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Google and Motorola are accused of conspiring to inflate FRAND patent prices

[This article contains analysis and editorial content.]

The "fair, reasonable, and non-discriminatory" (FRAND) patent rules govern essential standards patents.  FRAND patents are a double-edged sword.  On the one hand, if your company's patent is accepted as a FRAND patent, it becomes an industry standard, guaranteeing you licensing fees from competitors.  On the other hand putting research towards FRAND patents weakens a firm's both offensive and defensive legal capabilities.

I. Microsoft Looks to Block Google's Purchase of Motorola

The issue is hitting home for Motorola Mobility, one of the "big three" Android smartphone sellers.  Motorola Mobility holds over 17,000 patents, yet its acquisition by Google Inc. (GOOG) is threatened by a storm of criticism regarding how it is using its FRAND patents.  Microsoft Corp. (MSFT) has filed a complaint, which looks to potentially sink the acquisition, or force Motorola Mobility into a low-cost licensing scheme.

The formal competition law complaint was lodged by Microsoft deputy general counsel Dave Heiner, naming both Google and Motorola Mobility.  In a blog Mr. Heiner writes, "Motorola has refused to make its patents available at anything remotely close to a reasonable price.  We have taken this step because Motorola is attempting to block sales of Windows PCs, our Xbox game console and other products.  Motorola is on a path to use standard essential patents to kill video on the Web, and Google, as its new owner, does not seem to be willing to change course."

Twenty dollars on table
Motorola reportedly sought over $20 per Windows laptop sold, lashing back at Microsoft's Android licensing demands. [Image Source: Them Apples (modified)]

In a statement to Reuters, Motorola Mobility spokeswoman Jennifer Erickson said that her firm had not yet received a copy of the complaint, but that it "committed to vigorously defending its intellectual property."

And a Google spokesperson stated, that the complaint was "just another example of their attempts to use the regulatory process to attack competitors."

The filing is troubling for Motorola, as Apple, Inc. (AAPL) also filed a similar FRAND complaint against Motorola this week, after losing two FRAND-related cases to Motorola in Germany.  The losses have threatened to block sales of iPhone and iPad, as well as service from the iCloud.  However, the European Commission could move to fine Motorola and/or prod Germany to overturn the decision, should it decide that Motorola's application of FRAND patents is abusive.

II. FRAND: The Big Thorn in Samsung and Motorola Mobility's Side

II.i. Background

Google is currently the subject of a broad European Union antitrust probe.  And EU antitrust regulators are also keeping a careful eye on Motorola Mobility, whose acquisition they approved last week.  Yet another of the top three Android phonemakers -- South Korea's Samsung Electronics Comp., Ltd. (KS:005930) -- is also being probed by the EU for FRAND violations.

Ultimately these lawsuits represent the changing state of the phone industry, in terms of litigation.  

Over the last decade Motorola Mobility and Samsung poured billions into research and development to try to perfect 3G and 4G communications, as well as related fields like video encoding.  The operating assumption was that they would receive industry-wide licensing fees, which would offset any licensing costs of their own, which they might accrue.

However, this approach has been challenged in unique ways by both Microsoft and Apple.

II.ii. Apple Looks to Ban Everyone Who Stands in Its Way

Apple's approach is the most severe.  It has patented a number of very low-level software algorithms, including user interface features [1][2] -- the kinds of features that were not traditionally patented on a cell phone; or alternatively were covered under one sweeping patent, which was narrowly applied.

What is particularly important, as well, is how Apple has chosen to apply these patents.  Starting in the U.S., it has sued Motorola Mobility, Samsung, and HTC Corp. (TPE:2498), looking to remove their products from market, or push crippling restrictions onto their products.  Apple has at times hinted that in 2009-2010, when the legal storm was first brewing, that it had offered licensing to Samsung, and perhaps other Android phonemakers.  However, source indicate Apple's licensing demands were high, and it was only willing to license a scant few of its interface patents, making the deal essentially useless to the Android firms.

Apple gavel
Apple has tried to kill Android with lawsuits. [Image Source: ArsTechnica]

History aside, it is clear that Apple has little interest in reaching a licensing compromise with Android phonemakers at present.  It wants to damage them competitively with its IP.

Some would call this approach genius on Apple's part; others would call it anticompetitive.  Where members of the public stand on the issue partly boils down to a question of partisan bias -- iPhone owners tend to praise Apple's "innovative foresight", while Android owners condemn its "litigious abuse."

But bias aside, there are fundamental issues that make Apple's approach disruptive.

