Apple, Microsoft, Blackberry, Sony, and Ericsson jointly formed Rockstar Consortium to purchase patents from bankrupt Nortel. In 2009, Nortel, formerly a major telecommunications manufacturer, began liquidating its assets. After selling some cellular technology patents to Ericsson, 6,000 smartphone and digital communications-related patents were sold to the consortium for $4.5 billion in 2011. Google had made a losing bid of $3.14 (π) billion.
A similar consortium, CPTN Holdings, including Microsoft, Apple, and Oracle, had acquired 882 patents as part of the sale of Novell, a software company, to Attachmate. The US Department of Justice expressed antitrust concerns and the deal was changed in order to protect Linux-related software, on royalty-free terms. It's worth noting that Microsoft and Linux developers have had their own patent disputes -- Microsoft has been accused of "feeding patent trolls" by selling their own patents to small companies that in turn use those patents to litigate against Microsoft's competitors.
Google's Chief Legal Officer, David Drummond, wrote on Google's blog that this was "a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents...our competitors want to impose a 'tax' for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices. Instead of competing by building new features or devices, they are fighting through litigation." From Drummond's point of view, Microsoft and Apple, two well-known competitors, had colluded together to strangle Google.
However, Google has intensified its own patent portfolio. Only 11 days after losing the Nortel patent auction, Google purchased 1,029 patents from IBM and 1,023 additional patents the following month. Google then acquired Motorola Mobility for $12.5 billion. Google's CEO, Larry Page, wrote that this "would enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies." Motorola had 17,000 patents and 7,500 more patents pending.
Android manufacturers, including Samsung, HTC, and LG, reportedly pay Microsoft a $5 to $10 royalty for each Android device sold. In 2013, it was estimated that Microsoft was making over $2 billion per year from licensing agreements with Android manufacturers -- 5 times as much as from its own mobile operating system. As the Android market grows, those patent agreements could theoretically bring in $8.8 billion annually by 2017.
Microsoft's patent licensing strategy provide it with two major benefits. First, Microsoft receives a major source of a revenue. But perhaps more importantly, it places a price tag on an otherwise free-of-charge mobile operating system distributed by its competitor. In an interview with the Wall Street Journal, Microsoft's then-CEO, Steve Ballmer, said "It's not like Android's free. You do have to license patents."
Hi Dara,
ReplyDeleteI actually just made a post about Google's acquisition of Motorola in order to combat Rockstar and the Nortel patents and found an article about how Microsoft makes more money than Google from Android because of patent licensing. It's crazy to think that a competitor company can make money off of another company's creation just because they have the patents that grant them the power to do so. In many ways, it seems so unfair. It makes me wonder whether this is a fundamental flaw in our patent system and whether we can do anything to improve it. Then again, I don't know that much about our current patent system yet (hence why I'm taking this class!). And truthfully, it doesn't exactly make sense to be talking about fairness of profit when it comes to these companies, seeing as they make so much already. I guess it just goes to show how important patents are to being successful in the tech business.
Amy, the reasoning behind patenting has always been to encourage inventors to disclose their invention by allowing them to “earn” from their ideas (even when other parties are applying them). Can you expand on why you think it is an unfair, fundamental flaw in our system that “competitor company can make money off of another company's creation just because they have the patents that grant them the power to do so”?
DeleteHi Dr. Lavian. To many of us, it seems "fair" for a pharmaceutical company that invested $1 billion in a drug to be able to recoup its costs and turn a profit (at least a reasonable one). We understand that the company's expensive research and development is what made the drug (that is cheap to manufacture) so valuable.
DeleteBut is it still "fair" for Microsoft to receive large royalties from Android manufacturers -- more than Google itself does? Admittedly, Google's business model is not based around licensing Android, but we're still referring to a lot of money. I think the question of fairness boils down to whether these few ideas, in a smartphone operating system that combines many ideas, (uniquely) deserve such high royalties. Many of us probably don't think that is "fair".
Here's an article about patent trolls and President Obama's proposition to deal with the issue.
ReplyDeletehttp://www.theguardian.com/technology/2013/jun/05/obama-patent-trolls
As you mentioned, Microsoft was criticized for feeding patent trolls by enabling smaller companies to participate in the patent war by filing IP litigation that would hurt competitors. President Obama's strategy is to make IP litigation more costly for the losers, so that companies wouldn't be so careless about it. In addition, he calls for patent litigation to clarify who really stands to benefit from victory.
As the patent war escalates, I think it'll get much worse before getting better. With the invention of new technologies and more valuable patents, companies will want to fight harder and dirtier for rights to those patents. If waging legal war is worth the cost, companies will continue to fight.
Thanks Luke. I agree with the article that Obama's strategy is a good step. It only addresses part of the issue (an especially egregious one though) -- patent trolls suing end users for using everyday products that they claim are infringing. We'll still see patent trolls suing manufacturers. I agree with you that it's likely to get worse before getting better. However, the fact that Obama has identified the issue, made an improvement, and called for legislative change, is an important positive step.
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