29
Sep
Android-Money

It certainly seems like it. Yesterday, Microsoft announced via blog that it had concluded negotiations with Samsung and reached a licensing deal for the same seven patents it previously licensed to HTC for Android (along with other, smaller Android manufacturers). There were rumblings about just what royalty rate Samsung is paying, but the guess is anywhere from $5 to $15 per handset (it's likely on a percentage-of-MSRP basis - so think about 1-3% per $500 MSRP phone).

When it comes to royalty agreements, rates are usually internally fixed regarding certain categories of IP to avoid confusion about damages in lawsuits, but when there are allegations of continued infringement, the game changes. Samsung may well have paid more in light of its prior alleged infringement, or it may have paid less because it's a Windows Phone 7 partner. Who knows - the deals are all highly confidential. But what does this mean for Android?

The Alamo(torola)

It means Microsoft now has licensing agreements with companies that control well over 50% of the Android device ecosystem by market share.

Notable Android manufacturers that have avoided agreements so far include LG and Motorola - the latter of which has been sued by Microsoft for playing hard to get. LG is a major Windows Phone 7 partner, and the smallest of the "big four" Android manufacturers here in the US, so it's a fish Microsoft is probably not in much of a hurry to fry. Motorola, on the other hand, has been quite a holdout - filing patent countersuits against Microsoft, likely in a bid to force the software giant into settling on a deal that would be more favorable to Motorola.

It seems unlikely that Motorola, whose worldwide patent portfolio is one fourth the size of Samsung's, will be able to convince Microsoft that they deserve special treatment. The plain reality is that even if Motorola's counterclaims against Microsoft stack up enough to convince a jury they're legit, the royalties would very likely be subject to a "reasonable rate" ceiling (many of Motorola's patents are subject to RAND licensing limitations).

Microsoft's claims may end up, on the other hand, qualifying for treble damages (triple the amount) under the doctrine of "willful infringement," because it seems very likely that Motorola was on notice about its alleged infringement long before Microsoft took this battle to the courtroom. How is that? HTC's licensing agreement on these same patents was completed in April of last year. That means that, even if Moto wins on its own allegations, a victory for Microsoft on even a small portion of the patents could result in massive damages from a jury. That would end in a file for an appeal, and a settlement that'd be far worse than if Motorola had just caved in the first place.

At this point, there's little doubt in my mind that Motorola will fall in line and settle on these patents before this trial goes to a jury - they're just playing hardball. Even with the Google acquisition underway, and Google's continued insistence that Microsoft is just playing "patent bully," it must be even harder to look at Microsoft now with a straight face and say "You have no case." The very idea of licensing fees for what is supposed to be a free, open source OS must be philosophically appalling to someone like Andy Rubin, but as long as software and design patents are valid, it's one of the harsh realities of selling high-tech consumer products in the western world.

The Android Entry Fee

Once Motorola settles with Microsoft (which they were probably planning on anyways), it'll be nearly impossible for smaller manufacturers to shake off the Windows tax-man. But what about other threats? Apple and Oracle's ongoing tussles with Android manufacturers and Google, respectively, have yet to result in agreements on what color the sky is, let alone the legitimacy of the allegations involved. These will likely be harder-fought battles which will make it to juries, allowing the rest of the industry to look on and act accordingly.

The problem here is this: while Microsoft's small royalty from Android manufacturers may not be enough to truly deter handset makers from continuing to invest heavily in Android products, stacking on even more royalties might.

In the case of Oracle, which is seeking upwards of $1 billion in lost profits from Google for infringement of certain Java patents, Google may have to "suck it up" and take one for the team. If Google reaches an agreement to pay Oracle a lump sum for its past alleged infringement, and to license those patents without restriction for a term of years, manufacturers could avoid paying Google's bills. Regardless of their love of Android, I doubt HTC, Samsung, or Motorola have any great desire to pay for Google's alleged mistakes. I wouldn't hold out on something like this happening - Oracle clearly wants a royalty agreement.

It's doubly unlikely if the case makes it to the jury and Oracle wins on any of its claims, as it will almost certainly make condition one of a settlement a royalty agreement. If Google refused, an appeal would only delay things so long (with a slim chance of reversal), and the jury's awarded damages (which definitely will contain a royalty) would stand. Google doesn't want that. Of course, there's also the possibility that all of Oracle's claims will fail once what is left of them reaches a jury, but there's really no point in speculating on the jurors' decision - even a bona fide patent expert can't look into that crystal ball.

