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Arming for a patent war.

The patent system was meant to protect innovation and encourage innovators to share their ideas. However, in recent years, patents themselves have become valuable assets--worth far more, in some cases, than the companies that generated them. Recent patent sales have highlighted the increasing value of patents and led some analysts to worry about the effect of such sales on innovation and on the markets.

This is particularly true in the software and wireless industries, where patents protect everything from Apple's multitouch input gestures to the tiny program that allows users to view a just-taken photo on their phones' screens. In these markets, the patent issue has become particularly problematic. As the smartphone market explodes, hardware manufacturers and operating system creators are scrambling for any scrap of competitive advantage they can find. Sometimes, that advantage comes in the form of a suit for patent infringement. A two-year patent dispute between Apple and Nokia ended in June, with Apple agreeing to pay licensing fees and royalties to Nokia for its use of "technologies fundamental to making devices which are compatible with one or more of the GSM, UMTS (3G WCDMA) and wireless LAN standards," according to Nokia's announcement of the original complaint. In the meantime, Apple has launched a suit against Android handset manufacturer HTC for infringement of several patents associated with the iPhone. Android has been the subject of several suits, including most recently a complaint by Oracle that Google infringed on its patents and copyrights for the Java programming language. (The suit may cause problems for Oracle, as well, as the action has undermined the company's credibility with the open-source community.)

Adding to the mix is the activity of "patent trolls"--companies whose sole business plan is to collect and aggressively defend a vast portfolio of patents, some of them of questionable quality. WiLAN, MOSAID, Intellectual Ventures, and InterDigital, among others, have muddied the waters by filing rafts of complaints for patent infringement on the most basic components of smartphone technologies, from those that enable GPS to those that allow phones to use Bluetooth. These companies, as a recent Wall Street Journal report puts it, "use patents for offensive purposes, licensing them as broadly as possible and asserting them in infringement suits against companies that refuse to take a license."

Google, and its Android operating system, have been particular targets because the company's relatively small base of patents makes it vulnerable. Google holds less than a thousand U.S. patents--and most of those are associated with its search business--while Apple has nearly 5,000 and Microsoft holds close to 20,000. In part, the company's thin portfolio results from its skepticism regarding the patent system and in part from its relatively late entry into the smartphone market, years after other companies had been innovating and inventing in the space. As a result, the company has fewer weapons with which to defend itself in the smartphone patent war.

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Google recently set out to bolster its defenses by acquiring patents. When its bid for Nortel's patent portfolio failed, the company looked around for other opportunities, buying a package of over 1,000 patents from IBM in late July and considering acquiring InterDigital before shocking the technology world with the August 15 announcement of its intent to acquire Motorola Mobility for $12.5 billion in cash. Analysts agree that the Motorola acquisition, which could complicate Google's relationships with other Android handset manufacturers, was motivated by Motorola's portfolio of over 17,000 patents--18 of which were assessed by Bloomberg as being central to Motorola lawsuits against Apple.

Nortel's patents went to a coalition of companies that included Apple, Microsoft, and others for an unprecedented $4.5 billion (although the deal is being examined by the Department of Justice for violations of antitrust laws). That number, together with Google's acquisition activity, has generated interest among other companies holding substantial patent portfolios. Eastman Kodak opened bidding in mid-August for its package of digital imaging patents, some of which are the subject of litigation in progress against Apple and Research in Motion (the maker of Blackberry). Kodak's CEO, Antonio Perez, said the company was looking for the quicker infusion of cash promised by a sale, as opposed to waiting for litigation to proceed. The company is hoping for a bidding war, and they may get it. The 1,100 patents could bring up to $3 billion, according to some analysts.

The spate of activity has generated concern among some that the preoccupation with acquiring huge numbers of patents will distort the market, creating what analysts at international communications firm Fleishman-Hillard called a "patent bubble" in which companies are valued for the size of their patent portfolios rather than their innovativeness. Fleishman-Hillard and others argue that to some extent this is already happening as "companies have started collecting patents for their strategic desirability rather than any other measure of value," reflecting the development of "a broader trend for the industry, a trend that focuses on the collection rather than the creation of innovation."

There is some evidence that this sort of revaluation is already occurring. InterDigital's market value nearly doubled after Google and Apple expressed interest in its extensive patent portfolio (although it quickly crashed again when Google abandoned the deal in favor of Motorola), and Kodak's projected take from its patent sale will easily exceed its market value; indeed, if early indications are accurate, Kodak may realize an influx of cash four or five times its current valuation.

All of this is occurring in the context of an impending reorganization of the patent system, but it's unclear what impact patent legislation currently under consideration will have. Some argue that post-grant review and reliance on a first-to-file rather than first-to-invent standard, which are key features of the new law, will reduce incremental, duplicative, and strategic patents, eroding the armaments available to wage a patent war like the one currently under way in the smartphone industry. Whether that happens or not will depend on a host of details of implementation and enforcement.

It will also depend on companies' willingness to cooperate in licensing and cross-licensing their patents. The smartphone is a complex product, relying not on a single transformative innovation but on the configuration of thousands of inventions, each of which could carry its own patent. In a recent blog post, David Drummond, Google's chief legal officer, estimated that a smartphone could engage as many as 250,000 patents. As innovation becomes more complex, those kinds of technological configurations are becoming ever more common in a diverse range of industries. Whether or not patent sales are hindering innovation, as Kurt Walker, Google's general counsel, argues, they must influence corporate strategy for intellectual property. Corporate innovators of all sorts would be wise to keep a watchful eye on the wireless industry's raging patent war.

10.5437/08956308X5406001

MaryAnne M. Gobble, Managing Editor

Raleigh, North Carolina

gobble@iriweb.org
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Title Annotation:PERSPECTIVES: Views and News of the Current Research-Technology Management Scene
Author:Gobble, MaryAnne M.
Publication:Research-Technology Management
Date:Nov 1, 2011
Words:1150
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