Patently a problem: vendors draw up new battle lines

Citation

Curwen, P. (2012), "Patently a problem: vendors draw up new battle lines", info, Vol. 14 No. 3. https://doi.org/10.1108/info.2012.27214caa.001

Patently a problem: vendors draw up new battle lines

Article Type: Rearview From: info, Volume 14, Issue 3

A regular column on the information industries

The equipment manufacturing (vendor) market has been in structural disarray for a considerable time (Curwen and Whalley, 2010), the most recent manifestation of which has been the purchase by Sony of Ericsson’s half share in Sony Ericsson in October 2011. But this disarray could be laid primarily at the door of excessive competition – only those products which were reasonably priced, and/or technically at or near the cutting edge and/or designed in a manner attractive to potential customers could expect to have their moment in the sun, and even then it was unlikely to last for long unless it happened to be an Apple (which had itself to be continually updated).

Competition necessarily involved legal issues, but what has changed dramatically over the past year is that legal disputes have come to play a leading role in determining who and what succeeds or fails in markets such as that for handsets.

To clarify why this is so, we can turn to recent statements made by the Ericsson CEO, Hans Vestberg. He pointed out that the company owned 27,000 patents, including the world’s largest collection of mobile communications patents, and that a rapidly growing proportion of consumer electrical devices, ranging from toys to smart meters, involved some element of wireless connectivity. Hence fees could be charged where such connectivity involved Ericsson’s patents. IPR revenue had already doubled between 2006 and 2010 to over $700 million per annum and Hans Vestberg valued the total patent pool at $15.5 billion. Ericsson now intended to levy charges in areas such as web search and optical networks which it had previously ignored, and increasingly regarded IPR revenue as the ideal offset to the highly variable revenue stream forthcoming from the sale of physical products.

But if patents represent an increasing source of revenue – it is alleged, for example, that Microsoft earns more from its patents that cover elements of the Android OS than it does from its own Windows Phone OS – it follows that there will be an increasing number of disputes, and obviously the precise wording of patent applications is a major factor in this. Consider, for example, the announcement of US patent 8,046,721 on 26 October 2011. This patent related to so-called “keypad locks” in the context of touch screen handsets, and sought to patent on behalf of Apple the finger swipe method for unlocking them for use. This method was specified in such a manner as to preclude its use by Apple’s competitors even though it had already been incorporated into handsets manufactured by the likes of HTC. Wording patents in such a way as to be all-inclusive is not a new trick, although it tends to be more problematic outside the US in respect of software as compared to hardware.

Because there is so much money to be made, there is increasing evidence of an entity commonly referred to as a “patent troll”. The term broadly refers to a person or company which does not function as an inventor but rather buys-up and enforces patents (which the original patentee has generally not thought it worthwhile to enforce) in an aggressive and opportunistic manner.

However, the biggest gain for vendors from a strategy of patent disputes is probably derived from the delays while contested devices are prevented from entering the market. Losing a dispute may be irritating, and even reasonably costly, but if the value of all of the delays is taken into account then it is evident from experience that the strategy is going to yield net gains.

So it is hardly surprising that the holders of portfolios of patents are much in demand and have risen significantly in value in recent times. A first example relates to InterDigital, a giant in the patent world which attracted the attention of the likes of Google, Qualcomm and Nokia in the second half of 2011. So far as 2G and 3G are concerned, the major patent-holders are InterDigital, Qualcomm, Nokia, Ericsson and Motorola. Interestingly, Qualcomm has come to be seen as the voice of reason as it serves all of the vendors and has no obvious interest in fighting them through the courts, so there is widespread hope that it, rather than other parties that are eyeing InterDigital’s patents as potential weapons of war, will be the eventual purchaser.

A second example relates to Canada’s Mosaid Technologies which was the target of a hostile takeover bid from Canada’s Wi-Lan – these two companies are arguably the two most litigious non-vendors where patents are concerned – whose C$38 a share offer was trumped at C$42 a share by US-based private equity firm Stirling Partners in October 2011. Why the interest? Because, in September, Mosaid had gained control over 2,000 patents from Nokia and Microsoft which included 1,200 deemed to be essential to the GSM/W-CDMA and/or LTE standards. When Nokia and Microsoft agreed to work together on WP7, the value of the portfolio rose sharply.

So why did Nokia and Microsoft cede control? Because like other very large companies they know that they represent the ideal deep-pocketed targets to be taken to court, whereas minnows such as Mosaid are hardly worth the effort. However, this does not appear to worry Google over-much as it twice acquired roughly 1,000 patents from IBM during the latter part of 2011.

Interestingly, there is some evidence that the tables can be turned. It is worth noting, for example, that a minnow was successful in taking on Apple in November 2011. On this occasion, Apple attempted to defend its leadership of the profitable tablet market from alleged iPad copycats by obtaining an injunction in November 2010 to prevent the importation of the Android-based NK-T tablet into Spain. The importer, Nuevas Technologias y Energias Catala, had the injunction lifted, but by then it had managed to sell only 200 units instead of the projected 15,000 units. But whether it will be compensated remains a moot point.

There can be no doubt that Apple has become the market leader in terms of patent-related litigation, and it has become adept at playing the delaying game. Thus, for example, in the run-up to Xmas 2011, it initially succeeded in keeping the Samsung Galaxy Tab 10.1 – the major competitor to the iPad2 – off the shelves in Australia and parts of Europe including Germany by alleging that patent infringements had taken place. In Australia, Samsung admitted that if the Tab missed the Xmas season then it would have to be withdrawn permanently, a potentially valuable victory for Apple which had yet to be required to prove its case in court. On this occasion, Samsung was able to overturn the sales ban, but Apple duly filed an appeal. However, Apple was less successful in the US where it failed to ban a range of Galaxy devices in December.

It may be argued, naturally, that Apple poses the biggest threat to all of the other vendors and hence is bound to be their primary target for litigation, but it is also true that Apple is less than keen to reach compromises – as in this particular case – that allow competitors’ devices to remain on the shelves.

Tit-for-tat is certainly the order of the day. Apple and Samsung, for example, were involved in over 20 lawsuits during the final quarter of 2011. In response to Apple’s intransigence over the Galaxy Tab, Samsung threatened to sue to block sales of the impending iPhone 5, and patent suits in general seem to stimulate counter-suits almost as a matter of principle. HTC is another vendor with which Apple engages in a never-ending patent war, in good part because HTC patents are used generically in Android-based devices.

The latest spat involves Motorola Mobility and has an added frisson in that the latter is under offer from Google – an offer worth $12.5 billion essentially riding on the back of the target’s patent portfolio. In November 2011, a regional court in Germany ruled against Apple (as against its German subsidiary) on the grounds that it had infringed two Motorola patents, but as this is regarded as merely the prelude to an appeal and does not prevent Apple from continuing to market its products, it is not being treated as significant.

The European Commission is, however, becoming concerned about the effects of patent wars on the competitive landscape for mobile. As a result, it wrote to Apple and Samsung in November 2011 asking them to clarify the position with respect to standards-essential patents. Whether this will eventually lead to intervention by the commission remains unclear.

In conclusion, it may be argued that the present situation is destructive because getting the wording right in patent applications or re-engineering existing products to avoid litigation is increasingly considered to be as important as the actual act of inventing new products, and the licensing fees that inevitably go hand in hand with successful patents can put off potential licensees. Despite this, the courts will be busy in 2012.

Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK.