Smartphones are the latest patent battleground

One camp under attack: Manufacturers building phones with Android software, created by a coalition of companies led by Google. They are a target, in large part, because of their success. In the first quarter, Android phones accounted for 28 percent of all smartphone unit sales in the U.S., ahead of Apple's 21 percent, according to consultant NPD Group. In its March complaint to the International Trade Commission, Apple said several of HTC's Android phones infringe on its patents, some of which relate to how an operating system works and handles applications. Apple also sued HTC in federal court in Delaware, alleging patent infringement.
 

Patent payments

As smartphones grow increasingly complex, they rely on more patents. Nearly 8,000 patents, held by 41 companies, apply to phones' 3G wireless communications capabilities alone, according to industry research. Today handset makers pay less than 10 percent of their costs in patent royalties. But that percentage could jump substantially in the future—and potentially lead to a surge in prices that consumers and carriers pay for handsets.

 

There's precedent for higher licensing costs. When PCs and fax machines were new, their builders often paid 15 percent to 20 percent of the devices' selling price—not cost—for patent licensing, says Emmett J. Murtha, chief executive officer of Fairfield Resources International, a Darien (Conn.)-based firm that helps clients like Nokia and chipmaker Texas Instruments evaluate and license patents. Many of those older patents have since expired, but a multitude that apply to smartphones remain in effect.

One of the world's largest wireless patent holders, Qualcomm, already collects nearly $1 billion in royalty revenues a quarter—the result of its own lengthy legal battles with the likes of Nokia and chipmaker Broadcom.

 

Now other companies are jockeying to boost their royalty revenues as well. But some companies may not have royalty payments in mind. They may wish to prevent rivals from offering competing products. "Apple would like to prevent competitors from making phones that are iPhone-like," says Mark Lemley, a patent law professor at Stanford Law School whose clients have included Google and Palm. Other Android manufacturers may become targets for Apple and other companies in the future, say legal experts. While Google has a substantial patent portfolio of its own, and could buy licenses to additional patents to protect Android manufacturers, it has not yet specified its plans. Google spokesman Anthony House declined to comment.
 

Margin threat

HTC likely pays Microsoft $20 to $40 per phone such as the new HTC Droid Incredible from Verizon Wireless, estimates Rob Enderle, principal analyst at the San Jose-based consultant Enderle Group. Microsoft's Windows Phone operating system for smartphones has been losing steam for months, while Android has gained ground. Apple, HTC, and BlackBerry maker Research In Motion declined to comment.

 

One Android handset maker has already budgeted for its patent royalty payments to double next year, says an executive at the company, who spoke on condition of anonymity since his talks with patent holders are continuing. The extra fees could threaten the industry's margins, which in percentage terms range from the teens to the low 20s. But patent holders say they need to be paid for their inventions: "After all, technology just doesn't appear, fully developed, out of Zeus's head," Microsoft's deputy general counsel Horacio Gutierrez wrote in a recent blog post. "It requires lots of hard work and resources to create."

 

Nokia, which has struggled in the smartphone market, may not be willing to license some of its patents to its most dangerous rival, Apple, either. In 2009, Nokia's global smartphone unit market share shrank from 40 percent to 39 percent, while Apple's rose from 9.1 percent to 14.5 percent, according to consultant IDC. "Nokia may decide whether to license those patents or to keep them for itself as a basis for product differentiation," says Paul Malin, general manager of patent licensing at Nokia. "Nokia's patent portfolio has not been broadly licensed to competitors." Nokia sued Apple for patent infringement in court and complained at the International Trade Commission last year. Apple has since countersued, accusing Nokia of infringing on Apple inventions.

 

Smaller licensors

Smaller patent-licensing firms are attacking the mobile industry as well. In January, a newly formed company, MobileMedia Ideas, purchased 122 patents from Nokia and Sony. Two months later, the Maryland-based company filed lawsuits against Apple, Research In Motion, and HTC. "We are in communication with approximately 200 companies making thousands of products," MobileMedia Ideas Chief Executive Officer Lawrence A. Horn says. "In the past several years, there has been a big proliferation of valuable products, and now [these patents] have a value in the market."

 

As smartphones have proved popular, patent holders say it is time to pay up—and ultimately that's what consumers may be forced to do.