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Deal avoids more painful suits regarding software patents, but comes at the cost of profitability

Under a newly minted deal between the world's top smartphone maker -- South Korea's Samsung Electronics Comp., Ltd. (KSC:005930) and Nokia Oyj. (HEX:NOK1V)), Samsung agrees to pay Nokia royalties on its Android smartphones, beginning in January 2014.

I. Nokia Scores Licensing Payments From World's Largest Smartphone Maker

The deal is another crucial coup for the Finland-based Nokia, who recently opted to sell its recovering devices division to ally Microsoft Corp. (MSFT) and focus its efforts on the telecommunications equipment market.  Nokia already owns a major licensing deal with Apple, Inc. (AAPL).  Apple -- widely known in the smartphone "patent wars" as an aggressor -- ironically enough was on the receiving end of Nokia litigation back in 2009, which culminated in an agreement from Apple to pay licensing fees.

Apple's licensing rates (i.e. how much Apple pays Nokia per iPhone to "borrow" its "innovations" -- intellectual property) interestingly may have played a key role in the Nokia-Samsung negotiations and are also the subject of a growing controversy.

Samsung Galaxy S4 wide
Both Samsung (Galaxy S4, left) and Apple (iPhone 5S, right) are saddled with licensing fees to Nokia.

Apple and Samsung are currently locked in a second round of suits-countersuits, which will be tried in March 2014 in the U.S. District Court for the Northern District of California with Judge Paul S. Grewal presiding over the trial.  Ironically, that case only involves the Galaxy SIIGalaxy S3, and Galaxy Note 2 -- aging Androids which Samsung will likely have largely have stopped making by the time the case wraps up.  Apple tried to tack on Samsung's current flagship smartphone, the Galaxy S4, but Judge Grewal denied that motion, forcing Apple to have to likely wait for a third trial in mid-to-late 2015 on that, and possibly other devices.

Overseas Samsung has faced some minor losses, seeing brief bans of its "Galaxy Tab" product line, but has been successful in convincing foreign regulators that its workarounds eliminate Apple's infringement claims.  Notably in the UK Samsung actually was found completely innocent -- illustrating the diverse range of opinions regarding software patents and their scope.

Galaxy Note II
The Galaxy Note II is among the devices targeted by Apple's latest ban request.

In the U.S., Samsung lost the first round of the battle, with a hometown Californian jury -- who included jurors who had family members who were Apple shareholders -- deciding that Apple was innocent of infringement, but Samsung was guilty.  A jury ordered roughly $1B USD in damages, but $450M USD of that was awarded under improper instructions; so it's being recalculated (likely lower) at a special damages trial in November -- also in the USDC for Northern California, under the trial judge for the first case, Judge Lucy Koh.

II. Did Leaks Help Samsung Illicitly Score a Deal?  Apple, Nokia Claim So

The controversy regarding the Apple-Nokia licensing stems from the fact that Apple handed over confidential documents to Samsung's lawyers -- which were only allowed to prepare a defense for the case.  Those documents admittedly were not stamped with the appropriate confidential steal ("Attorney Eyes' Only"), due to what Samsung's lawyers claim is a "mistake".  They were also uploaded to an FTP, which Apple's law team contends was access by 223 unauthorized individuals -- including Samsung lawyers and executives involved in the Nokia investigation.

Apple cites a deposition from Nokia's chief intellectual property officer, Paul Melin who at a June 4 settlement talk with Samsung was reportedly surprised when Samsung executive Dr. Seungho Ahn knew of the secret terms of the Apple license, and reportedly use that for leverage, telling Mr. Melin "all information leaks".

Apple v. Samsung
Apple and Nokia claim Samsung abused confidential information to gain an upper hand in its dealings. [Image Source: Gizmodo]

Quinn Emanuel Urquhart & Sullivan, LLP -- the outside counsel representing Samsung admits that it made "missteps" in the case, which they "deeply regret".  But they deny that Dr. Ahn knew of the agreement, arguing that Mr. Melin misunderstood Dr. Ahn due to a language barrier (English is a second language for Dr. Ahn).

If Apple is able to nail the lawyers at Quinn Emanuel with sanctions it would be a major blow and set a difficult initial hurdle for Samsung to overcome image-wise in the second trial.  It could also seriously impact Dr. Ahn, who happens to have J.D. legal credentials from the State Bar of California.

Fortunately for the Samsung team, Judge Grewal so far has remained unconvinced of Apple's argument for lack of complete information.  He commented in a recent hearing, "I am not yet satisfied that sanctions are warranted in this matter."

It's pretty clear based on Quinn Emanuel's defense testimony from the hearing, that Samsung did something at least mildly illegal, in failing to stamp the documents appropriately and uploading them to a potentially shared FTP.  How serious a breach this was may be difficult for Apple and Nokia to definitively prove -- as most of the critical details happened behind the veil of Samsung's servers.  In terms of image, the account is mildly damaging to Samsung although at this point the battlelines are drawn; its detractors will largely view this as another instance of "Samsung stealing", while its proponents will view it as a merry rogue, perhaps flexing the bounds of legality to battle the patent aggression of Apple and Nokia.

II. Samsung -- Profitable, but Not Safe as the Vultures Circle

With that in mind, at the end of the day Nokia did decide -- whether it was due to knowing what Samsung (illicitly) knew with respect to its Apple arrangement, or something else -- to four months later accept Samsung's licensing settlement offer.  The pair are still have a bit of negotiating to do, though as the "damages" for the bind arbitration (i.e. per unit licensing fees) will be decided sometime in 2015 (and retroactively applied to 2014 sales).
Nokia 770
Nokia was a pioneer in the smartphone space with devices like the Nokia N770 (2005).

It is unclear whether Nokia will offer any special exemptions for Samsung's Windows Phone handsets.  Nokia did not spare the Radar 4G Windows Phone from HTC Corp. (TPE:2498) in the pair's recent ongoing legal strife.  However, Microsoft has since received a confidential licensing agreement for Windows Phone as part of the Nokia Devices deal -- leaving it unclear whether or not Windows Phone (as a platform) has received licensing from Nokia (meaning all Windows Phones released from Q3 2013 on would likely be protected), or if the licensing only applies to Nokia Devices' Windows Phones.  The licensing pact, like the deal between Apple and Nokia, is sealed, so we may never know (given that Samsung has already settled with Nokia and HTC is likely to settle).

Nokia says it currently receives patent licensing fees from a whopping 50 OEMs.  It quite possibly may have the strongest smartphone patent portfolio in that its pioneering work in smartphones allowed it to describe in patents the basic software setup of the modern smartphone, with sufficient ambiguity in the language to broadly cover most current devices.  Better still, most of these patents weren't part of any standard, and thus aren't bound by any sort of obligatory licensing.

Nokia sign
[Image Source: Reuters]

Samsung now is safe from Nokia, but it's still reeling from being sued by Rockstar Consortium -- a group of tech firms that includes Apple and Microsoft -- and even fellow Android OEM Sony Corp. (TYO:6758).  The suit is controversial as Apple and Microsoft had promised to the use these patents -- which come from a 6,000 patent portfolio from bankrupt telecommunications firm Nortel -- in a peaceful manner, at the time of their $4.4B USD purchase approval in Feb. 2012.

The suit is also controversial as Samsung has a licensing agreeement with Microsoft for Android, and is rumored to pay one of the highest rates of any OEM (nearly $15 USD per device).  Samsung may have paid Microsoft over $3B USD in 2012 in licensing fees on the 215 million smartphones it sold, most of which ran Android.  Given that Samsung is already paying Microsoft, it seems rather unethical that Microsoft would turn around and try to troll this cash cow for even more via shell company.

About the only good news for Samsung is that even with the new "Nokia tax", Samsung will likely remain the most profitable Android OEM in the industry, given its current large quarterly smartphone profits.

Sources: Nokia [press release], The Verge [documents leak]

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Screw Apple
By kickoff on 11/4/2013 3:26:18 PM , Rating: 2
As long as Apple is on the losing end of this one, I'm good. They are the aggressors in nearly EVERY case out there and we'd all be paying a lot less for phones if we didn't have to cover legal fees for all involved in the price of phones.

Just make the best phone and compete, ALL of you and we'll let the market decide.

RE: Screw Apple
By t_sandman on 11/4/2013 4:13:46 PM , Rating: 1
Samsung is making plenty of profit. Thinking Samsung wants to pass on savings to the consumer is laughable. Competition drives prices down, and so far, in the Android world, Samsung does not really seem to have any. Demand for Samsung phones is high so prices will stay high.