The issue -- and where FRAND comes in -- is that Apple is a newcomer to the phone market.  Hence the majority of its patents have been on interface technology, rather than on wireless communications.  Thus where as Samsung and Motorola Mobility have large IP libraries, much of it the most important patents are FRAND, and thus are crippled in terms of offensive or defensive use against Apple's non-FRAND patent library.

II.iii.  Microsoft: Willing to License, but Only at Exorbitant Rates

A similar situation exists with Microsoft.  Microsoft has convinced HTC to pay around $10 per Android phone it makes, and Samsung to pay about $15 per phone it makes, in licensing fees.  Google and Motorola Mobility have refused to play Microsoft's game and the result has been a suit against Motorola Mobility.

But Motorola has struggled in its countersuit, because -- again -- Microsoft was a disruptive sort of entrant to the industry, bringing with it a tradition of operating system development, a field of technology rife with design feature emulation, but with much of the development being conducted outside the confines of standardization.

Based on the two side's accounts, it appears that Microsoft approached Motorola seeking a net licensing fee along the lines of what HTC and Samsung agreed to.  As with Samsung Microsoft considered the relatively high fee "pre-discounted" by Motorola's promise to license its IP (including the FRAND patents).  Motorola felt this was unfair and rejected the deal, feeling it should break even or even be getting paid, not the other way around.  The pair then went to war.

In the perfect world Samsung or Motorola might see their FRAND patent collection as being worth as much as Microsoft's software algorithm and user input patents.  But Samsung's licensing concession illustrates that non-FRAND patents are currently worth, much more than FRAND ones.

Ultimately a $10 or $15 fee might seem innocent, given that the Android phonemakers still maintain a profit margin.  But if you don't happen to be Apple, your profit margin is likely already razor thin and just a few of these fees (say one to Apple, one to Microsoft, etc.) could leave you with no profit, or even paying a net loss per handset.  And the eroding margins would further cripple a firm's ability to fund research and development, file for patents, and provide an effective defense in court.

Microsoft accuses Motorola of asking for $22.50 USD per laptop for its fifty h.264 patents alone, versus the $0.02 USD that the holders of 2,300 other h.264 patents charge.

Clearly, Microsoft is making a strong case that Motorola is asking for a ridiculous fee -- the pressing question is what kind of fees Microsoft is asking for, for its non-FRAND IP.  Clearly, Microsoft has been charging cooperative Android phonemakers orders of magnitude more that $0.02 for its own ubiquitous patents.

While it may not ultimately change whether or not Motorola is violating FRAND and should be punished, Microsoft's exorbitant licensing fees to Samsung, HTC, and others do offer some insight into why Motorola would stoop to such preposterous demands.

III. Pressure Mounts to Modify FRAND or See Cooperative Tradition go Extinct

III.i. From Friendly Competition to a Murderous Season

Whilst examining FRAND patent use and abuse, it would be folly not to consider the influence of the changing smartphone market.

This electronics subsector has seen a great deal of turbulence in recent years, growing increasingly hypercompetitive.  Back in 2005 Microsoft and Nokia Oyj. (HEL:NOK1V) were market leaders.  Then from 2007-2008 Canada's Research in Motion, Ltd. (TSE:RIMtook the lead.  And most recently Apple and Samsung, et al. (Android) have booted RIM, Nokia, Microsoft, and others, pulling into a neck-and-neck race for smartphone dominance.

Since Apple's initiation of the world patent war in May 2010, this hyper-competitive atmosphere has transformed into a sue-or-be-sued atmosphere.

Best Buy smartphone display
Today's hyper-competitive smartphone market has fostered a hyper-litigative approach, which is undermining the principles of FRAND and fair licensing. [Image Source: Best Buy]

Ultimately, this atmosphere will likely push the top veteran Android phonemakers like Motorola and Samsung away from offering their patents via FRAND, instead focusing on user interface patents.  No longer is a patent's value based on its technological merits, a major component of is the ability to sue -- to in essence embody the antithesis of FRAND patents -- being unfair, unreasonable, and discriminatory (UUD).

The disadvantage of the UUD patent approach is that while it may spur innovation in the GUI and software realm, as competitors race to escape the scope of each others' patents, it will ultimately have a deep and deleterious effect on the state of wireless communications development.  

Some of this effect may be offset by chipmakers like Qualcomm, Inc.'s (QCOM) emerging role in developing standardized wireless communications and media-encoding advances.

III.ii. The Game is Changed, the Rules May Need to be Changed, as Well

It is crucial for regulators in the EU, U.S., and elsewhere to carefully weigh the state of the market when considering Samsung and Motorola's claims against Apple and Microsoft.  Traditionally, these claims would be considered abusive; their rates punitive; the suit itself patently discriminatory.  

However, in today's atmosphere regulators must reexamine the fundamental "fair" worth of patents -- which is likely far different from traditional modest FRAND licensing fees (such as the $0.02 per 2,300 patents, cited by Microsoft).  

Samsung sold over 35 million smartphones in Q4 2011.  That means that Microsoft ultimately is pulling in over a $1B USD a year in licensing fees from Samsung alone -- over $300M USD a quarter.  Given that these fees come from a relatively small core set of "strong" patents out of Microsoft's massive library, Microsoft's asking price for licensing likely grossly eclipses traditional FRAND rates.

Thus perhaps regulators need to redefine what is today a "fair" licensing rate and impose limitations on whether a company can be seeking a blanket ban on a competitor's products and still expect them to meekly license under FRAND terms.

FRAND patents are for friends
[Original Image: Cayusa/Flickr; modifications: Jason Mick/DailyTech]

After all, FRAND is not exactly charity work, but there's an inherent premise of cooperation involved.  When competitors refuse to cooperate, either seeking outright bans or astronomically higher per-patent licensing fees, the premise of FRAND cooperation begins to crumble.

Potential softening of FRAND protections would certainly be unfortunate, and in many ways could be antithetic to the spirit of FRAND.  But ultimately, they're necessary to save any hope of ongoing FRAND work, given the market's entropic descent from a climate of cooperation, coupled with mild competition, into a savage sue-or-be-sued uncooperative, anticompetitive atmosphere.

Sources: Microsoft, Reuters



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RE: FRAND
By JasonMick (blog) on 2/23/2012 9:17:37 PM , Rating: 2
quote:
the scale and maturity of the iTunes store and it's customer base
True, iTunes was a huge value add, in that Apple cleverly packaged its App Store into it, rather than going the usual route and launching a stand alone app. As a result, rather than just another face in the crowd, it gain instant exposure for its apps.

I would tend to describe the original iOS and iPhone more as supremely polished (for the time), rather than innovative.

Let me explain:
Other than multi-touch, most of things on the iPhone were rehash of things others -- or in some cases even Apple -- had done in the past:
+icon grid (Palm, Apple, RIM, etc.)
+email client (RIM, etc.)
+messaging hub (RIM, etc.)
+slide to unlock (Neonode, possibly others)
+apps (Palm, Microsoft, RIM, etc.)
+touch gestures (academia, Microsoft, etc.)
+built in browser (RIM, Nokia, etc.)

Now, returning to the fundamental improvement of multi-touch. I agree it was a relative novel development, and in some ways defined the iPhone. But ultimately, when talking to iPhone users, while they use some two-finger gestures (mostly pinch to zoom), their positive experience is largely driven by their positive impression of the core apps. In that regard, the touch innovations (which Apple largely purchased, or contracted, rather than develop first hand), were secondary to the careful precision with which Apple approached its core apps.

If you look @ competitors of the time like the LG Prada, clearly the basic ideas behind the iPhone were there, the competition just:
a) Lacked the multi-touch screens as Apple bought virtually all the initial supply in 2007 and early-to-mid 2008
b) Lacked the polish in their core apps.

That said, I would agree with your assessment that the stores and selective peripherals were good value adds that helped to provide a further complete experience for iPhone adopters.
quote:
verybody and everything was disrupted by the iPhone

I would agree with this most definitely. Again, as with the iPod, Apple arrived after the party was already started, but it did took a niche that was far from realized and put a more polished device in it, instantly making an iconic product.

In doing so, it certainly set a new bar of the level of polish need to sell a phone, a challenge, which I feel Google has largely risen to with ICS and Microsoft has risen to with WP7 (despite its commercial flop).
quote:
Google/Android have made a valiant effort to keep up (sometimes pulling ahead in limited ways but generally lagging behind a bit)
Here I would tend to disagree.

Google and Android were even later arrivals to the game than Apple. At the end of 2008 they had about 1 percent of the market, following the launch of the HTC Dream, aka G1, on T-Mobile.

In 2009 they gradually built momentum, before jumping in the lead in the U.S. in 2010:
http://www.dailytech.com/NPD+Confirms+Androids+Sta...

But they have held a cumulative global lead in sales since 2011:
http://www.dailytech.com/Android+Overtakes+Symbian...
http://www.dailytech.com/Android+Outsells+iPhone+5...

Again, Android started 2011 on a roll, having soared from nowhere into first place.