A final possibility is Google abandoning its current custom implementation of Apache Harmony and coming up with an alternative solution - but I'm not a programmer, and don't know if that's really even a practical option.

And what about Apple? Well, luckily (or less unluckily?) most of Apple's claims relate to look and feel of hardware and method of implementation of end-user functions, not the actual code. This means Google and manufacturers could design around Apple's IP. They probably already are. This wouldn't change past infringement, but it could avoid costly and investment-discouraging royalties. And let's face it, Apple isn't really after a piece of the Android profit pie like Microsoft - they're just trying to ensure their products remain distinct. I wouldn't say the protection they're seeking is necessarily fair or reasonable from a common-sense perspective, but hey, they've got the patents, folks. It's a harsh reality, but it's reality nonetheless.

Conclusion: Is Free And Open No Longer Free?

With the Samsung-Microsoft patent licensing arrangement in place, I can't help but feel Motorola, and likely LG, are next in line. At which point, for all intents and purposes, Android will come subject to a royalty. Manufacturers can, of course, do things like raise prices and push carriers for greater subsidies, but in the end it's the consumer who will always feel the cost of doing business most.

Will this push manufacturers away from Android? HTC isn't wasting time expanding its own Windows Phone 7 lineup, along with Samsung and LG. But this is competition. I, for one, have hope that Google's ability to innovate, its open philosophy, and Android's established market clout will keep the smartphone OS business highly competitive, royalties be damned.

While Android's "free and open" status originally made it the most economic mobile OS option for manufacturers, to say this is the key factor in Android's dominance of over half of the US smartphone market for recent purchases this year would be naïve. There's a reason Android outsold comparably priced and equally powerful products running iOS, Blackberry OS, and WP7 - and the reason is consumers. Sure, WP7 is looking like more of an option to manufacturers, and we'll see how that plays out in the coming years, but Android is gaining brand recognition - especially among Sprint and T-Mobile customers.

And if there's one thing Apple has taught us, it's that customer loyalty isn't something to scoff at.

FOSSPatents, Microsoft

David Ruddock
David's phone is whatever is currently sitting on his desk. He is an avid writer, and enjoys playing devil's advocate in editorials, and reviewing the latest phones and gadgets. He also doesn't usually write such boring sentences.

  • MpO

    Unfortunately, it seems too often the USPTO will approve most any patent and let the companies battle it out in the courtroom, wasting lots of time and money. Which leads to a settlement that can be cheaper than fighting a lawsuit until a proper judgement can be obtained.
    In the end, no matter who wins, the consumers lose because of all the extra expenses, which lead to higher prices.

    • http://schpydurx.livejournal.com ProfessorTom

      So what you're saying here is that government regulation is useless because the government is run by people too, not some sacred entity?

  • todd

    We also don't know what these seven patents are, and if they are a type that can be designed out of the product. I would assume that they cannot since that would be an easy solution; that is unless the agreements for future sales is to make up for past transgressions.

  • L boogie

    Only time would tell on this particular matter because Microsoft doesn't even necessarily have to push wp7 thanks to the royalty jackpot from android but would do so anyway and the royalties are gonna advance wp7 & eventually wp8. But despite all this, google as well as OEMs would not get this far and all of a sudden, abandon the open source philosophy that has catapulted android and its partners into a global phenomenon. Eventually, a conclusion would be reached that would favor all parties (not sure about Apple) and be beneficial to consumers because who else would carry the costs of this endless waltz.

  • Chris

    Android was never free, at least in the sense that everyone except for Amazon and the Chinese use it. There has always been a fee attached to have access to the market and Google's apps.

    Samsung has fought tooth and nail with Apple, who has less patents. I'm willing to bet you they took this deal because there were barely any royalties attached. Microsoft needed HTC and Samsung to at least give the appearance of caving, to put fear into the smaller players.

    Remember that Microsoft needs Samsung more than Samsung needs Microsoft. Windows Mobile is anemic right now, and if HTC and Samsung don't make Windows handsets its DOA.

    Given the current growth and demand, its likely that manufacturers would be willing to pay far more for Android than they would for WP7.

    As for Motorola, its not just a one way lawsuit. There are definitely some patents that Microsoft will need to license from Motorola.

  • Mark

    And whose fault is that? Theirs of course. Call it patent trolling or whatever you may but they know the rules of the game and how tricky patents cases are. Pay up or put up.

  • Batista

    It's a gloomy future for android because of this whole patent BS. I just wonder how will Amazon fight the predictable patent licensing problems that will arise with Kindle Fire...

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