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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

Comments     Threshold

This article is over a month old, voting and posting comments is disabled

By JasonMick on 2/23/2012 9:18:15 PM , Rating: 3
[Cont'd due to editor error with overly long reply]

My point about Apple's product differentiation is not to claim that they do or don't succeed in achieving that, merely that it is Apple's strategy to strive for product differentiation and therefore that strategy has profound implications for their IP strategy
True, but I think Apple has struggled to continue to offering strong differentiation or significant progress in terms of its core operating system.

I think a major driver of iPhone 4S sales was simply that many lusted for the iPhone 4's more modern spec, but many were scared off by its antenna issues.

To be fair I think Apple is still narrowly the premium app supplier, though Android has almost closed this gap.

But in terms of hardware Apple's device is arguably the best 3.5-inch device out there, but across the full size spectrum, there's plenty of nicer pieces of hardware, depending on what you're looking for.

And ICS is more bleeding edge (in my opinion) than iOS 5.1 in its base user interface and the apps are on par with Apple's in terms of polish.

I think ultimately Apple is still doing a great job financially and marketing-wise.

I just think that without Steve Jobs, Apple is suffering from a bit of Windowitis. Much like Windows in the late 1990s, it's offering slow plodding improvements, but not exactly recapturing the spark that it had when it shook the market with its polish and premise.

I think ultimately Apple could come back with a much more advanced and innovative product, but we shall see. I think a huge part of the iPhone's success boiled down to Steve Jobs ruthless and exacting leadership, which may not have been employee-friendly, but bred game-changing products.

I see Tim Cook as the type who won't disappoint and will continue to put up industry-leading financial performances given the tried and true model he's working with. And I see him as shepherding solid device launches. But I don't exactly see him reinventing the market with new ultra-iconic ultra-polished products like Steve Jobs did.

therefore that strategy has profound implications for their IP strategy.

I think you must consider that Apple is setting a new standard with regards to aggressive litigation and patenting. If you've been following the deluge of Ice Cream Sandwich patents and new Samsung, Motorola filings, as well as the slew of countersuits, you'll see that the Android players are quickly catching on.

But yes, Apple did take them a bit by surprise (though I don't know if that's something to be proud of).

In a way I would assume the leadership of Apple doesn't see their patenting and litigation efforts as trolling, they see it as "differentiation", but the fact remains that competitors in nearly every other business sector can differentiate their products without creating a massive war of lawsuits.

Again, here I say it takes two to Tango, so part of the blame rests on Google, et al. But Apple did start this mess.

By TakinYourPoints on 2/24/2012 1:27:58 PM , Rating: 2
To be fair I think Apple is still narrowly the premium app supplier, though Android has almost closed this gap.

I disagree, the app gap seems to be widening. While games are an obvious thing (developers still target iOS over Android), productivity is another area where iOS is far ahead of Android. Microsoft is one of the biggest developers on iOS with almost two dozen full featured applications on it compared to about five apps on Android, and the Android apps are simple things like front-ends to Bing and MSN. Office for iPad is coming soon while they have no plans to bring it to Android.

The reasons, aside from popularity, also stem from the fact that enterprise is avoiding Android due to its security issues. iOS on the other hand supports more ActiveSync security policies than any mobile platform out there. Combine that with strong vendor support and those are huge reasons why businesses are deploying it. This logically translates into greater productivity app development for it.

Then there are hard metrics. Android development flatlined over 2011 while iOS development (already popular) continued to accelerate over the year:

"I modded down, down, down, and the flames went higher." -- Sven Olsen

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