So Samsung having to pay fees to Nokia and Microsoft for the privilege of using patents and being sued by the EU over FRAND and Rockstar Consortium for patent infringement is somehow Apple's fault?

You do know that Apple is not the only company suing Samsung. I don't hear Google getting sued for the Nexus phone products or Motorola being sued for their phone products (Well it is coming). They seem to have some of the less expensive phone products on the market. However, they are not as in demand as Samsung products so Samsung is content to charge a premium for their high end phones.

Google bid for the patents, but it didn't get them. Instead, the patents went to a group of competitors—Microsoft, Apple, RIM, Ericsson, and Sony—operating under the name "Rockstar Bidco."

It appears the patent wars are just heating up. The internet is all abuzz about Rockstar Consortium suing many major mobile phone manufacturers (the Android type). This group spent 4.5 billion for the patent portfolio and now they are coming after anyone who is using these patents without paying for them. Expect more of the same litigation we have been witnessing throughout the years. If Google/Samsung are found to be guilty, I would not expect prices for Android to go higher even if they have to pay patent license fees. My rationale for this is that Android would need a reason to be an alternative to Microsoft and Apple. I think charging more than Apple or Microsoft for a phone would hurt Android. So prices would have to remain flat or go lower which would impact Samsung profits. I am not sure Google would be as impacted since their source of revenue comes from advertisement. Going to be interesting to see how this unfolds.

RE: Screw Apple
By Reclaimer77 on 11/4/2013 4:33:50 PM , Rating: 2
Your entire premise is false. Samsung does make plenty of profit, yes. However it's a well known fact that cost increases are not eaten by companies, they are passed on to the consumers.

So yes, in essence, the "Microsoft/Nokia" patent trolling tax ultimately does increase the cost of smartphones to the consumer. How much is debatable, but the impact is certainly there.

The vast majority of smartphone owners would never know it, because of the carrier subsidy. Very few people buy $800 halo-phones outright.

RE: Screw Apple
By t_sandman on 11/4/2013 4:50:41 PM , Rating: 2
Samsung does make plenty of profit, yes. However it's a well known fact that cost increases are not eaten by companies, they are passed on to the consumers.

I agree with your statement. However, Samsung is the most profitable Android manufacturer. They also have some of the most expensive phones. I don't think there is a correlation between lawsuits and high prices in this case. I think the high prices are because they are the most popular. The Google Nexus 5 is a worthy competitor for Android but it is a few hundred less than the GS4.

I don't believe if tomorrow all lawsuits were to evaporate that Samsung would suddenly start to lower their prices. The only way prices go down is through competition. If Google or Motorola started to sell as many phones as Samsung, then Samsung would lower their prices to be competitive, regardless of the number of lawsuits Samsung is facing.

RE: Screw Apple
By troysavary on 11/5/2013 7:49:11 AM , Rating: 2
Samsung phones were expensive before they started paying licensing fees to MS. The reason phones are expensive is because they can charge that much due to subsidies from carriers, not because of $10 or so per device in licensing. If there were no locked in expensive cell plans covering the cost of the phones, then prices would quickly come down. Right now, profit margins on flagship phones are way higher than margins on laptops and tablets, which are more expensive to make, more powerful, and arguably way more useful than phones.

RE: Screw Apple
By Reclaimer77 on 11/5/2013 9:12:22 AM , Rating: 2
Do you even bother to read my posts? I already said that...

Do you really believe these licensing payments come from Samsungs profits? No, they come from the wallets of those who buy their phones.

This isn't hard...

RE: Screw Apple
By troysavary on 11/5/2013 1:52:03 PM , Rating: 2
The phones did not suddenly go up in price when Samsung started paying royalties to MS. Samsung was always charging as much as they thought the market would bear. The royalties have had no appreciable effect on phone prices. Subsidies, on the other hand, and THE major factor in prices. You said the consumer did not notice the (non-existent) increase in prices because of subsidies, where I contend that the high prices are the direct result of subsidies. So no, you did not say what I said.

RE: Screw Apple
By Reclaimer77 on 11/6/2013 12:45:35 AM , Rating: 2
The phones did not suddenly go up in price when Samsung started paying royalties to MS.

