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Analyst Insights Wireless Watch: The wireless patent giants start to bite back against Apple and Microsoft
Nov 9, 2011 – Rethink Research

In the escalating smartphone patent wars, the main headlines have centered on the new mobile powerhouses, as they apply their huge software and web IPR arsenals to the handset world. As Microsoft, Apple and Google assert their power through lawsuits and acquisitions, the traditional power brokers in wireless IPR have been uncharacteristically quiet. No longer. Samsung has been far more aggressive in recent weeks about shaking its patent-laden iron fist at Apple’s attacks. And now the ‘MEN’ (Motorola, Ericsson, Nokia) companies which laid the foundations of the mobile industry, gathering vast stores of IPR in the process, are starting to roar.  
Only Qualcomm is effectively neutralized. Still the biggest mobile intellectual property mover and shaker of them all, it nevertheless needs to build strong relationships with the new industry leaders, which means pulling in the horns of its patent division somewhat. However, that does not mean Qualcomm should not be closely watched. There are many battles still to be fought in 4G mobile licensing, particularly when it comes to patents which cover the fundamental workings of cellular networks and devices – the key strength of the MEN players, Qualcomm and InterDigital. Most of the burden of those royalty fees rests with the equipment and device makers, allowing Microsoft and Google to remain somewhat aloof from the traditional bilateral negotiations with Qualcomm and co, which were a fact of life for the previous generation of mobile leaders.  
In the new world, the situation is different – the handset makers and their chip suppliers bargain over fundamental wireless IPR, while the software majors attack on different fronts, where those traditional mobile players are weaker. But the dividing lines are blurring. Google will soon be a handset maker itself, effectively making it into one of the MEN triumvirate, and while Microsoft may not actually decide to make its own phones, it has effectively joined that MEN table too by virtue of its close alliance with Nokia.  
Meanwhile, Apple is, in one respect only, akin to HTC and other newer smartphone makers – it has a major mobile device business but is weak on basic wireless IPR. It has managed to avoid the issue of its lack of bargaining power vis-à-vis the MEN firms by slapping them with its own, very different, patents, and by seeking to ignore the fact it needs to license basic 3GPP technologies at all. But the more aggressive it becomes on its own territory, the less likely its rivals are to accept that status quo. The flaws in its plan were highlighted when it lost a fight with Nokia over just such fundamental wireless patents, and the same issues are being raised in its Samsung cases.  
Here is Apple’s Achilles’ heel. It cannot make a wireless device and get around the basic 3GPP patents, but it is relatively weak here by virtue of its later entry into the mobile market, with most of its own patent claims relating to newer trends such as touchscreens, multimedia functionality or its famous user experience. While these give it bargaining power against the 3GPP giants, they do not give it the ability to ignore wireless royalties altogether. This was made very clear in its fight with Nokia, which was settled after only 20 months (record time for such a complex multilateral battle between two giants) with Apple agreeing to unpublicized one-off payments and ongoing royalties. Nokia had filed suit in October 2009, citing 10 patents, and followed that up with a 2010 complaint in the International Trade Commission. The latter claimed that Apple infringed its patents in "virtually all of its mobile phones, portable music players and computers" – and those patents were "fundamental to making devices which are compatible with one or more of the GSM, UMTS and wireless LAN standards”, in areas such as wireless data transmission, codecs, security and encryption. These would be almost impossible to work around since they are built into industry standards, and had been tested multiple times in court, and licensed by virtually every other player. This saw Nokia none-too-subtly reminding the industry’s upstarts that it has “invested approximately €43bn in research and development and built one of the wireless industry's strongest and broadest IPR portfolios, with over 10,000 patent families."  
Similar issues are raising their heads in the Samsung cases, especially the effective test case being run in Australia. Here, Samsung filed suit in October citing three Australian patents, all concerned with fundamental wireless workings in transmitting 3G data. Apple counsel Cameron Moore argues that these patents fall under the auspices of the 3GPP and ETSI, which insists on FRAND (fair reasonable and non-discriminatory) licensing for essential IPR in 3G standards – ie, Samsung cannot seek damages or excessive fees. But that does not alter the fact, according to Samsung, that Apple still needs to licence the IPR, and has so far rejected invitations to do so.  
Moore has deployed a common tactic for seeking to get round such fees, claiming that Qualcomm, which makes the baseband chip for the iPhone 4S, has licensing deals in place for the patents in question. This raises one of the thorniest issues in wireless IPR, the question of ‘double dipping’ (the heart of many complaints against Qualcomm in the past) – whether a licence held by one player in the handset supply chain covers the eventual OEM. This issue is also important to Microsoft, with lawyers debating whether its new Android-related patent agreements with various ODMs also cover the customers of those manufacturers, such as Amazon. According to ZDnet Australia, Samsung said its experts would need to see the sourcecode for the 4S firmware to see how the chip interacts with the rest of the phone to judge those claims, but the basic issue at stake is far broader and decisions in individual spats like this could help define how fundamental wireless IPR holders could exploit their assets in the 4G era.  
