Smartphones are the latest patent battleground

The patent wars are raging in the mobile device market, and they could result in rising costs for handset makers and higher gadget prices for wireless carriers and consumers. So far this year, Apple and HTC—two of the most innovative smartphone makers—have become embroiled in more patent-related litigation than in all of 2007, and they are on track to beat their own 2008 and 2009 records, according to Bloomberg data.
On May 7, Nokia lodged a patent infringement suit against Apple in Madison, Wis., that said Apple's iPhone and iPad violate five Nokia patents. In just seven months, the companies have exchanged five suits and countersuits. The tussle began in October 2009 when Nokia accused Apple of infringing on 10 patents and demanded royalties.
In March, Apple  sued Taiwan-based HTC, alleging it infringes on 20 Apple patents relating to touch and menu controls. The latest legal volley came May 12 when HTC responded to the Apple litigation with a complaint at the U.S. International Trade Commission, asking the agency to halt imports and sales of iPhones and iPads in the U.S. "We are taking this action against Apple to protect our intellectual property, our industry partners, and most importantly our customers that use HTC phones," Jason Mackenzie, a vice-president at HTC, said in a statement.
Microsoft is also pursuing patent payments from companies that make phones based on Android software. On Apr. 27, Microsoft said HTC will license its software for the phones. The terms haven't been disclosed. Patents also played a role in the recent $1.2 billion deal for Palm. Hewlett-Packard has said that patents associated with Palm's WebOS operating system for smartphones is one reason it wants to acquire Palm. "This landscape looks like France in 1914," says Eben Moglen, a professor at Columbia Law School. "This is the onset of a period of instability."

Revenue pie

Patent holders want a larger slice of smartphone revenues, which grew 27 percent to $61 billion in 2009 and are on track to grow another 30 percent this year, according to Boston-based consultant Strategy Analytics. And the companies that want a slice come from not only the phone but also the PC and software industries, whose inventions and functions smartphones increasingly absorb.
Each industry has its own unique functionality to protect: Apple holds many patents related to computing, applications, and touch technologies, which have been a hit in the iPhone. Nokia holds rights to many of a telephone's communications capabilities, while Microsoft owns a wealth of patents related to mobile device software. As companies seek to keep their technological acumen away from rivals—or to collect patent royalties from those rivals—the lawsuits are piling up. "Whenever industries merge, there may be patent litigation," says Gustav Brismark, vice-president for patents strategy and portfolio management at Swedish telecom gearmaker Ericsson, which holds many wireless connectivity patents.
One camp under attack: Manufacturers building phones with Android software, created by a coalition of companies led by Google. They are a target, in large part, because of their success. In the first quarter, Android phones accounted for 28 percent of all smartphone unit sales in the U.S., ahead of Apple's 21 percent, according to consultant NPD Group. In its March complaint to the International Trade Commission, Apple said several of HTC's Android phones infringe on its patents, some of which relate to how an operating system works and handles applications. Apple also sued HTC in federal court in Delaware, alleging patent infringement.
Patent payments

As smartphones grow increasingly complex, they rely on more patents. Nearly 8,000 patents, held by 41 companies, apply to phones' 3G wireless communications capabilities alone, according to industry research. Today handset makers pay less than 10 percent of their costs in patent royalties. But that percentage could jump substantially in the future—and potentially lead to a surge in prices that consumers and carriers pay for handsets.
There's precedent for higher licensing costs. When PCs and fax machines were new, their builders often paid 15 percent to 20 percent of the devices' selling price—not cost—for patent licensing, says Emmett J. Murtha, chief executive officer of Fairfield Resources International, a Darien (Conn.)-based firm that helps clients like Nokia and chipmaker Texas Instruments evaluate and license patents. Many of those older patents have since expired, but a multitude that apply to smartphones remain in effect.
One of the world's largest wireless patent holders, Qualcomm, already collects nearly $1 billion in royalty revenues a quarter—the result of its own lengthy legal battles with the likes of Nokia and chipmaker Broadcom. Now other companies are jockeying to boost their royalty revenues as well. But some companies may not have royalty payments in mind. They may wish to prevent rivals from offering competing products. "Apple would like to prevent competitors from making phones that are iPhone-like," says Mark Lemley, a patent law professor at Stanford Law School whose clients have included Google and Palm. Other Android manufacturers may become targets for Apple and other companies in the future, say legal experts. While Google has a substantial patent portfolio of its own, and could buy licenses to additional patents to protect Android manufacturers, it has not yet specified its plans. Google spokesman Anthony House declined to comment.
Margin threat

HTC likely pays Microsoft $20 to $40 per phone such as the new HTC Droid Incredible from Verizon Wireless, estimates Rob Enderle, principal analyst at the San Jose-based consultant Enderle Group. Microsoft's Windows Phone operating system for smartphones has been losing steam for months, while Android has gained ground. Apple, HTC, and BlackBerry maker Research In Motion declined to comment.
One Android handset maker has already budgeted for its patent royalty payments to double next year, says an executive at the company, who spoke on condition of anonymity since his talks with patent holders are continuing. The extra fees could threaten the industry's margins, which in percentage terms range from the teens to the low 20s. But patent holders say they need to be paid for their inventions: "After all, technology just doesn't appear, fully developed, out of Zeus's head," Microsoft's deputy general counsel Horacio Gutierrez wrote in a recent blog post. "It requires lots of hard work and resources to create."
Nokia, which has struggled in the smartphone market, may not be willing to license some of its patents to its most dangerous rival, Apple, either. In 2009, Nokia's global smartphone unit market share shrank from 40 percent to 39 percent, while Apple's rose from 9.1 percent to 14.5 percent, according to consultant IDC. "Nokia may decide whether to license those patents or to keep them for itself as a basis for product differentiation," says Paul Malin, general manager of patent licensing at Nokia. "Nokia's patent portfolio has not been broadly licensed to competitors." Nokia sued Apple for patent infringement in court and complained at the International Trade Commission last year. Apple has since countersued, accusing Nokia of infringing on Apple inventions.
Smaller licensors

Smaller patent-licensing firms are attacking the mobile industry as well. In January, a newly formed company, MobileMedia Ideas, purchased 122 patents from Nokia and Sony. Two months later, the Maryland-based company filed lawsuits against Apple, Research In Motion, and HTC. "We are in communication with approximately 200 companies making thousands of products," MobileMedia Ideas Chief Executive Officer Lawrence A. Horn says. "In the past several years, there has been a big proliferation of valuable products, and now [these patents] have a value in the market."
As smartphones have proved popular, patent holders say it is time to pay up—and ultimately that's what consumers may be forced to do.
Kharif is a reporter for Bloomberg Businessweek in Portland, Ore.

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