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

"It seems as though my state-funded math degree has failed me. Let the lashings commence." -- DailyTech Editor-in-Chief Kristopher Kubicki

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