement.
All the details we know about are found in the first paragraph of the press release:
Google and HTC Corporation today announced a definitive agreement under which certain HTC employees – many of whom are already working with Google to develop Pixel smartphones – will join Google. HTC will receive US$1.1 billion in cash from Google as part of the transaction. Separately, Google will receive a non-exclusive license for HTC intellectual property (IP).
The major asset Google is getting is the engineering team tasked with supporting the design of its Pixel series of phones, for which HTC is the contract manufacturer. According the Bloomberg, this so-called “Powered by HTC” team has about 2,000 members. What Google doesn’t get is HTC’s whole smartphone business. HTC chairwoman Cher Wang says in the press release that the deal will enable “continued innovation within our HTC smartphone and VIVE virtual reality businesses”.
The Taiwanese company is also holding onto its IP assets. Last week, this blog contemplated what patent portfolios might change hands in a possible Google buyout of HTC’s smartphone unit. An HTC purchase would not be a major patent play like the search giant’s Motorola Mobility acquisition, we concluded; but HTC does have around 2,000 US patents including third-party assets from the likes of HP, NEC and Nokia. It is now clear that those patents will stay in the Taiwanese company's possession.
The word ‘separately’ in the above quoted passage seems to indicate that the IP licence and the cash-for-engineers swap are two discrete deals. The terms of the licence aren’t given, and the release suggests it isn’t necessarily even new, stating: “Google will continue to have access to HTC's IP to support the Pixel smartphone family.” But by putting the licence in the headline of the deal, both sides have given a clear signal to the market that HTC owns its IP and Google will have the right to use it.
Some have suggested that Google’s main interest is in financially propping up a competitively useful company. There may well be some truth to that – the two have a long relationship going back to HTC’s production of the first-ever Android phone, and they’ve allied on patent litigation and licensing initiatives like PAX over the years as well. Google may also have steered clear of outright acquisition to avoid upsetting other Android partners like Samsung.
But whatever Alphabet’s motivations, this deal is, on its face, all about intellectual assets, specifically know-how. It may be that $1.1 billion is pocket change for Google (parent company Alphabet has around $95 billion cash on hand), but it seems like a lot to pay for the right to add 2,000 engineers to your payroll. At over half a million dollars per head, Google must see value in the future stream of innovations and designs that will come out of the Pixel R&D team.
For HTC, on the other hand, $1.1 billion is a significant sum. It was not so long ago that investors valued the entire company at less than the $1.5 billion it then had in the bank. For HTC to receive cash equal to 60% of its market cap should enable the company to make big investments in its future - especially as it has lost a number of presumably well remunerated staff members from its payroll. For it to net that amount of money without parting with its promising VR division or its most valuable IP assets – its brands – is even better.
Wang also seems to see the agreement as a vindication of HTC's innovation prowess. "Our unmatched smartphone value chain, including our IP portfolio, and world-class talent and system integration capabilities, have supported Google in bolstering the Android market," she says in the press release.
During the height of the smartphone patent wars, HTC was sometimes pointed to as an example of what not to do when it comes to patent strategy. The assets included in this deal – and those that are left out – indicate the value that other intangibles can generate.