Nokia looks to either score licensing fees, or force HTC onto Windows Phone

Microsoft Corp. (MSFT) is showing off a mean one-two punch against the smartphone market's top platform Google Inc.'s (GOOG) Android.  After pressuring most Android OEMs into lucrative long-term licensing deals which erase much of the OEMs' margins, and now its close partner Nokia  Oyj. (HEL:NOK1V) and is using patent lawsuits to deliver the second blow.

I. Microsoft Circumvents Licensing Deal Via Subsidiary Nokia

The first victim of this strategy is HTC Corp. (TPE:2498).  HTC signed a deal with Microsoft in 2010, reportedly paying Microsoft around $10 USD per Android smartphone it sells.  The deal grants HTC licenses to various Microsoft operating system and hardware patents that HTC's Android device might otherwise infringe upon.

Generally HTC has tried to play peacemaker when it's been dragged into court.  In November of last year it signed a 10-year licensing pact with Apple, Inc. (AAPL).  Earlier last year Apple had scored an import ban via the U.S. International Trade Commission, the nation's trade court.  The ban caused serious damage to HTC earnings, by worsening the Android phonemakers sales slump.

HTC sign
HTC continues to be bullied by Microsoft and Nokia. [Image Source: Reuters]

While HTC has continued to struggle financially, one might think that it was safe from fresh patent litigation -- at least litigation from Apple and Microsoft, two of the smartphone war's primary drivers.  But if you thought that you would be wrong, as Nokia has secured a ban on much of HTC's smartphone line via a preliminary ruling by the ITC.

Since it has signed a licensing pact with HTC, Microsoft cannot directly sue it.  But in its recent complaint, Finnish phonemaker Nokia Oyj. is instead doing that work.

Nokia recent sold its devices unit to Microsoft, along with a 10-year patent licensing promise for $7.2B USD.  But Nokia Oyj. as a whole continues to exist in Finland and continues its anti-Android "license or be sued" patent campaign.

II. Nokia Started the Patent Wars, and it's Still Pushing Them

Nokia alleges that Qualcomm, Inc.'s (QCOM) radio circuitry inside the Snapdragon 600 (APQ8064) and other commonly used smartphone components violate dozens of patents (at one point the count was 50) owned by Nokia.  But rather than sue Qualcomm, et al., Nokia has decided to selectively target phonemakers that use the chips.

Snapdragon 4
Nokia claims Qualcomm's Snapdragon 4 and other chips infringe on its IP. 
[Image Source: Engadget]

Nokia has long been at the forefront of the so-called "smartphone wars", an industry-wide patent suing frenzy that began in 2009.  Ironically Apple -- the other leading litigator -- was the first company to be sued back in 2009 when Nokia accused Apple of violating 10 of its patents.  

Nokia also set the model that Apple and others would later follow by filing an ITC complaint requesting a ban on infringing products.  As virtually all smartphones are made in China, these import bans would effectively amount to sales bans.  The ITC approach is a particularly attractive one in the U.S. as elements of the 2006 Supreme Court ruling in eBay v. MercExchange [PDF] made it harder to secure more traditional federal court orders to ban products while pursuing infringement claims in the federal court system.

ITC office
The ITC has become a popular route to product bans. [Image Source: Wikimedia Commons]

Nokia's current complaint was filed in the U.S. District Court for the Southern District of California in May 2012 (Case 13-cv-01231-BEN-WMC) by the power law firm Neil Dymott Frank McFall & Trexler APLC [press release].  A separate ITC complaint was filed in parallel.  That complaint targeted a slew of devices that now comprise the older models in HTC's Android lineup including the HTC Amaze 4G, the Inspire 4G, Flyer, Jetstream, Radar 4G, Rezound and Sensation 4G.

The Sensation 4G

The ITC complaint involved nine "non standards essential patents", of which two were singled out to aid in a final ruling. These were EP1133831/U.S. Patent No. 7,415,247 which covers a "Method and arrangement for transmitting and receiving RF signals through various radio interfaces of communication systems" (filed: 1999, granted: 2008) and EP0951138/U.S. Patent No. 6,373,260 which describes a "Method for attenuating spurious signals and receiver" (filed: 1999, granted: 2002).

