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Microsoft and Apple appear to be trying to bully the Android ecosystem out of the market with lawsuits and licensing demands.

Companies have transformed patents from a way to a protect innovations, into a currency used to bully competitors out of the market.  (Source: Google Images)

Without intervention, Android's top phonemakers may find themselves forced into a financially untenable position.  (Source: Digitals Life)
U.S. antitrust regulators fear "Rockstar" coalition could litigate Android phonemakers to death

The smartphone war continues to rage on and Google Inc.'s (GOOG) Android has stepped out into the lead.  It outsold Apple, Inc. (AAPL) smartphones over 2 to 1 globally in the last quarter.  And minority players like Microsoft Corp. (MSFT) were struggling to cling on to insubstantial market shares.

I. Google: Market Champion or Buying Time?

Android's race to the top was fueled by its support of an open ecosystem in which players like Motorola Solutions Inc. (MSI), Samsung Electronics Comp., Ltd. (SEO:005930), and HTC Corp. (TPE:2498) could all make Android devices without direct licensing fees (Google profited off of app sales and mobile advertising).  

The result was an ecosystem which frequently delivered hardware that was more advanced than Apple, Research in Motion, Ltd. (TSE:RIM), and Microsoft's offerings.  And not only was the hardware better, the selection was broader too.

But despite the appearance that Android won, the ecosystem is now facing the looming potential of doom.  That doom could come thanks to Apple, RIM, and Microsoft's growing portfolio of purchased intellectual property and desire to sue Android handset makers into submission.

Apple currently is suing HTC, Samsung, and Motorola in cases that stretch across multiple countries and continents [1][2][3][4].  Microsoft is suing Motorola as well and is using legal threats to try to force Samsung into a per phone licensing deal (as much as $15 USD per Android phone sold), as it did with HTC last year.  Likewise, Oracle Corp. (
ORCL) is seeking $6.1B USD in damages, claiming that Android is infringing on the Java patents it obtained in its acquisition of Sun Microsystems.

The combined picture is clear.  Apple and Microsoft have sued or entered into sweet licensing agreements with virtually every major Android maker (a few like 
LG Electronics Inc. (SEO:066570) have been spared, presumably on the merits of their smaller market share).

II. Android Faces Death by Multiple Means

The question becomes whether Android handset makers can remain viable in the face of these lawsuits.  While a $15 USD licensing fee to Microsoft might not be lethal, if Samsung and HTC have to pay an additional $15 USD to Apple and $15 USD to Oracle, the result may be the phones will become unprofitable.

On the other hand, if Google's handset partners refuse to play ball, they may be forced to pay even worse damages by international courts.

Apple, Microsoft, and others have multiple routes to use their intellectual property to kill Android.

III. Shadowy Alliance Beats Google for IP Treasure Chest

Those efforts have been strengthened by the purchase of Nortel Networks' portfolio of over 6,000 patents.  The telecom equipment maker put the portfolio on the market after it was forced to declare bankruptcy in 2009.

Google hoped to win the portfolio, bidding $900M USD.  It insisted that its purposes for acquiring it would be peaceful.  In its blog its Senior Vice President and General Counsel Kent Walker explains, "[O]ne of a company’s best defenses against .
.. [patent] litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services."

The comment would prove fortuitous, as Google was beat by a shadowy bidder calling itself "Rockstar Bidco".  That bidder offered up $4.5B USD, an offer that was embraced by a cash-thirsty Nortel, leave Google's potential offer in the dust.

So who was Rockstar Bidco?  Turns out it was none other than Apple, Microsoft, RIM, and three other companies -- the same players who are working to use their already substantial IP to try to sue or license Android handset makers into the red.

IV. U.S. Antitrust Regulators May Step In

The plot to kill Android is so obvious that it has top antitrust experts screaming foul.  Robert Skitol, an antitrust lawyer at the Drinker Biddle firm, opines in a Washington Post interview, "Why is the portfolio worth five times more to this group collectively than it is to Google? Why are three horizontal competitors being allowed to collaborate and cooperate and join hands together in this, rather than competing against each other?"

Brian Kahin, a senior fellow at the Computer & Communications Industry Association, adds, "The one thing that's significant here is you have three of the four smartphone platforms ganging up on the fourth. You want patents for an economic benefit, not as a legal instrument."

The questions Mr. Skitol and Mr. Kahin raises are reportedly being echoed among top U.S. antitrust officials.  Pressure is mounting for the U.S. government to block or place serious restrictions on the "Rockstar Bidco" acquisition of the Nortel IP.

The American Antitrust Institute sent a letter to the U.S. Department of Justice, begging them to limit the purchase.

The sale is set to be made official on Nortel's antitrust proceedings today, though regulatory approval still awaits.

Mr. Walker says the outcome of the pending sale could be a matter of life or death for the Android ecosystem and free market.  He states, "This outcome is disappointing for anyone who believes that open innovation benefits users and promotes creativity and competition. We will keep working to reduce the current flood of patent litigation that hurts both innovators and consumers."

V. From Bully to Victim: Google's Unusual Situation

Google clearly won't go down without a fight, nor will its handset partners.  But if the intellectual property pressure grows too great, the Android coalition may be rendered unable to compete.

The situation is highly unusual, due to a number of reasons.  First, Google itself is the subject of antitrust scrutiny on reports that it abused its dominant Android position to bully service providers.  Second, the case represents a situation in which small players are able to team up and legally damage a clear-cut market leader -- a relative rarity.

Thus Google -- which of late has become viewed as a bully of sorts -- finds the tables turned, and finds itself a clear victim.

