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Pair cement their IP bond in the face of common threats

On Monday, Google Inc. (GOOG) and Samsung Electronics Comp., Ltd. (KRX:005935) (KRX:005930) signed a cross-licensing intellectual property pact, which cemented the pair's previously largely informal licensing relationship.
 
I. Solidifying Android
 
Currently, Google's Android operating system is found on three out of every four smartphones sold, while Samsung accounts for rough one in three smartphones sold, according to recent figures.
 
Samsung reported its earnings last week, falling short of analyst expectations.  Overall, the South Korean gadgets, manufacturing, and appliances firm saw a contraction in the high end, with sales of its aging Galaxy S4 smartphones falling to 9 million units.  Samsung expects slow sales in Q1, but is hoping for a vigorous Q2 recovery, with the launch of the Galaxy S5 smartphone.

Samsung Galaxy Grand
Samsung is the top Android smartphone maker.

IFI Claims Patent Services, the patent-research division of Madison, Conn.-based Fairview Research LLC, suggests that -- market struggles aside -- Samsung is a rising power in terms of intellectual property.  In 2013 it was awarded 4,676 U.S. patents, second only to International Business Machines Corp.'s (IBM) 6,809 awarded U.S. patents, according to IFI.  Google, by contrast, was "only" in eleventh place with 1,851 patents.

Nokia Patent King
Samsung is a top player in the global patent scene. [Image Source: Chetan Sharma]

Mobile patent rankings
Samsung's mobile patent portfolio is the second largest in the world in terms of sheer volume, although it's considered weaker than Microsoft or Apple's. [Image Source: Chetan Sharma]

While the financial terms of the Google-Samsung deal were not revealed and are unclear, it's believed that the deal is more of a mutual assurance of safety than a deep partnership.  Notably, it does not allow for patent transfer, according to The Wall Street Journal.  Transfer is a provision where partners can lend patents to each other to help defend against patent lawsuits.
 
II. Market Failures Convince Sometimes Competitors of Mutual Need
 
Google competes with Samsung directly in the smartphone market, via its Motorola Mobility subsidiary, which it purchased for $12.5B USD in Aug. 2011.  Motorola isn't much of a threat; even with the Galaxy S4 sales slump, it still outsold Motorola Mobility's flagship Moto X handset nearly 20-to-1.
 
Likewise, Samsung's effort to compete with Google in the OS space -- Intel Corp. (INTC) co-developed Tizen -- has proven a weak challenge at best to Android.  Intel's growing relationship with Google has put pressure on the project, as has the increasingly fierce demands of the mobile market.
 
Bloomberg notes that earlier in 2013 Samsung has said it would release Tizen phones by Feb. 2014, news that was viewed as signs of a cracking Google-Samsung alliance.  But in its discussion with analysts over Q4 results, Samsung said those plans were shelved and that it had no plans to release a commercial Tizen device "for the time being."
Tizen

IBK Securities Comp. analyst Lee Seung Woo remarks:

It seems like Samsung’s strategy over Tizen-powered smartphones is fizzling out.  Samsung seems to be reworking its strategy and sticking with Android on smartphones and developing Tizen for other applications, including its home appliances and TVs, instead.

This puts Samsung's strategy roughly in line with fourth-placed phonemaker and domestic rival LG Electronics Inc. (KRX:066570)(KRX:066575), which similarly uses Android for its smartphones and webOS and other proprietary solutions for its "Smart TVs".

Larry Page at meeting
Google CEO Larry Page meets with Samsung executives. [Image Source: HK Silicon]

Allen Lo, who was named Deputy General Counsel for Patents at Google in April 2012, comments:

We’re pleased to enter into a cross-license with our partner Samsung.  By working together on agreements like this, companies can reduce the potential for litigation and focus instead on innovation.

Samsung intellectual property chief, Dr. Seungho Ahn delivers a not-so-subtle jab at rival Apple, Inc. (AAPL), adding:

This agreement with Google is highly significant for the technology industry.  Samsung and Google are showing the rest of the industry that there is more to gain from cooperating than engaging in unnecessary patent disputes.

However Apple isn't the only major patent holder Samsung is battling.
 
