Protection of Innovation

Abstract

Property rights are one of the cornerstones of Western civilization’s success. Patents have been granted for a long time and copyrights as well. Both are being questioned in the age of the Internet and the age of the North–South divide.

Protection is not a principle. But an expedient.

Benjamin Disraeli (1804–1881), British politician

The Economist: Smart-phone lawsuits: The great patent battle

Nasty legal spats between tech giants may be here to stay

© The Economist Newspaper Limited, London (Oct 21st 2010)

HISTORY buffs still wax poetic about the brutal patent battles a century ago between the Wright brothers and Glenn Curtiss, another aviation pioneer. The current smart-phone patent war does not quite have the same romance, but it could be as important.

Hardly a week passes without a new case. Motorola sued Apple this month, having itself been sued by Microsoft a few days earlier. Since 2006 the number of mobile-phone-related patent complaints has increased by 20% annually, according to Lex Machina, a firm that keeps a database of intellectual-property spats in America.

Most suits were filed by patent owners who hail from another industry, such as Kodak (a firm from a bygone era that now makes printers), or by patent trolls (firms that buy patents not in order to make products, but to sue others for allegedly infringing them). But in recent months the makers of handsets and related software themselves have become much more litigious, reports Joshua Walker, the boss of Lex Machina.

This orgy for lawyers is partly a result of the explosion of the market for smart-phones. IDC, a market-research firm, expects that 270m smart-phones will be sold this year: 55% more than in 2009. “It has become worthwhile to defend one’s intellectual property,” says Richard Windsor of Nomura, an investment bank.

Yet there is more than this going on. Smart-phones are not just another type of handset, but fully-fledged computers, which come loaded with software and double as digital cameras and portable entertainment centres. They combine technologies from different industries, most of them patented. Given such complexity, sorting out who owns what requires time and a phalanx of lawyers.

The convergence of different industries has also led to a culture clash. When it comes to intellectual property, mobile-phone firms have mostly operated like a club. They jointly develop new technical standards: for example, for a new generation of wireless networks. They then license or swap the patents “essential” to this standard under “fair and reasonable” conditions.

Of apps and scraps

Not being used to such a collectivist set-up, Apple refused to pay up, which triggered the first big legal skirmish over smart-phones. A year ago Nokia lobbed a lawsuit at Apple, alleging that its American rival’s iPhone infringes on a number of its “essential patents”. A couple of months later, Apple returned the favour, alleging that Nokia had copied some iPhone features. Since then both sides have upped the ante by filing additional complaints.

Lending ferocity to this legal firefight is the fact that competition in the smart-phone market is not merely about individual products, but entire platforms and operating systems (see chart). These are the infrastructures that allow other firms to develop applications, or “apps”, for these devices. Should any one firm gain an important lead, it might dominate the industry for decades—just as Microsoft has dominated the market for personal-computer (PC) software.

Yet there is a difference between the smart-phone war and the earlier one over PCs. There is a new type of player: firms with open-source platforms. Google, for instance, which makes its money from advertisements, does not charge for Android (its operating system for smart-phones) and lets others modify the software. This makes life hard for vendors of proprietary platforms, such as Apple and Microsoft.

This explains another set of closely watched lawsuits. In March Apple sued HTC, a Taiwanese maker of smart-phones, which responded in kind a couple of months later. Earlier this month it was Microsoft’s turn to file a lawsuit against Motorola, which is likely to retaliate soon. And Oracle, a maker of business software, has sued Google directly, albeit over a different issue, concerning how Android uses Java, a programming language.

Some expect Apple and Microsoft to sue Google. Yet this is unlikely, because the online giant will be hard to pin down. Google does not earn any money with Android, which makes it difficult to calculate any potential damage awards and patent royalties.

The frenzy of smart-phone litigation could last for years. The combatants have deep pockets and much to lose. Google is bounding ahead: Android now runs 32% of smart-phones sold in America, whereas Apple’s iPhone has only 25% of the market and the BlackBerry has 26%, according to Nielsen, another market research firm.

Similarly, Nokia, which has already lost ground to Apple, cannot afford to see its intellectual property devalued. Should Nokia prevail, Apple may be slapped with $1 billion or so in licensing fees, estimates Christopher White of Bristol York, an investment bank.

If the market for computing tablets (which are essentially oversized smart-phones) takes off as expected, there will be even more lawsuits. Apple is set to sell some 15m iPads by the end of the year. Gartner, a market-research firm, predicts that the overall tablet market will reach nearly 55m units in 2011.

Eventually, even lawsuits must come to an end. How much harm they will cause remains to be seen. If Apple wins against HTC, that would be bad news for upstart handset firms. Until a few years ago, HTC only made devices for others, but now it has become a brand of its own.

Litigation may also make smart-phones dearer. Mr White of Bristol York estimates that device makers already have to pay royalties for 200–300 patents for a typical smart-phone. Patent costs are 15–20% of its selling price, or about half of what the hardware components cost. “If 50 people [each] want 2% of a device’s value, we have a problem,” says Josh Lerner, a professor at Harvard Business School.

Finally, there is a danger that the current intensity of litigation will become normal. Pessimists predict an everlasting patent war, much as the wider information-technology industry seems permanently embroiled in antitrust action. The Wright brothers’ legal skirmishes were put to rest only by the outbreak of the first world war. With luck, the smart-phone patent battles will end more quietly.

Clarification: In the infographic, the line between Microsoft and HTC indicates that they have “settled.” In fact, Microsoft and HTC entered into a patent licensing agreement—they never litigated over the mobile phones. This clarification was added on October 22nd 2010.