But in 2011 it stalled somewhat, releasing the lackluster Gingerbread updated and creating confusion by releasing the (effectively) closed-source Honeycomb tablet OS.

Apple, meanwhile, finally dropped its latest iPhone, the 4S, which combined with certain events, such as the death of Steve Jobs, the antenna issues pushing some buyers to skip the previous generation, the wide network availability, etc. launched with unprecedented hype. The pent up demand kept Apple narrowly ahead of Samsung in global smartphone sales, but still behind cumulative Android sales on a platform basis.

Looking forward to 2011, I would be far less confident, if I were you that Apple will even be the #1 individual smartphone seller in terms of volume. Ice Cream Sandwich is very polished and advanced. It's an almost iPhone-like game-changer, and as word spreads, it should propel Google and its partners to new heights.

And many of its patent-pending innovations will make it far harder to sue off the market than Gingerbread or Froyo.

Of course Apple isn't exactly crying in their milk. They have more money than they know what to do with, given their ludicrous margin. But ultimately they will likely have to settle for being second -- at best -- in 2012 sales, I believe.
quote:
Google has almost completely failed to make a successful business of Android.

Again here I think you are slightly misinformed. Google has actually made quite a bit of money off of mobile advertising, via AdMob. On the iPhone AdMob is the backup advertising platform of choice, while on Android it's THE platform.

Via AdMob Google is estimated to have made as much as $1B USD in 2011 -- of which it gets a cut in the hundreds of millions.
http://signalnews.com/admob-googles-mobile-bet-pay...

At the same time iAd has done respectably, but has struggled and lost some big clients.

Of course Google ad success is chump-change compared to Apple's hardware margin profits. That said, to say Android has "completely failed to make a successful business" is ludicrous as you are talking about a platform that is making Google hundreds of millions yearly and is the world's most-used smartphone operating system.

A commercial failure?

Hardly.


RE: FRAND
By Tony Swash on 2/24/2012 5:43:29 AM , Rating: 2
I think it worth pursuing this issue of Android commercial success. Some people see the figures for Android devices sold or for Android market share and think that that automatically translates into commercial success. It doesn't.

At the moment all the Android device makers except for Samsung are either barely breaking even or making a loss, and Samsung's profits (in relation to turnover) are pedestrian. Android's App ecosystem is financially pallid compared to iOS as is the Android device specific peripheral market.

Google has spent billions on Android, including £10 billion plus on just buying Motorola whose purchase was predicated on Android. Android devices sell in their tens of millions every quarter. And yet Google makes (in relation to market size and the size of of it's core business) piffling profits. The mobile ad market looks like being fairly insignificant for everyone, which is a problem if your core business is advertising. If we are really witnessing the long term secular decline of the desktop market and a shift to the internet primarily on mobile devices then on these results Google will see it's business contract sharply over the coming decade no matter how many Android devices are sold. Google can see this coming and everything it is doing is about avoiding that but it's core response strategy, Android, is not succeeding in removing that threat.

Meanwhile Android is forking with products like the Amazon Fire that appears to have eaten the low end Android tablet market but which is not making either Google or Amazon any money. Amazon's strategy of killing all other retail via razor thin margins and massive scale may work long term and thus selling devices like the the Fire at a loss as they do may make sense long term but it hardly counts as being a financial success for Android.

You may be right about Apple losing it's mojo after Steve but I wouldn't bank on it. The main product that Jobs designed at Apple was Apple itself and I think he crafted something rather special. Apple appears to be using the same strategy with Android as it did in the PC market where it started as a huge underdog and attacked the PC business via attacking it's weakest link, the OEM's, by just seizing all the profits in the market and thus sucking the oxygen out of it's competitors businesses.

The only worthy competitor Apple have at the moment is Samsung (and maybe Amazon) and the battle between them is going to be hugely entertaining as they shower competing toys upon us. Google seems incapable of moving beyond it's one good idea which it had an amazing fifteen years ago, everything else it has done has been a commercial failure. Microsoft fell into a coma sometime around the end of the 1990s and seems only now to be waking up but no matter how fast it runs it may never catch up.


RE: FRAND
By Tony Swash on 2/24/2012 1:42:33 PM , Rating: 2
Just a follow up. Came across this report today.

http://www.electronista.com/articles/12/02/24/blac...

Quote:

quote:
In North America, iOS' share of mobile ad impressions grew a full 12.1 points between October and January, according to mobile advertiser InMobi. Traffic from iOS devices hit 35.3 percent in January, as compared to 32.7 percent for Android, and 11.6 percent for BlackBerry. Android in fact slipped 3.2 points between October and January, allowing iOS to seize leadership.


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