Microsoft has transitioned from a producer to a litigator in terms of revenue

While Apple, Inc.'s (AAPL) noisy legal vendetta [1][2][3][4] [5][6][7][8] [9][10][11] against Google Inc.'s (GOOG) world-leading Android operating system has generating headlines due to Apple's desire to ban its competitor, Microsoft Corp.'s (MSFT) own legal battle against Android has gone underreported and largely misunderstood.

With Microsoft reporting the latest addition to its family of forced Android patent licensees -- Compal Electronics, Inc. (TPE:2324) -- this seems like the perfect time to break down what Microsoft is doing here and the good, bad, and ugly aspects of its actions.

I. Why is Microsoft Suing and Forcing Licensing on Android OEMs/ODMs?

Microsoft is apt to drop phrases like "reasonable and fair" and "needs of our customers and partners", but let us face the sticky reality -- no one really wants to pay Microsoft millions in licensing fees.

The licensing quest is largely a byproduct of Microsoft's unique position -- or perhaps more bluntly put, failure in the market.  

Along with Nokia, Oyj. (HEL:NOK1V) and the defunct Palm (acquired and essentially killed by Hewlett-Packard Comp. (HPQ)), Microsoft was one of the first companies to launch what we would call today a "smartphone".  And Microsoft was perhaps the most zealous pioneer in terms of patenting fundamental smartphone OS mechanisms.

Despite that pioneering role, Microsoft is essentially a failure in today's mobile market from a pure unit sales perspective.  Windows Phone 7 languishes in market share.  

As they say, necessity is the mother of invention.  Amid this backdrop, Microsoft has turned from primarily being a producer of smartphones to primarily being an R&D-based litigator on the smartphone market, employing its treasure trove of smartphone and operating system patents to milk money [1][2][3] from Android device makers via threat of lawsuit.  

This transition is inarguably illustrated in the company's financials.  Microsoft now makes more money off of licensing its intellectual property to smartphone rivals than it does off its own mobile devices.

II. Who is Microsoft Suing; Who is Microsoft Licensing to?

With the addition of Compal to its stable of licensees, Microsoft estimates it now gets a cut of the revenue of over half of Android smartphones.

Its general counsel Horacio Gutierrez characterizes these agreements as "fair".  He elaborates:

Amidst continuing clamor about uncertainty and litigation relating to smartphone patents, we're putting in place a series of agreements that are reasonable and fair to both sides. Our agreements ensure respect and reasonable compensation for Microsoft's inventions and patent portfolio. Equally important, they enable licensees to make use of our patented innovations on a long-term and stable basis.

At this point Microsoft reveals that it has forced the following companies into licensing agreements:
  1. Samsung Electronics Comp., Ltd. (SEO 005930)
  2. HTC Corp. (SEO:066570)
  3. Acer Inc. (TPE:2353
  4. Viewsonic Corp.
  5. Onkyo Corp. (JSD:6628)
  6. General Dynamics Corp. (GD) (owners of Itronix, a maker of rugged tablets)
  7. Velocity Micro, Inc.
  8. Wistron Corp. (TPE:3231)
  9. Quanta Computer Inc. (TPE:2382)
  10. Compal
And it's suing:
  1. Motorola Mobility -- a subsidiary of Google Inc. (GOOG)
  2. Barnes & Noble, Inc. (BKS)
  3. Foxconn -- a subsidiary of Taiwan's Hon Hai Precision Industry Co Ltd. (TPE:2317)
  4. Inventec Corp. (TPE:2356)
Android licenses and litigation
[Source: Microsoft]

Interestingly, Microsoft appears to be double dipping, seeking licensing fees both from the "original equipment manufacturer" (OEM) who mostly designs the device (e.g. Samsung) and from the "original device manufacturer" (ODM) who primarily handles manufacturing the device (e.g. Foxconn).  Microsoft claims to have forced 55 percent of the Android ODMs and 53 percent of Android OEMs, in terms of U.S. sales, into licensing agreements.