III. License or be Sued -- Licensing? Nevermind, We'll Sue You Anyways

When Nokia's devices unit was acquired by Microsoft at the start of September -- some expected or hoped that Microsoft might drop the case out of respect for its licensing relationship with HTC.  While the deal did not give Microsoft ownership of Nokia’s intellectual property it did cement the pair's close "strategic relationship".

But Microsoft appears to have no voiced compunctions about its partner continuing to attack its licensees.

On Monday, Nokia was rewarded when Administrative Law Judge (ALJ) Thomas Pender ruled that HTC infringed on the Nokia patents and ordered a ban of the HTC One in a preliminary ruling.  Due to the government shutdown that ruling is currently unavailable.

Nokia spokesperson Mark Durrant told Reuters in an emailed statement, "Nokia is pleased that the initial determination of the ITC confirmed that HTC has infringed two of our patents."

The company is expected to push the ITC to also ban HTC's flagship One smartphone and other newer models, which also use Qualcomm chips.  A final ruling is expected in January, after which HTC has 90 days to respond or face a ban.  If the panel of three ALJs upholds the ruling that HTC infringed, its products could be banned from import by April 2014.

The HTC One could be banned by April 2014.

Ultimately, Nokia seem unlikely to actually want to have to follow through on a product ban.  Rather the decision to continue with the complaint will likely look to force HTC (and others) to separately license Nokia's patent portfolio.

A spokesperson for HTC told The Wall Street Journal that HTC will "keep its alternative plans ready to ensure no business disruption."

It's unclear whether that plan involves switching the chips used in the smartphones, switching to Windows Phone, or offering to pay Nokia via a new licensing agreement.

IV.  Microsoft, Nokia are on Pace to Milk Billions  from Android in 2013

Microsoft already makes more than any other party that's sued Android phonemakers to force licensing. It's scooping an estimated $10 USD in pure profit off every HTC smartphone sold; versus a mere $3 to $4 USD that Apple is rumored to receive.  If Nokia could force HTC (and others) to pay an additional $10-15 USD per Android device to license its patent portfolio, it could essentially make it so phonemakers make no profit off the Android smartphones they sell.

This clever scheme would either pad Nokia's profits, or force phonemakers onto the only other mature third-party smartphone platform -- its partner Microsoft's Window Phone. HTC already makes Windows Phones, so the latter is a plausible possibility.
HTC Windows Phone 8X
The HTC Windows Phone 8X

Microsoft was reported some time ago to make more profit off Android licensing that Windows Phone, and given the influx of new high-profile licensees like Samsung and China's ZTE Corp. (SHE:000063).  

Today nearly four out of five smartphones sold are Android phones, and Microsoft is getting a cut of every one of those devices.  Microsoft is on track to make a couple billion dollars off Android licensing this year.  Nokia has also built a strong portfolio of licensing obligations.  It has estimates that it will make $675M USD in royalties off Android smartphones in 2013.

Nokia is today profitable, but its sales aren't great.  It sold 5.6 million smartphones last quarter.  But HTC has fared even worse; it was rumored to have sold only 1 million units of its flagship HTC One smartphone as it missed Q2 earnings targets in July.  If Nokia can force licensing it could potentially score hundreds of millions in new licensing fees, just like its partner Microsoft.

Royalties are where the money's at for Microsoft and Nokia.
[Image Source: Life's Cheap Thrills]

This is not the first major patent loss of 2013 for HTC.  In May it was discovered via teardowns that Geneva, Switzerland-based STMicroelectrics N.V. (EPA:STMhad apparently stolen the noise-cancelling dual-membrane mic technology Nokia licensed it to use in Lumia components.  HTC subsequently apologized, dropping the once-key feature, and managed to successfully avoid an import ban in Europe.

Sources: ITC, Reuters, WSJ

"We’re Apple. We don’t wear suits. We don’t even own suits." -- Apple CEO Steve Jobs

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