Everybody is armed, forces are deployed and the battleground is chosen. Let's get this thermonuclear war started.
2011 was the year that the major mobile platform providers loaded up with ammunition in the upcoming world war between Apple, Microsoft, Research In Motion and Google. Apple acquired patents from Novell while the "Rock Star" group of RIM, Microsoft and Apple won the majority of Nortel's patents. Google went big and bought everything that Motorola owned. We know all of this already. But, that was just the staging area. The real test will be in 2012. On Monday, the United States Department of Justice approved all of those acquisitions in one fell swoop.
Steve Jobs promised to go "thermonuclear" on Android over patent violations. That seems to be a dying wish that Apple is willing to pursue. Now that the big guns are out, what will be the consequence to the mobile ecosystem? Will the arms race force a détente, powerful patent portfolios canceling each other out? Or is this the beginning of disruptive lawsuits that ultimately becomes harmful to consumers looking for choice?
Where the Guns are Pointed
We are going to try to make this as simple as possible. If you want the real grit on patent lawsuits, check out our coverage here or check on various patent issues.
For the first few rounds of patent battles, Microsoft and Apple fought a proxy war with Android and Google by bringing patent lawsuits against Android OEMs like Samsung, HTC and Motorola. The only company coming directly after Google over mobile patents was Oracle, based on its acquisition of Sun Microsystems and Android's use of Java.
Apple's cold war with Android focused on getting Android devices off the shelves in key markets. Both Samsung and HTC felt the brunt of Apple's lawsuits. Motorola has caught Apple's recent ire, with a new "anti-suit" filed this week in San Diego that accuses Motorola of using "FRAND" patents in lawsuits. FRAND stands for "fair, reasonable and non-discriminatory." A patent is determined to be a FRAND if it becomes an industry standard. Motorola, as one of the founding fathers of mobility, owns a boatload of "essential" patents, many of which surround various implementations of "3G."
The blow-by-blow of patent battles is an onerous study. Trying to explain Apple's "anti-suit" against Motorola in regards to Qualcomm based-band patents is like trying to have a conversation about quantum mechanics underwater. In this discussion, the blow-by-blow is not the point. What it boils down to is the idea of essential patents. Motorola owns many of the industry standard patents and says that it will cap its licensing fee of these patents at 2.25% of every device sold. In a market that has billions of dollars at stake, 2.25% is a pretty significant number.
The troubling thing about Motorola's suits that have use the essential patents is that it could set a difficult precedent for the industry. The notion of FRAND is that companies do not bring essential patents to court because it is not fair or reasonable to impose fees on the entire industry on industry standard technology.
The thing about all the recent patent acquisitions is that every one of the major players in the ecosystem now own significant numbers of essential patents. Nortel and Novell patent repositories held significant numbers of essential patents, one of the reasons that the bidding was out of control.
This chart from Reuters was published in Aug. 2011 but still gives a pretty good idea of who is suing whom in the patent wars.
The question now becomes: what will be done with these patents?
The Cost to the Consumer
The primary concerns the U.S. Department of Justice expressed when approving the three acquisitions surrounded these standard essential patents (SEPs). For a breakdown of the issue, read the DOJ's full statement issued on Monday regarding the approval process.
There are a few key takeaways:
The division's concerns about the potential anticompetitive use of SEPs was lessened by the clear commitments by Apple and Microsoft to license SEPs on fair, reasonable and non-discriminatory terms, as well as their commitments not to seek injunctions in disputes involving SEPs. Google's commitments were more ambiguous and do not provide the same direct confirmation of its SEP licensing policies.
Apple's and Google's substantial share of mobile platforms makes it more likely that as the owners of additional SEPs they could hold up rivals, thus harming competition and innovation. For example, Apple would likely benefit significantly through increased sales of its devices if it could exclude Android-based phones from the market or raise the costs of such phones through IP-licenses or patent litigation. Google could similarly benefit by raising the costs of, or excluding, Apple devices because of the revenues it derives from Android-based devices
The DOJ noted that Microsoft and RIM's low market share makes it unlikely either company could bring lawsuits based on essential patents because it would ultimately prove unprofitable.
Where does this whole mess lead us? The DOJ's concerns are that patent litigation will lead to competitors extorting higher rates from each other, hence making it less profitable to be in the mobile business and more expensive for the consumer. While Motorola or other Android OEMs would love to block the sale of Apple products in certain countries, the real goal is to extract money from the iPhone maker. Apple has plenty of money and one of the reasons it is sitting on its pile of cash is to fight these lawsuits and provide a buffer to its profitability. Apple has the ability to have Android devices taken off store shelves and has done it with HTC and Samsung in the past.
So, what does thermonuclear patent war look like? Higher prices for consumers, the squeezing of the ecosystem in such a way that weaker companies die off, stifling of innovation because of regulatory or legal concerns and the slowdown of product releases that have the potential to shape the fundamental nature of how people live there lives.
Without Android, Apple would love to issue every man, woman and child in the world an iPhone, subsidized through the carriers. It can continue its iterative and boring product release schedule. Android would love to push the iPhone and its profit gobbling monstrosity out of the industry but then people would be deprived of the one splendid device that has come to define a generation.
Patent agreements, especially surrounding standard essential patents, are a cost of doing business in our modern industry. But, when business start taking innovative products off shelves and forcing competitors into bankruptcy, a line has been crossed. The industry now stands on the edge of a knife. With everybody armed to the teeth will they find a way to co-exist or will they fire their warheads to the detriment of all?
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