VI. The Big Picture

While the possibility that Android, a beloved smartphone institution, could be sued out of existence by Apple, Microsoft, et al. is alarming to many, this incident in many ways serves most of all to illustrate much broader problems with the U.S. intellectual property system.

Companies in the U.S. are laying claim to increasingly generic intellectual property and using that IP as instrument not to innovate, but to litigate.  The street runs two ways in most cases -- often times IP lawsuits are followed by IP countersuits [1][2].  But often one player in the market is using IP as the general bully, while the other is trying to defend itself.

Many argue the U.S. desperately needs intellectual property reform.  But the federal government under both former President George W. Bush (R) and under President Barack Obama (D) has been slow to act.

The Nortel sale should offer a key signal to the market.  If the federal government blocks it, it may be a sign that the era of using IP as an offensive weapon is coming to an end.  On the other hand, if it's approved without restriction, it will offer a virtual blueprint of how to defeat your competitor.  If the latter scenario plays out consumers may find themselves in an odd market where it's not the competitor with the best products that wins, but the company with the best lawyers and patent portfolio.

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RE: This is just getting silly
By BailoutBenny on 7/12/2011 3:30:35 PM , Rating: 0
I contest the notion that patents were ever intended to protect innovators. I believe the entire theory and design of IP came about specifically for the reasons it is used today, to compromise and inhibit true competition in the free market. After all, a patent/copyright/trademark is nothing more than government granted monopoly and monopoly is a lack of competition. Sure, it can be dressed up to show how it helps innovators but I believe the natural human tendency towards acquiring capital, hence capitalism, would culminate in innovation without IP. Those other natural human tendencies of greed and power lust are the true originators and benefactors of IP law.

If the problem were to be solved today, IP law would have to take leaps and bounds backwards; in my opinion IP law should be abolished completely. It will never happen because corporations pay too well.

RE: This is just getting silly
By BailoutBenny on 7/12/11, Rating: 0
RE: This is just getting silly
By monitorjbl on 7/12/2011 5:10:17 PM , Rating: 2
I can understand the way you feel about the system as it stands today, but when it was written I honestly think its intentions were good. Remember, at the time the legal system was very friendly to the guy with the most money or social standing get away with anything he did, even in America. Our society and people were still pretty British at the time, we'd been a nation separate from Britain for about 6 years by the time the first patent was issued. Monopolies were basically guaranteed to exist without regulation in a climate like this; some rich guy would very likely come along and steal your idea, leaving you with no recourse but a bottle of wine (if you could afford it).

With patents, that could (almost) no longer happen. There would be a record of your filing at the patent office, so if some guy came along and tried to make money off your idea without your consent, there would be a mountain of proof against him that would make social standing and wealth less important. It's basically providing a ton of non-circumstantial evidence against the offender.

Unfortunately, the law is way too lenient on what a person is allowed to patent and who can own a patent. If you can't create a working prototype within a certain amount of time, your patent really should be revoked; in other words, you can't just own an idea because you were the first to think of it, you have to actually make something out of it. Furthermore, patents should absolutely NOT be transferable. There is no reason for another entity to assume ownership of something another entity conceived of and created. The only purpose for that is exactly what this article details.

RE: This is just getting silly
By BailoutBenny on 7/13/11, Rating: 0
RE: This is just getting silly
By monitorjbl on 7/13/2011 1:19:17 PM , Rating: 2
Sorry, it may have been more accurate to say 'steal your product and design'. In ye olden tymes, there wouldn't be a whole lot of evidence that this occurred if the guy who sole it just went to a different town or state to produce it. And if he had more resources to start with, he could probably do it much better and end up putting the inventor out of business. Nowadays, that's much harder to do.

However, monopolies absolutely exist without government. In a non-regulated market, the first one to market will absolutely and permanently dominate the market. With no regulation on price fixing, espionage, murder, theft, or any of the tactics that could be used to establish an absolute monopoly, a smart company will use all of them. The only reason they don't is because its not in their best interests to break the law. A company wants to win, not compete; it's in their best interests to own 100% of the market share because at that point they control the price, not the market.

In other words, a perfectly free market by your definition is one in which the companies are still bound by some code of ethics. Ethics are simply another form of regulation in this context, and as such would not exist in a perfectly free market. They wouldn't exist even in a real-world market if there weren't laws codifying them and dictating the punishments for breaking them.

RE: This is just getting silly
By fteoath64 on 7/16/2011 11:31:41 AM , Rating: 2
@monitorjbl: Well said!. I will bring it a step further so people will understand one new thing today. A company is a "structure" that uses humans (its employees/owners/etc) to keep itself alive and grow to the maximum it can. ie making as much money as it can. As such, the humans will resort to whatever means (legally mostly, sometimes illegal, other times they don't know and don't care) to achieve this because they felt they are "part" of this company. This structure has no regard for human values and exploit human greed for money and for power to achieve its aims.
So you can see that large companies are totally sterile in working environment and often violate laws intentionally.
Humans can survive without the structure but the reverse is not true, so its is the proverbial enslavement, unless one cuts the cords and exits. The society and mindset need a major change for us to evolve, otherwise we are doomed!.

RE: This is just getting silly
By Murst on 7/13/2011 4:04:23 PM , Rating: 2
The purpose of IP law isn't to "compromise and inhibit true competition", but to protect investment.

Why would a drug company spend $1 billion or more to invent a drug if it could not have it protected by IP laws? Once a drug is created, it costs cents to produce. The only way to make back the investment is to be allowed to sell the drug at a premium. If your competition could just steal the idea and sell it for cents, there's no way to remain profitable for the inventor.

I do think that IP is being abused by many companies/lawyers, but it does actually serve a very useful purpose in society. The laws need to be updated so that inventors are in fact protected, but abuse is removed.

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