Since yesterday, the techno-blogosphere is abuzz with what could be the hottest news of the year – “Google buys Motorola for $12.5 billion”. Why did google decided to buy Motorola and not HTC or other mobile hardware companies? What is google getting out of this deal? Should they do this deal now? There are lot of questions. Let’s get a small context before we understand the reasons. For the last year or so, Google is amidst thick of action. Among many other products and innovations they are working on, Android is definitely one the most important item. Android is witnessing some spectacular growth across all parts of the globe. Android-based smartphones lead the marketshare charts today. Naturally, this kind of growth cannot be good for other businesses with vested interest. So, the competitors (exemplary counterparts such as Apple and Microsoft) decided to gang up and see how they can slow down the growth of Android. One of the successful but devious strategies they devised was to amass thousands of patents from Novell and Nortel that were expiring. These patents can be used to file litigations and lawsuits against infringers. Apple and Microsoft won the auction by shelling out as much as $4.5 billion for the patents that started with pre-bid estimate of just $1 billion. You can see how determined the competitors were to get hold of these patents!
Financial Times reported in an article that there might be 250,000 patents at stake in a smartphone. Most of these patents have overlapping claims thanks to lack of due diligence in the patent-issuing practice. So, the competitors of google who have amassed thousands of patents found that some of those patents are violated/infringed by Android. The competitors decided to extract a ‘licence’ fee for every android device in the market. Why target only Android and not other operating system? Because, the time is well spent in pursuing the market incumbent rather than going after others who would declare bankruptcy instead of standing up! Microsoft very recently demanded Samsung and other android device manufacturers to shell out $15 for every android device shipped in the name of ‘license cost’. With almost 550,000 android devices activated on a daily basis around the globe, just the licence revenue will work out to $8.25 million a day or $ 3 billion a year! Just imagine and this figure will only go north with further android growth. There are two scenarios. The license cost may make the android phones dearer or Device makers decide to find other operating systems such as Windows Phone. Either way competitors win and the demand for android will be curbed. That’s the sole intent!
David Drummond, Chief Legal officer of Google summarizes this issue nicely
“A smartphone might involve as many as 250,000 (largely questionable) patent claims, and our competitors want to impose a “tax” for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices. Instead of competing by building new features or devices, they are fighting through litigation.”
“We are looking intensely at a number of ways to preserve Android as a competitive choice for consumers, by stopping those who are trying to strangle it. We’re encouraged that the Department of Justice forced the group I mentioned earlier to license the former Novell patents on fair terms and that it is looking into whether Microsoft and Apple acquired the Nortel patents for anti-competitive means. We’re also looking at other ways to reduce the anti-competitive threats against Android by strengthening our own patent portfolio. Unless we act, consumers could face rising costs for Android devices — and fewer choices for their next phone.”
So, one of the ways Google figured out to reduce this anti-competitive threats was by acquiring Motorola which is sitting on a rich pile of 24,000 patents. Motorola is one good company when it comes to innovation. Most of the features that we see today in the smartphone of feature phone was probably first pioneered by Motorola. So, the patents that Motorola own probably cover lot of ground as far as mobility is concerned! Before this acquisition, Google had just 700 patents. Think about it..just 700! While microsoft had 18,000+.
You might wonder, “Why can’t google develop an operating system like android without infringing any patents?”. Well, Patents are vague and there is low standard for patent eligibility. Engineers can patent potential ideas easily. All they need to have is an idea – can be even trivial. Over a period of time, lot of patents have come by and have covered lot of possible ideas. Android might have tens of millions of code. Auditing these huge codebase to see if any patent is being infringed is humanly impossible. So, it makes sense for companies to just not bother about infrigement and just tackle it latter with money and lawyers 🙂
All these deals, acquisitions have to finally go through scrutiny and regulations. It has to come clean without any suspicion on anti-trust, anti-competitive intent! But the game field is changing. Google has woken up finally and is playing the patent game accordingly. Thanks the rich cash pile it has. It’s funny, even the stock market is valuing the underlying patents that a company owns. When shareholders and investors are seeing it this way, a company has to play the game accordingly. For now, Google can breathe little easier..but it’s a long to go for the technology companies.
A nice anecdote shared by Gary Reback puts this patent bubble into perspective. In the 1980s, attorney Gary Reback was working at Sun Microsystems, then a young technology startup. A pack of IBM employees in blue suits showed up at Sun headquarters seeking royalties for 7 patents that IBM claimed Sun had infringed. The Sun employees, having examined the patents, patiently explained that six of the seven patents were likely invalid, and Sun clearly hadn’t infringed the seventh. Reback goes on to explain
An awkward silence ensued. The blue suits did not even confer among themselves. They just sat there, stonelike. Finally, the chief suit responded. “OK,” he said, “maybe you don’t infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?” After a modest bit of negotiation, Sun cut IBM a check, and the blue suits went to the next company on their hit list.
Patents are meant to foster and protect the innovation. Today, Patents are meant for exactly the opposite – to stop the innovation! The inefficient patent system cannot be changed overnight and the real world has to adopt and play the game accordingly…For now, lets just hope that Android remains as OPEN and FREE
* Microsoft offers Windows phone licensees indemnity against software patent lawsuits.
* Oracle believes Android is an infringement to Java. Oracle owns Sun which created Java in the first place!