This is an issue of keen issue to the European Union and its antitrust agencies. Its executive arm, the European Commission, has requested information on patents from Apple and Samsung, as it becomes increasingly concerned about how valuable IPR might be used in an anti-competitive way. "The Commission has sent requests for information to Apple and Samsung concerning the enforcement of standards-essential patents in the mobile telephony sector," said a statement. "Such requests for information are standard procedure in antitrust investigations to allow the Commission to establish the relevant facts in a case."  
The EU did not specify whether its probe related to one or both of the vendors’ claims, but Apple said in a court filing that Samsung was the focus. "Samsung's litigation campaign and other conduct related to its Declared-Essential Patents is so egregious that the European Commission recently has opened an investigation to determine whether Samsung's behavior violates EU competition laws," the iPhone maker stated in a filing on October 28 in a court in California. Samsung just said it was cooperating fully.  
If the EC finds grounds for investigation, it could open formal proceedings. "The fundamental question of patent is whether it really represents a monopoly; it's a question which has been struggled with since medieval times," Alexander Poltorak, CEO of IPR firm General Patent, told TotalTelecom. “And the one exception to that rule is standard-essential patent, where patent law becomes intertwined with antitrust law."  
With such fundamental issues looming, another of the MEN giants is also getting more aggressive with Apple now. It is Motorola, not Samsung, which has struck the biggest blow so far against Apple in its Android onslaught. In an intriguing twist, a regional German court in Mannheim has granted Motorola Mobility a preliminary injunction against Apple, pointing to the kind of value in the former’s patent portfolio, which attracted Google to it in the first place.  
Unlike a couple of preliminary injunctions Apple has won against Samsung, this ruling does not bar the iPhone maker from selling products in Germany, since the lawsuit was filed against Apple Inc corporation, not the local German subsidiary. Nor does the ruling name any specific products – but it does find that Apple infringed on two Motorola patents.  
"We will continue to assert ourselves in the protection of these assets, while also ensuring that our technologies are widely available to end users," a Motorola spokesperson told CNet. But its antagonist reacted with the PR equivalent of a shrug, saying in a statement: "This is a procedural issue and has nothing to do with the merits of the case. It does not affect our ability to do business or sell products in Germany at this time."  
The two patents involved are both European but have US equivalents filed during the 1990s, and both relate to fundamental aspects of mobile data and messaging - one covers a "method for performing a countdown function during a mobile originated transfer for a packet radio system" and the other a "multiple pager status synchronization system and method”.  
According to patent expert Florian Mueller of FOSS Patents, Apple may have allowed for the default award of an injunction – since it will not stop sales immediately - in order to present all its arguments in an appeal. He told CNet the tactic is commonly used under German law as a way to avoid missing a filing deadline. However, he added: "This is a very strange episode in the ongoing mobile patent wars, and without a doubt, this does potentially strengthen Motorola Mobility vis-à-vis Apple."  
The renewed focus on basic wireless IPR brings not just Qualcomm, Motorola and Nokia, but also Ericsson, into the ring. Sony Ericsson – the joint venture which will soon lose its Swedish parent, but with patent licensing deals intact – has gloated over its claimed immunity from the legal attacks on its Android rivals, thanks to the huge IPR position of its two owners. Now Ericsson, in its Capital Markets Day in Stockholm, has made its most explicit statements yet about building an increased revenue stream from its patents. The company, one of the lead IPR holders in LTE, said it aimed to increase revenue from its stockpile of over 27,000 patents as these turned up in an ever-wider range of connected devices, from toys to smart meters. “By 2015 two thirds of all consumer electronics devices will have some sort of connectivity,” CEO Hans Vestberg said in an interview. “Any company or manufacturer that wants to get in there will need an agreement with Ericsson.” The cross-licensing agreements which Sony will take when it buys out its partner’s share in their handset venture may end up being worth more than the JV’s actual products.  
Vestberg said Ericsson owned the industry’s largest portfolio of wireless communication patents and exploiting this more effectively for revenue would help offset the increasingly fluctuating nature of its core network business. He boasted of IPR which covers “basically everything in the telecom industry”, including the world’s largest collection of Wi-Fi patents. Already, IPR revenue has doubled between 2006 and 2010, to reach SKr4.6bn ($704m). Helena Nordman-Knutson, an analyst at Pareto Oehman, told Bloomberg that Ericsson’s patents could be valued at as much as $15.5bn, based on the price Google paid for Motorola’s intellectual property.  