Android licensing
[Source: Microsoft]

Microsoft complains about the holdouts, stating:

For those who continue to protest that the smartphone patent thicket is too difficult to navigate, it's past time to wake up. As Microsoft has entered new markets from the enterprise to the Xbox, we’ve put together comprehensive licensing programs that address not only our own needs but the needs of our customers and partners as well. As our recent agreements clearly show, Android handset manufacturers are now doing the same thing. Ultimately, that's a good path for everyone.

Basically, Microsoft's approach appears to be to try to charge both the device marker and the device manufacturer in order to pile the fees on Android.  This serves a double purpose.  First, Microsoft hopes that it may convince some companies like Samsung and HTC to drop Android and adopt its Windows Phone.  

However, if it can't  convince them to do that, it will at least guarantee itself some big profits, piggybacking on Android's success.  Microsoft reportedly makes up to $15 per licensed handset sold.  In fact, it reportedly gets more money from Android than it does from its own Windows Phone, which has a tiny market share.

Best of all, Microsoft can somewhat avoid "looking like the bad guy", by trying to push licensing as an alternative to litigation.  As a result, while its scheme is arguably almost as damaging to Android as Apple's, it has received less criticism in the tech media sphere.

III. What IP Violations is Android Accused of?

One question a lot of people ask is what patents exactly Microsoft is using in this intellectual property protection scheme.  The Motorola lawsuit reveals important details about exactly what Microsoft is licensing, and claiming Android infringes upon.

Listed below are all the patents used in that lawsuit, their filing date (very important), their approval date, and whether they originally were intended towards desktop Windows, or mobile Windows. 
This is a relatively old Windows patent, which covers using a dual set of files names, one short and one long.  This patent is relatively "strong" as Microsoft was indeed one of the first ones to take this approach.  Significantly, it will expire in 2013, as utility patents have a lifetime of 20 years (thanks for the correction Theoz!). This patents is very similar to the first namespace patent -- it also covers filename shortening and handling a dual set of short/long file names.  This patent also expires in 2013, given the original filing date. Flash memory can be corrupted in various ways.  In this patent Microsoft covers erasing "dirty" segments of flash memory, when the amount of available blocks gets low. All 3G devices are essentially covered by this patent.  Microsoft claims invention of the  radio interface layer (RIL), an API which is used to separate the hardware from the OS software.  Basically this is the same concept as a "driver".  Apple clearly is in violation of this patent (as is pretty much everyone else).  This patent is likely a "fair, reasonable and non-discriminatory" (F/RAND) patent, given its relation to wireless signalling technology.  This may be one reason why Microsoft is seeking to license it before suing.

This patent seems relatively weak, in that it's hard to believe Nokia, Samsung, and others didn't have some sort of API in place back in 2001.  Of course, with the shift from first to invent to first to patent in the U.S., prior art may be a moot point. The utility covered in this patent is the adding of a contact, via your call history.  Again, both Android and Apple appear to be in clear violation of this patent.  Namely, in both operatings iOS and Android you can click a call from an unrecognized number and select to make it a contact, with the number prepopulated into a field in the contact card -- this is precisely what Microsoft's claims to have invented in this patent.

Add Contact to Android

Again, the big issue here may be prior art.  The patent was filed in 2002, making its originality a bit more feasible, but it still seems a bit surprising that no other OEM -- including Nokia -- had implemented the ability to add calls from unknown numbers to contacts prior to 2002. In this patent Microsoft claims invention of a notification system, similar to that used in iOS and Android.  "Clients" (apps/services) register with the system via API calls.  Notifications lead to messages being displayed, applications being launched, or other actions.

Android notifications

Again, the key thing here is prior art and the filing date.  Microsoft filed for this patent way back in 2004.  At the time notifications were nothing new in the PC setting, but it's very possible Microsoft was the first to dream up this being applied in the mobile end. This patent covers pop up menus that occur when you hover over or click on certain elements in the GUI.  Again, this kind of mechanism is found all over Android and iOS -- it is very ubiquitous.

