On May 7, Nokia lodged a patent infringement suit against Apple
in Madison, Wis., that said Apple's iPhone and iPad violate five Nokia
patents. In just seven months, the companies have exchanged five suits
and countersuits. The tussle began in October 2009 when Nokia accused
Apple of infringing on 10 patents and demanded royalties.
In March, Apple sued Taiwan-based HTC, alleging it infringes on
20 Apple patents relating to touch and menu controls. The latest legal
volley came May 12 when HTC responded to the Apple litigation with a
complaint at the U.S. International Trade Commission, asking the agency
to halt imports and sales of iPhones and iPads in the U.S. "We are
taking this action against Apple to protect our intellectual property,
our industry partners, and most importantly our customers that use HTC
phones," Jason Mackenzie, a vice-president at HTC, said in a statement.
Microsoft is also pursuing patent payments from companies that
make phones based on Android software. On Apr. 27, Microsoft said HTC
will license its software for the phones. The terms haven't been
disclosed. Patents also played a role in the recent $1.2 billion deal
for Palm. Hewlett-Packard has said that patents associated with Palm's
WebOS operating system for smartphones is one reason it wants to
acquire Palm. "This landscape looks like France in 1914," says Eben
Moglen, a professor at Columbia Law School. "This is the onset of a
period of instability."
Revenue pie
Patent holders want a larger slice of smartphone revenues, which
grew 27 percent to $61 billion in 2009 and are on track to grow another
30 percent this year, according to Boston-based consultant Strategy
Analytics. And the companies that want a slice come from not only the
phone but also the PC and software industries, whose inventions and
functions smartphones increasingly absorb.
Each industry has its own unique functionality to protect: Apple
holds many patents related to computing, applications, and touch
technologies, which have been a hit in the iPhone. Nokia holds rights
to many of a telephone's communications capabilities, while Microsoft
owns a wealth of patents related to mobile device software. As
companies seek to keep their technological acumen away from rivals—or
to collect patent royalties from those rivals—the lawsuits are piling
up. "Whenever industries merge, there may be patent litigation," says
Gustav Brismark, vice-president for patents strategy and portfolio
management at Swedish telecom gearmaker Ericsson, which holds many
wireless connectivity patents.
One camp under attack: Manufacturers building phones with Android
software, created by a coalition of companies led by Google. They are a
target, in large part, because of their success. In the first quarter,
Android phones accounted for 28 percent of all smartphone unit sales in the U.S.,
ahead of Apple's 21 percent, according to consultant NPD Group. In its
March complaint to the International Trade Commission, Apple said
several of HTC's Android phones infringe on its patents, some of which
relate to how an operating system works and handles applications. Apple
also sued HTC in federal court in Delaware, alleging patent
infringement. Patent payments
As smartphones grow increasingly complex, they rely on more patents.
Nearly 8,000 patents, held by 41 companies, apply to phones' 3G
wireless communications capabilities alone, according to industry
research. Today handset makers pay less than 10 percent of their costs
in patent royalties. But that percentage could jump substantially in
the future—and potentially lead to a surge in prices that consumers and
carriers pay for handsets.
There's precedent for higher licensing costs. When PCs and fax
machines were new, their builders often paid 15 percent to 20 percent
of the devices' selling price—not cost—for patent licensing, says
Emmett J. Murtha, chief executive officer of Fairfield Resources
International, a Darien (Conn.)-based firm that helps clients like
Nokia and chipmaker Texas Instruments evaluate and license patents.
Many of those older patents have since expired, but a multitude that
apply to smartphones remain in effect.
One of the world's largest wireless patent holders, Qualcomm,
already collects nearly $1 billion in royalty revenues a quarter—the
result of its own lengthy legal battles with the likes of Nokia and
chipmaker Broadcom.
Now other companies are jockeying to boost their royalty revenues
as well. But some companies may not have royalty payments in mind. They
may wish to prevent rivals from offering competing products. "Apple
would like to prevent competitors from making phones that are
iPhone-like," says Mark Lemley, a patent law professor at Stanford Law
School whose clients have included Google and Palm. Other Android
manufacturers may become targets for Apple and other companies in the
future, say legal experts. While Google has a substantial patent
portfolio of its own, and could buy licenses to additional patents to
protect Android manufacturers, it has not yet specified its plans.
Google spokesman Anthony House declined to comment.
Margin threat
HTC likely pays Microsoft
$20 to $40 per phone such as the new HTC Droid Incredible from Verizon
Wireless, estimates Rob Enderle, principal analyst at the San
Jose-based consultant Enderle Group. Microsoft's Windows Phone
operating system for smartphones has been losing steam for months,
while Android has gained ground. Apple, HTC, and BlackBerry maker
Research In Motion declined to comment.
One Android handset maker has already budgeted for its patent
royalty payments to double next year, says an executive at the company,
who spoke on condition of anonymity since his talks with patent holders
are continuing. The extra fees could threaten the industry's margins,
which in percentage terms range from the teens to the low 20s. But
patent holders say they need to be paid for their inventions: "After
all, technology just doesn't appear, fully developed, out of Zeus's
head," Microsoft's deputy general counsel Horacio Gutierrez wrote in a
recent blog post. "It requires lots of hard work and resources to
create."
Nokia, which has struggled in the smartphone market, may not be
willing to license some of its patents to its most dangerous rival,
Apple, either. In 2009, Nokia's global smartphone unit market share
shrank from 40 percent to 39 percent, while Apple's rose from 9.1
percent to 14.5 percent, according to consultant IDC. "Nokia may decide
whether to license those patents or to keep them for itself as a basis
for product differentiation," says Paul Malin, general manager of
patent licensing at Nokia. "Nokia's patent portfolio has not been
broadly licensed to competitors." Nokia sued Apple for patent
infringement in court and complained at the International Trade
Commission last year. Apple has since countersued, accusing Nokia of
infringing on Apple inventions.
Smaller licensors
Smaller patent-licensing firms are attacking the mobile industry as
well. In January, a newly formed company, MobileMedia Ideas, purchased
122 patents from Nokia and Sony. Two months later, the Maryland-based
company filed lawsuits against Apple, Research In Motion, and HTC. "We
are in communication with approximately 200 companies making thousands
of products," MobileMedia Ideas Chief Executive Officer Lawrence A.
Horn says. "In the past several years, there has been a big
proliferation of valuable products, and now [these patents] have a
value in the market."
As smartphones have proved popular, patent holders say it is time
to pay up—and ultimately that's what consumers may be forced to do.
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