However, Vestberg acknowledged that the traditional system of secret, bilateral agreements common in handsets would not work in the world of billions of wireless gadgets. “If we are going to get 50bn connected devices in 2020 it’s not only going to be handsets,” he said. “It’s not going to be practical for us to make bilateral negotiations with all the manufacturers. We need new business models and we need to work in groups.” This hinted at willingness to join patent pools, a structure to which Ericsson, along with Qualcomm, has always been hostile. And the web players are not safe from the Swedish behemoth. Vestberg warned that the firm intends to collect royalties from patents it has not previously monetized, in areas from web search to optical networks.  
While Apple’s legal approach is to try to disrupt sales of Android-based rival products through injunctions, Microsoft’s main tactic is to sign licensing deals which both give it an additional revenue stream, and make Android less attractive to OEMs by raising its costs. It aims to sign all the major Android vendors to license the patents it owns in the Google OS, and that major league now includes Huawei. The Chinese firm has confirmed that it is in negotiations with Microsoft over certain IPR.  
As Huawei moves upmarket from featurephones to smartphones, Android is becoming more strategic to it, and it aims to be in the smartphone top five within three years. As with other licensing deals, Microsoft may hope for a double whammy here – royalties from Android units, but also support for its own WP7 platform.  
By adding to the cost base associated with Google’s OS, it removes one of WP7’s disadvantages, especially for an OEM like Huawei, which focuses heavily on cost sensitive markets. The hardware vendor’s device CMO, Victor Xu, said in May that his firm was keeping a watching eye on WP7 and might release handsets in 2012, following in the footsteps of compatriot ZTE, which already has a dual Android/WP7 strategy.  
When Microsoft signed up Samsung recently for a patents deal, the agreement also included closer cooperation on WP7 device development and marketing, and if the Windows giant could agree a pact of similar scope with Huawei, it would set an interesting new precedent with a major from China, a country whose players have often proved difficult in IPR settlements, and which is seeking its own major patent base to reduce dependence on western inventions. Huawei is one of the largest patent holders in wireless standards including LTE.  
Xu would only tell reporters that "negotiations are in progress", confirming “Microsoft has come to us” and adding: "We always respect the intellectual property of companies. But we have 65,000 patents worldwide too. We have enough to protect our interests. We are a very important stakeholder in Android."  
Few companies have actively resisted Microsoft’s advances so far, though the exceptions include Motorola Mobility and Barnes & Noble. The latter is engaged in a David and Goliath campaign against the Windows giant’s policies, and it has stepped up its efforts by requesting that the US Department of Justice investigate Microsoft and whether it is seeking to  
monopolize the mobile device market by demanding patent royalties on Android. “Microsoft is embarking on a campaign of asserting trivial and outmoded patents against manufacturers of Android devices,” the bookseller said in a letter to Gene Kimmelman, the DoJ’s chief counsel for competition policy. “Microsoft is attempting to raise its rivals’ costs in order to drive out competition and to deter innovation in mobile devices.” Microsoft is suing B&N for alleged infringement of five patents and also faces a complaint before the ITC over its Nook ereader/tablets.  
“All modern operating systems include many patented technologies,” Microsoft said in a statement. “Microsoft has taken licences to patents for Windows and we make our patents available on reasonable terms for other operating systems, like Android. We would be pleased to extend a licence to Barnes & Noble.”  
This sums up the debate that is ripping the wireless device industry in two, and will always be waged in any technical market – at what point the right to profit from an innovation turns into anti-competitive behaviour. The line has always been a blurred one for Microsoft since it achieved its huge Windows presence, but Google is, predictably, going further than B&N in condemning its actions. Executive chairman Eric Schmidt told a press conference this week: "Microsoft is not telling the truth on this issue, and they are using tactics to scare people because they are scared of the success of Android.”  
LG signs with Intellectual Ventures:  
LG is the latest handset maker to sign a licensing deal with Intellectual Ventures (IVI), joining Samsung, HTC and RIM, among others. In an ironic twist, IVI – one of the largest US patent aggregators, and numbering Google among its backers – recently sued Google’s soon-to-be handset unit, Motorola Mobility.  
To avoid a similar fate, LG has signed a new deal which gives it access to IVI’s portfolio of 35,000 patents. The US firm is a privately held group numbering many large hi-tech firms, and founded in 2000 by Intel and Microsoft to support a shared approach to patent ownership and protection, which it argues helps licensees protect themselves from litigation.  
In October, IV charged Motorola with infringing six patents but it managed to sign up Samsung and HTC last year and RIM in March.

Courtesy Rethink Research.

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