The practice of safeguarding ICT innovation seems to be spiralling out of control. Who are the winners and who are the losers in this bizarre battle?
Vicious clashes over intellectual property rights in the hi-tech sector have raged for decades. As soon as something is technologically feasible, it’s inevitable that in a world of seven billion inhabitants, you are not the only one trying to develop a new device or chasing a vision for innovative software. So it’s a routine occurrence for one company to sue another for an alleged breach of patent. Especially since high-flying technicians move from one employer to another, and the knowledge they developed with one company may later be used to benefit another. The movement of staff is compounded by the risk of industrial espionage: as well as storing information inside their heads, it may also be tempting to take physical or digital information with them. IT developers working with open source software disdain patents altogether, and simply hope their intellectual property will be admired, reused and improved, since it almost certainly cannot be protected.
Courting Conflict
Yet such big money is at stake, and so many customers to be won or lost, that the courts are frequently called upon to resolve clashes between IT developers. Often the claim is that one company has reverse engineered breakthroughs developed by a rival so they can quickly launch their own slightly modified copy. At other times legal action stems from the belief that a rival has simply put their own name on a feature or function that was blatantly stolen without the pretence of any enhancements. Since leading companies in the information and communications technology (ICT) industry all employ people capable of amazing inventions, it’s sometimes difficult to prove theft or replication, rather that the coincidence that two companies were working on the same idea simultaneously. Complicating the issue even more is the fact that ICT development is truly global, involving multiple jurisdictions with different legal processes and differing attitudes towards the theft of intellectual property. A legal victory in one territory may hold no authority in another country, or may even clash with the verdict reached by a different court. Which often means that products or features available in some countries are banned in others, due to an isolated ruling on patent infringements or anti-competitive behaviour. Industry veterans will remember how Microsoft was in and out of court for more than a decade over various practices, including whether it should be allowed to link its Internet Explorer browser to its Windows operating system. The European Union decided that this did contravene its antitrust rules and fined Microsoft more than $600 million. Now the intellectual property war has inextricably followed the trend set by internet browsers, by migrating from the PC to the smartphone. And just like those earlier Microsoft skirmishes, this is also a convoluted issue involving numerous players lodging various claims and counter-claims. The current complicated legal battles make a story of epic proportions, involving global patent litigation over tablet computers and smartphones produced by warring technology giants Apple, Samsung Electronics, Microsoft, HTC, Google and others. The stakes are enormous because the smartphone makers are fighting to dominate a market worth an estimated $206 billion, according to figures from researcher IHS Inc. With smartphone consumption poised to explode, companies are clamouring to buy existing patents to gain an edge – or at least to prevent themselves from being sued by their rivals.
Money, Money, Money
Most of the battles revolve around the Android operating system, which was developed by Google for use on mobile devices. When Android was first launched, its chances of competing against the Microsoft and Apple operating systems seemed slim. Yet by June this year Android had grown to rank as the world’s top smartphone platform, claiming 40.1% of the market share, up 5.4 percentage points from March. Apple held second place with 26.6% of the smartphone market, according to ComScore, up just a sluggish 1.1 points from the prior period. Microsoft’s share had actually fallen to 5.8% for its Windows Phone 7 operating system. More than 550,000 Android devices are activated every day on products developed by 39 manufacturers. Interestingly, Google offers Android for free, whereas Microsoft charges a fee for licensing Windows Phone 7. That strategy by Google has made the manufacturers who use Android vulnerable to endless lawsuits by Apple and Microsoft, however. If they can win patent infringement cases, then the smartphone manufacturers will either grow reluctant to use Android at all, or will have to pay royalties for the right to use another company’s intellectual property copied in those phones. Nor surprisingly, patents have become so lucrative that numerous legal firms specialise in that field, researching every device to work out whether intellectual property may have been infringed. “This is not a winner’s game; it’s a money game,” says South African analyst Steve Ambrose of World Wide Worx Strategy. “There are firms of attorneys who spend their lives doing research to try to figure out who is doing what and looking for ways to create issues. Lots of people make profits simply from dealing with patents, and if it wasn’t for lawyers there wouldn’t be a problem.” An infographic of the patent lawsuits looks like a spider’s web, with everybody suing everybody. “Intellectual property is a huge business because devices like phones have tons of interdependent services and elements,” Ambrose says. Ironically, Microsoft earns more money from sales of Apple’s iPhone than it does from its own phones, simply due to royalty payments, Ambrose says. “Over the years there has been an enormous cross-pollination of patents, so one element of a particular product is patented by one guy and another element is patented by another guy. Microsoft owns a ton of them and gets paid for certain elements. Android was supposed to be a free operating system, but it’s not free by any means because HTC pays Microsoft $5 for every phone,” he says. “The technology developers are hoping to prove a best-selling phone breaches its patents so they can force the manufacturers to pay them a couple of dollars per phone. So there’s a huge cash settlement, and then good income going forward ad nauseum.” So far the lawsuits have not affected Africa directly, as no manufacturer has been slapped with an injunction banning it from selling any products here. The battles are still being fought in the far more lucrative consumer playgrounds of the US, Germany and Australia. The US government is now reassessing its legislation in an effort to stem the abuse. “Patents were created to protect people’s intellectual property,” Ambrose says. “What it has become is a money-making scheme and ultimately that drives up the cost of everything because you have to pay various people to make your product and pay legal teams to manage the whole system – so it’s a huge money-making racket on all levels. “Patents are not consumers’ friends.”