III. Samsung Reduces Enemies List to Two
 
In the current litigious climate, Samsung has managed to settle a number of disputes, but it's still struggling with a couple of nasty patent spats.  The best-known example is the conflict between Samsung and the world's second largest smartphone maker, Apple.
 
Apple won the first round, scoring a jury verdict of $890M USD in damages, after some minor recalculations.  That case covered Samsung's first two major flagship Android smartphones, the 2010 Galaxy S, and the next year's follow-up the Galaxy S II.  Apple and Samsung are currently in court-ordered negotiations in a second case, which involves the 2012-era Galaxy S3, as well as the Galaxy Note and Note 2 phablets.
 
Overseas Samsung has faced some minor losses, seeing brief bans of its "Galaxy Tab" product line, but has been successful in convincing foreign regulators that its workarounds eliminate Apple's infringement claims.  Notably in the UK Samsung actually was found completely innocent -- illustrating the diverse range of opinions regarding software patents and their scope.
 
Aside from the legal strife with Apple, the other major legal headache for Samsung is the so-called Rockstar Consortium, which has filed suit in Texas federal court against Samsung and most of the other top Android phonemakers.  Rockstar is a holding vehicle for the patents they bought in mid-2011 from bankrupt Canadian telecommunications firm Nortel.

Rockstar
 

The Rockstar Consortium is controlled by Windows Phone maker Microsoft Corp. (MSFT), Apple, languishing Canadian smartphone veteran firm BlackBerry, Inc. (TSE:BB), Sweden's Ericsson AB (STO:ERIC.A, ERIC.B), the Mass.-based EMC Corp. (EMC), and a single Android OEM -- Japan's Sony Corp. (TYO:6758).
 
Google has filed a countersuit to try to shield Samsung and other partners, but legal experts say the tactic used has a low success rate on the appeals circuit.
 
Google's Motorola subsidiary faced similar legal attacks from Microsoft and Apple.  It lost to Microsoft, and will likely be forced to pay royalties; it ground Apple to a relative stalemate.
 
Nokia Oyj. (HEX:NOK1V) and Samsung in Nov. 2013 entered a long-term patent licensing agreement, which is expected to run through 2018.  Samsung also has a licensing pact with Microsoft, which it signed in Sept. 2011, a long term deal that includes royalties on every handset that Samsung sells.

Ericsson
Samsung and Ericsson recently ended an international patent spat with a licensing deal.
[Image Source: Reuters]

Samsung and Sweden's Ericsson this month agreed to a licensing deal on certain telecommunications patents, which will involve a one-time initial payment of $640M USD, and smaller ongoing licensing payments.  That deal covers various products including Samsung Electronics' networking offerings and mobile phones.
 
IV. Deal Expected to Last 10 Years, Also Cover Chrome OS
 
Returning to the Samsung-Google tie-up, the deal will last for 10 years, expiring in 2024.  It reportedly excludes some patents (e.g. the Google search patents, likely), but does cover a "broad range of technologies and business areas" -- including smartphones -- according to the press release.  However, it will also cover patents granted over the next ten years in these areas.
 
Aside from smartphones and tablets, the deal also cements Google and Samsung's relationship in other sectors.  Samsung is a rising power in the person computer industry, and some of its most popular computer models now run Google's Chrome OS, the fastest growing PC operating system.
Samsung Chromebook
The deal will also protect Samsung Chromebooks.

 
Amidst the lull in Windows sales, Samsung and other OEMs have been eager to jump on the Google bandwagon. While the OS is a bit lacking in apps and processing power compared to Windows, it is drawing customer enthusiasm for its strength as a simple messaging, recreation, and internet browsing platform.
 
Patent licensing is a complex and some would argue dysfunctional web in the mobile market.  Aside from occasional product bans and regular lawsuits, the industry is mired in a series of payments.

Internet cables
Mobile patents today are creating a tangled mess of licensing payouts and pacts.
[Image Source: Reuters]

Overall Microsoft and Nokia are the biggest winners, but some (like Apple) pay some (e.g. in Apple's case Nokia) while squeeze money from weaker players (e.g. in Apple's case HTC Corp. (TPE:2498)).  Such transactions are made inequitable in that they're based as much in legal department spending as innovation, given the prevalence of repatenting prior art, or patenting nebulous concepts and later trying to squeeze patents into litigation.

Sources: Samsung, Bloomberg, WS



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