Oracle vs. Google – The Merry-go-round.

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I think Google will end up paying less than $1bn.

• Google and Oracle are at it again with Oracle asking for up to $9bn of damages as a result of Google’s alleged copyright infringement of the Java programming language.
• Normally this would be quite straight forward but where it gets complicated is that Java is open source software meaning that Google is entitled to use it.
• 37 Java APIs lie at the heart of this dispute which make up less than 0.1% of the Android software that runs on 2.0bn devices of which 0.9bn are Google ecosystem devices.
• However, Oracle owns the copyright on these 37 APIs and claims that Google simply copied them rather than make its own versions to work in conjunction with the open source Java code.
• Google’s position is that it its use of the APIs transformed the software into something new which counts as “fair use” because it is far more than merely copying.
• Last time around, the jury found that Google had violated Oracle’s copyrights but were deadlocked as to whether or not it constituted “fair use”.
• The supreme court declined to intervene which is why the whole issue is being dragged before a court again.
• There are strong arguments in both directions:
  • For Oracle. Google has a history of copying code line for line from the open source community and I believe that much of Android Auto was built this way.
  • Google does not seem to be denying that it copied the APIs but it categorically states that it did so legally.
  • This immediately puts Google on the back foot as it is not really denying Oracle’s accusation and is left defending its actions.
  • For Google. For seven years prior to the launch of Android, many companies tried and failed to create a viable operating system for a smartphone using Java.
  • Google’s success in doing so strongly indicates that it fundamentally changed the nature of the Java code to make it work properly on mobile thereby, in all likelihood, fulfilling the requirements of “fair use”.
  • Furthermore I think that Oracle’s allegation that Google copied Java APIs wilfully for monetary gain is baseless.
  • Google used Java as the starting point for Android because of Andy Rubin, the creator of Android.
  • Andy Rubin’s previous company Danger, created a data centric device called the Sidekick that was based on Java.
  • Consequently, when he came to Google with the mission to create Android, Java was the natural starting point.
  • Engineers do not tend to think about copyright or patents when they create something, they just focus on making the best product that they can which is what I am certain happened in this case.
• There is no doubt that Google has made a vast amount of money from the Android software which carries its services to mobile users but Oracle’s estimate looks punchy.
• RFM estimates that between 2013-2015, Google generated $30.4bn in revenues ($20.8bn from advertising and $9.6bn from Google Play) from devices based on Android software.
• Due to the very rapid growth in Android over the last 3 years, revenues prior to 2013, are unlikely to be more than $1bn-$2bn and not really meaningful.
• I believe that a very large proportion of this was profit but it is impossible to tell because many of the costs of providing the services will be the same as those for providing services to PCs.
• Legal cases in general are very difficult to predict and this one is far more difficult than most.
• I suspect that the outcome will be a settlement where Google pays Oracle something but far less than the $9bn that is flying around.
• My back of the envelope calculation ($30.4bn at 5% royalty) gives a figure of $1.5bn but given what companies are paying in royalties these days, this 5% looks high.
• Consequently, I think it unlikely that Google will pay more than $1bn which is a figure that could pass through the financial statements with barely a ripple.
• Alphabet remains around fair value meaning that I see more upside in Microsoft or Samsung but Apple is still looks incredible value for the really long term income investor.