Apple versus Samsung
One of the largest battles currently being waged sees Apple pitched against Samsung Electronics. Apple has launched an international legal battle by alleging that Samsung’s Galaxy phones and Galaxy Tab computers ‘slavishly copy’ its iPhone and iPad. The clash could dent Samsung’s fastest-growing businesses, since Galaxy gadgets running the Android operating system are regarded as the biggest challengers to Apple’s devices. Samsung has denied the accusations and retaliated with allegations of its own. The claims and counter-claims escalated, and Samsung and Apple are now suing each other in 20 cases in nine countries on four continents. Apple has already won some victories, forcing Samsung to withdraw two features from the Galaxy 10.1. Some remaining disputes involve touchscreen display technology, and a patent over the way finger movements are used on tablets to generate a software command. Microsoft has also demanded that Samsung pay $15 for each Android smartphone it manufactures, to compensate for other alleged patent violations. But the legal battles are about more than money and market share. They also highlight the perception that Apple revels in: of being an innovative trendsetter that other companies cannot hope to match, but can merely emulate. The reputational kudos to Apple from each win and the damage to Samsung from each loss are inestimable in terms of image, respect and share price value. Apple has already won an order preventing Samsung from selling its latest Galaxy tablets in Germany, and from selling some models in the Netherlands after courts in those countries upheld claims that Samsung had appropriated Apple’s intellectual property. The court in the Netherlands ordered Samsung to prepare a software update to eliminate one of the violations. In October, a Sydney court temporarily banned Samsung from selling its new Galaxy Tablet 10.1 in Australia until a patent lawsuit involving touchscreen technology is ultimately resolved. The judge granted the temporary injunction as she felt that Apple was likely to win the trial. The ruling was a blow for Samsung, which had hoped to launch its new model in time for the Christmas rush. “We are disappointed with this ruling and Samsung will be seeking legal advice on its options,” the company said in a statement. “Samsung will continue its legal proceeding against Apple’s claim in order to ensure our innovative products remain available to consumers.” Samsung remained confident that it could win a counter-claim by proving that Apple had violated its wireless technology patents, the statement said. “We will continue to legally assert our intellectual property rights against those who violate Samsung’s patents and free ride on our technology,” it declared.
California Critical
Perhaps the most important victory or loss will come in California, long regarded as the hotbed of high-tech innovation. This is where Apple first sued Samsung, alleging that the product design, user interface and even the packaging of Samsung’s Galaxy devices ‘slavishly copy’ the iPhone and iPad. In response, Seoul-based Samsung filed its own lawsuits accusing Apple of infringing patents for its wireless telecommunications technology. Attorneys for both companies appeared before a US District Court in October, and Apple asked Judge Lucy Koh to issue a preliminary injunction to ban Samsung from selling its tablets in the US while the case is being heard. Judge Koh told Apple it regulations, with 3,000 lawsuits being filed this year alone. “In the tech sector, since the late ’90s, losses from litigation have been exceeding the benefits,” Bessen said. Yet he predicts that ICT players will make many more acquisitions purely to amass a warchest of patents. The answer may lie in cross-licensing deals, Bessen suggested, where companies strike five-year pacts not to sue each other over patents in a particular field. With more patents in its arsenal, Google may now be able to secure a better cross-licensing deal with Apple or Microsoft.
Attacking Android?