Android Popups

Aside from arguments surrounding prior art in the PC realm, the applicability of this PC patent to the mobile realm is debatable.  If it is indeed valid, it will expire in two years, so Android (and iOS) may be granted a reprieve here.
This patent covers filed caching and reconciliation between locally modified copies of a single document being edited on various clients.  This is essentially how offline access to a number of services like Google Docs works, and clearly Microsoft's patent precedes Google Docs.

Again, there may be a prior art claim here, but Microsoft patent appears pretty non-obvious and strong, particularly given the filing date.
Windows Mobile began very much as a business-assistant device, much like Palm's lineups.  By the time the smartphone had transitioned to an entertainment device -- a transition largely spurred by Apple's iPhone -- Microsoft was already falling behind.  However, in its golden era, where the focus was on business, Microsoft came out with a number of innovations in that arena.

This patent covers sending a meeting request via a calendar application, tracking the status of sent requests, and removing duplicate requests to reduce network load.  Google Calendar (as well as the calendar app in iOS) appear to infringe upon this early mobile IP.

IV. Conclusions

At the end of the day, when it comes to patent disputes the questions most consumers ask are:
  1. Is the invention non-obvious?
  2. Is the invention novel, and without prior art? (Patenting others' ideas is a pretty dirty tactic, albeit encouraged by recent patent law changes.)
  3. Is the IP used in a "fair" way, such that licensing is sought on industry standards.
Unlike Apple, whose patents -- such as the infamous "GUI bounceback" animation patent used in a variety of Android suits -- are largely relatively obvious and simplistic, Microsoft's patents are in most cases more novel and complicated.  Further, their application tends to be more narrow, versus Apple's broad claims of ownership of minimalist mobile devices.

In terms of prior art, Microsoft also appears to stand on more solid footing as it indeed a very early innovator in the mobile OS realm.  

That said, it may face some similar prior art issues to Apple, as some of the technologies in question may have appeared in competitors' products or published in academic works.  The important thing to remember here is that the U.S. has just passed an IP reform bill, which does away with first to invent, thus rendering prior art arguments much weaker.  Still, such issues could come back to bite Microsoft in terms of image, if its rivals can clearly show it's "lifting" other companies' inventions.

Turning last to the "fairness" of the licensing, clearly Microsoft is trying to maximize its profits.  But in terms of its approach, it at least is trying to make a deal, versus Apple's approach of using IP as a club to try to beat competitors out of the market.

Thus from a variety of fundamental philosophical criteria of IP validity, Microsoft's licensing bid may not be perfect, but its better than some, certainly.  Given the fundamental strength of the IP, it should be apparent now why so many big Android firms agreed to license.

Given that many of its patents cover inventions that are today industry standards (e.g. notifications, popups, etc.) it would be very hard for Android manufacturers to modify their way out of infringement (unlike Apple's infringements, where such modifications should provide a far easier "escape route").  This is likely why many Android manufacturers simply bit the bullet and begrudgingly licensed.

It's not like Microsoft just went out and patented a GUI animation years into the smartphone game.  In Microsoft's case it filed many mobile patents in the extremely early stages of smartphone development (ca. 2000-2004) and described complex and novel systems.

That said, one crucial thing to remember is that these patents will expire.  Many are expiring within two years, and almost all will be expired within a decade.  As a result, within a decade Microsoft's license agreements with Android OEMs and ODMs will almost certainly be drastically restructured.  Remember, ten years ago Windows Mobile had just come out.  Ten years from now seems like a long time, but it really isn't that far away.

In that regard, Microsoft can revel in its licensing successes for now, but if it doesn't continue to push ahead in the mobile realm, its gains will be short-lived.

Source: TechNet

"And boy have we patented it!" -- Steve Jobs, Macworld 2007

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