Intellectual Property Wars of Attrition

Image via CrunchBase

HTC does not look so quietly brilliant today after US International Trade Commission (ITC) Administrative Law Judge Carl Charneski issued a proposed decision finding July 15th that HTC violated two of ten patents owned by Apple but used by HTC in its Android-based smart phones and probably every other Android-based phone produced by other makers as well.

The Apple patents Judge Charneski cited HTC for violating infringing are:

The ruling now goes to the full six-member ITC for a final decision.  But there are other cases pending include complaints by AAPL that HTC’s development of tablet devices intended to compete against iPad also violate AAPL patents for software architecture and user interfaces, hardware for touch screens and movement sensors.  So expect a steady drip of bad publicity and uncertainty concerning new products from HTC and other Android-based manufacturers since AAPL has plenty of cash to spend tormenting and hounding its competitors over IP and patent infringement issues.

What’s the big deal?

This decision is the first time that use of the Android OS has been legally found to infringe on the third-party intellectual property rights of another company, in this case AAPL.

If the ITC upholds the Judge’s finding, it has the power to stop sales of HTC phones that run on Android in the US.   The Android operating system has seen its market share in the smart phone category rapidly grow to about 38% because Google’s business model is to make Android available at little or no cost to developers so Google can mine the advertising and search revenue potential from its users.

Since the ALJ found that only two of ten patents were infringed upon, the trade press speculates, probably correctly, that the resolution of this case will force HTC to pay royalties to AAPL for each device sold as compensation for the infringement and right to use the technology going forward. Such a precedent likely means EVERY Android-using smart phone maker will also have to pay royalties to AAPL.

The big deal gets bigger than this case because similar lawsuits against Android are being brought or settled by Microsoft as part of a strategy to either rein in Google’s growth or get a piece of the action using patent infringement lawsuits and royalty payment settlements as the tactic of choice. Virtually every smart phone manufacturer is subject to this disruptive technology hostage taking strategy in the fight for market share in this important mobile market.  Expect it to quickly spill over into tablets too.

The decision shows us once again why protecting your intellectual property is critically important for every start-up and technology developer.  The royalties for use of patents is likely to be a material source of revenue for AAPL and MSFT and others.  And the cost of using that ‘free’ Android OS is turning out not to be as cheap as expected for many smart phone makers.

Who wins?

Ironically, while AAPL has certainly made history, scored points, won the judgment that will surely produce even more money for its cash pile, the biggest winner in this case might actually be its old nemesis MSFT.


Microsoft stumbled badly in the mobile market and was for a while considered out of the game.  Android was kicking it right and left and its tough to compete against the ‘free’ Android business model Google was using especially if you are MSFT more accustomed to the near monopoly recurring revenue from software licenses.

MSFT settled a patent infringement case with HTC in April 2010. Under that settlement HTC has paid Microsoft $5 for each of the 30 million Android phones shipped. That $150 million is about five times more than MFST made on sales of 2 million Windows Phones where the trade press says MSFT gets about $15 per phone.

MSFT also recently announced a strategic partnership with Nokia which stumbled badly in the phone handset market.  Nokia expects to use Windows phone software for its new products in an effort to catch up. But in April, Nokia filed a patent infringement suit against Apple of its own alleging AAPL itself infringed on several patents it owns covering multi-tasking operating systems, data synchronization and call quality.

So is Nokia playing both MSFT and AAPL trying to get the best deal for its own smart phone future?  Or would it rather have a MSFT partner and some of AAPL’s money?

IP wars of attrition are about market share and weakening opponents’ competitive advantage.  Disruptive technology has a way of turning things on its head and the phone wars and tablet battles are prelude to what we might see in a truly competitive energy market space where the contest isn’t about energy commodity but customer aggregation, smart grid technologies, and scalable growth for new entrants.

The real goal is humbling Google through the relentless pressure on its Android business model. Both AAPL and MSFT hate ‘free’ anything especially when it is used against them.  AAPL will fiercely protect its own patents and intellectual property as it has done in this case against HTC.  But AAPL’s gain might mean quietly cheering on its old opponent MSFT to re-gain a foothold in the mobile smart phone market again.  Why would AAPL want MSFT to gain share in mobile phones?  Because MSFT share gain would likely come at the expense of Google’s Android.  Or between them their royalties from patent infringements Android users must pay each of them makes Android less attractive to other smart phone makers.

The enemy of my enemy is my friend as the old saying goes.