Google believes that these lawsuits are simply an attempt to get a royalty tax imposed for the use of patented technology, which would raise the price of Android phones and diminish their appeal to consumers. Google’s chief legal officer, David Drummond, is using his official blog to gripe about what he calls an “organized campaign against Android by Microsoft, Oracle and other companies, waged through bogus patents”. Microsoft and Apple were “banding together to acquire Novell’s old patents and Nortel’s old patents to make sure Google didn’t get them; seeking $15 licensing fees for every Android device; attempting to make it more expensive for phone manufacturers to license Android (which we provide free of charge) than Windows Phone 7,” he said. “Patents are meant to encourage innovation,” Drummond wrote, “but lately they are being used as a weapon to stop it.” He added: “We’re not naive; technology is a tough and everchanging industry and we work very hard to stay focused on our own business and make better products. But in this instance we thought it was important to speak out and make it clear that we’re determined to preserve Android as a competitive choice for consumers, by stopping those who are trying to strangle it.” He has a point – although Google itself subsequently went on its own patent buying spree and hired a top patent lawyer to play them at their own game. Apple’s ferocious legal activity has turned into a widespread offensive against several makers of Android devices for allegedly infringing the designs of its iPhone. The company did give fair notice, however. When the iPhone was introduced in 2007, the late Steve Jobs warned rivals to keep their hands off Apple’s intellectual property. “We’ve been innovating like crazy for the last few years on this and we’ve filed for over 200 patents for all of the inventions in iPhone. And we intend to protect them,” Jobs said.
HTC faces off Apple
Another company feeling the wrath of Apple is HTC, which was sued in March this year for allegedly infringing 20 iPhone patents. A US trade committee quickly ruled that HTC probably had violated two of Apple’s patents, although the case is still dragging on. In September, HTC turned the tables by using nine patents it had just bought from Google to counter-sue Apple by slapping it with some infringement allegations of its own. Google itself had owned the patents for less than a year, after buying them from Motorola, Openwave Systems and Palm. Agreeing to sell those patents to HTC in the midst of this legal whirlpool was an interesting and perhaps bold step, since HTC quickly used the patents to attack Apple for allegedly infringing the patents it had just obtained from Google. HTC hopes that smart move will also give it the ammunition to overturn the 20 patent-infringement claims it is facing from Apple. HTC’s counter-claim accuses Apple’s Mac computer, iPhone, iPod, iPad, iCloud and iTunes technologies of infringing various patents, including methods to upgrade software wirelessly and to provide constant contact between applications and a radio modem. “HTC will continue to protect its patented inventions against infringement from Apple until such infringement stops,” HTC general counsel Grace Lei said. “We believe that we have an obligation to protect our business, our industry partners and our customers, who love using our products.” Yet Apple had already won a case against HTC in July, when a judge ruled that some HTC Android devices infringed two patents. Another complaint still pending alleges a breach of patent committed in HTC’s Flyer tablets. “We think competition is healthy, but competitors should create their own original technology, not steal ours,” said Apple spokeswoman Kristin Huguet, reiterating a statement made by Jobs last year. Google’s action to help HTC defend itself was hugely significant in this industry-wide dispute over smartphone technology, since the battle also affects other Android customers including Motorola Mobility, Samsung and Barnes & Noble. Google had previously has been criticised for not wading in to help users of its Android software who were facing lawsuits from Apple. Technology analyst Will Stofega of IDC described Google’s decision to sell those patents as a bit of a game-changer. “Google was interested in protecting its licensees with Android. It shows they need to support their customers in order to make sure the customers stick with them,” he said. But by getting involved, Google has made itself more vulnerable to be on the receiving end of litigation from Apple, which has so far mostly targeted the manufacturers who use Android, rather than Google, which developed it.
And the Losers are ...
As Google’s Drummond complained on his blog, Microsoft and Apple were fighting through litigation rather than by creating more innovative new devices or features of their own. “A smartphone might involve as many as 250,000 (largely questionable) patent claims, and our competitors want to impose a ‘tax’ for these dubious patents that makes Android devices more expensive for consumers,” he said. “They want to make it harder for manufacturers to sell Android devices.” When Apple, Microsoft, RIM, Ericsson, EMC and Sony bought the patents owned by Nortel for $4.5 billion they bid as ‘Rockstar Bidco’ – a name that implies that this has become more about game-playing, posturing and one-upmanship than about serious technological innovation. The bundle of patents spanned numerous aspects of telecoms as well as internet searching and social networking. Google had bid $900 million for the bundle, but the “Rockstars’ offered five times more. With so many players suing and counter-suing each other, the battles are not only complicated and expensive. They also risk making the industry focus more on who owns the rights to existing intellectual property than on developing further innovations. As these legal battles wend their way through multiple courts in multiple countries, the only certain fact is that the lawyers will benefit handsomely. The handset manufacturers and the consumers who use them will most likely be the losers.