Who the hell said they did? Where did I say that?

But SOMEONE is paying those royalties. And it sure isn't Samsung, it's ultimately paid by the consumer.

I can't believe you're trying to make the argument that the Microsoft tax had a "non existent" effect on smartphone prices. Wtf, are you this dense?? I honestly hate you for making me look up something that should be common sense, but may this will shut you up.

"There’s little denying there’s a “Microsoft tax” on Android: most consumers are (and have been) paying it. Google and Motorola’s fight against Microsoft’s patents seems more prideful than practical: eventually Motorola’s devices may carry it too. (Guess what: Google’s current Nexus lines are made by Samsung, LG, and Asus/Pegatron, who each have deals with Microsoft.)

Android devices do cost more as a result:
consumers might not see the difference in a $600 unsubsidized Samsung Galaxy S4, but it will be more apparent in low-cost devices where a fixed per-device royalty will account for a larger proportion of the price. Android devices will only get so cheap."

RE: Screw Apple
By Just Tom on 11/5/2013 10:53:31 AM , Rating: 2
Your entire premise is false. Samsung does make plenty of profit, yes. However it's a well known fact that cost increases are not eaten by companies, they are passed on to the consumers.

Like many well known facts this one is false. Companies seek to maximize profits and/or marketshare. Do you seriously think Samsung, which is the most profitable and largest cell-phone manufacturer, would lower prices if these lawsuits and penalties did not exist? And if so why? If these lawsuits suddenly disappeared the only thing that would happen is Samsung's stakeholders would make more money.

RE: Screw Apple
By sprockkets on 11/4/2013 7:38:17 PM , Rating: 2
You do know that Apple is not the only company suing Samsung. I don't hear Google getting sued for the Nexus phone products or Motorola being sued for their phone products (Well it is coming). They seem to have some of the less expensive phone products on the market. However, they are not as in demand as Samsung products so Samsung is content to charge a premium for their high end phones.


Galaxy Nexus was banned for a little while thanks to apple
Motorola was sued by both Microsoft and Apple, with MS going to the ITC and court over their "outrage" over royalties and Apple and Moto's suit getting tossed out of court, though with both appealing...

That and premium pricing? Both Samsung and Moto charge the usual amounts for flagship phones, so?

RE: Screw Apple
By whatsa on 11/5/2013 6:42:06 PM , Rating: 2
For the nexus definitely.
Google give them away there is no margin to absorb the added cost. also this relates to all phones manufacturered by google so although not a lot it still 100s of millions$.

I wish they just had a central body for SEP. that your phone could be sent to and they would have the SEP prices.
then their costs for doing this would be less than a cent per phone. then compliance and banning would just be if you paid.
countries could base market access based on compliance/certification by central body.

RE: Screw Apple
By saarek on 11/6/2013 7:10:07 AM , Rating: 1
Yes, it's all good saying that our phones would be cheaper if Apple (and others) stopped suing Samsung and the other Android licensees for patent infringement.

But on the flip side, if you personally came up with a product and then your neighbour saw it and decided to borrow the best bits without giving you credit or paying you a penny you'd be up in arms about it too.

Apple needs to and should pay for the technology that they have taken from others. Samsung, Google and the others need to learn to do the same thing.

Unfortunately with the way the whole trial system works the damage is already irreparably done by the time some token settlement figure is handed out.

Patents don't work because huge companies like Samsung can take what they want now and pay pittance for it later. A slap on the wrist and a fine after you have made billions out of someone else's tech is no deterrent at all.

a lot of this is wrong
By whatsa on 11/5/2013 6:28:06 PM , Rating: 2
Firstly it was the laywers site
that gave samsung access.

This is a huge issue as the rule of law
ie the courts guarantee the privacy of this info from the
warring parties to allow lawyers to use this but not discuss it with clients, to help resolve the issue.

If the court orders are not followed then we have a major problem. There will be something major from this as the courts need to make sure the penalty is bad enough to stop future breaches.

The SEP/ non-SEP whining.
Samsung is a component manufacturer and has exclusive rights to their patented bits. the patent cost is just included in sale price of the component. So they are getting paid for their inventions, I think everyone else should too.

"Death Is Very Likely The Single Best Invention Of Life" -- Steve Jobs

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