Smartphone sector in a patent arms race


In recent times, an increasingly competitive and litigious smartphone industry has spawned a patent arms race, and the need for participants to bulk up their proprietary patent portfolios.
Specifically, an eruption of patent lawsuits has occurred between almost every major developer of smartphone hardware and software in the industry. In many respects, companies are buying insurance against future legal action, injunctions, etc.

Early in 2011, a consortium led by Apple and Microsoft paid an astounding $4.5 billion for more than 6,000 patents owned by the now defunct Nortel Networks.

For anyone without a calculator handy, that equates to roughly $750,000 per Nortel patent. To put the intensity of competition for Nortel’s patents into context, Google opened the bidding at just $900 million (Nortel’s creditors will be happy), and was ultimately shut out completely.

Not to be without a dance partner, Google recently purchased Motorola and its 17,000 patents for $12.5 billion in cash, as well as a thousand or so patents from IBM for an undisclosed sum. This may work to put a lid on the patent race/bidding frenzy in the near term, because Google was really the one driving it.

How much is at risk? Consider the lost sales associated with the EUs recent halt of Samsung’s new Galaxy Tab because the design was too much like the iPad. Similarly, Apple has sued HTC for infringement this year and HTC has in turn counter-sued, claiming the iPhone violates several of its patents. The list goes on.
The mindset has really become one of “if you sue me, I’ll sue you back,” because the odds are that if you hold enough patents, your competitor will be infringing upon one of them.

By the same token, if you don’t have a patent war chest of your own, you are without any leverage. The result has been an increase in demand for such patents, followed by a spike in their valuations.
Consequently, large, cash-rich companies such as Google, Apple, and Microsoft have been patent stockpiling, or buying up patents to protect themselves from being sued.

It is believed that at the crux of the war was Google’s relatively late entry into the smartphone space and the robust growth in its Android operating system.

Because it was largely without a wireless patent portfolio, it had to acquire one in order to protect itself against litigation and to put it on a more level playing field with other wireless giants.

In other words, Google may very well have a great future in the wireless space, but it was essentially without a past in terms of intellectual property.

The winners will ultimately be the lawyers, and the perennial dogs like Nortel, Motorola, and even Eastman Kodak that have seen their enterprise values resurrected by their underlying patent portfolios. Smartphone maker Research in Motion, with its languishing BlackBerry brand, has also been rumoured to be a takeover target, in large part because of its patent library.

Pure play patent companies or patent trolls such as Wilan and Mosaid (who hold patents but never actually plan to manufacture or sell related products) also stand to benefit from valuation lifts over time. They simply sue anyone else trying to manufacture devices that appear to be based on their patents, and may very well become takeover targets themselves.

However, it is ambiguous as to whether their competitive edge will be hurt by their traditional prey, now beefing up their own patent portfolios.

Some industry watchers have been critical of the patent race, suggesting that the resources being allocated toward the collecting of old patents will crowd out investment in new innovation and research and development.

While there may to be some truth to this, the move away from PCs to mobile devices is irrefutable, and too much is at stake, especially for those that are late to the game.

Most of the large players are also sitting on enormous cash balances, so they have plenty of powder dry and itchy trigger fingers.