There were signs of hope that tech industry litigation fever might be cooling after several years of aggressive tactics.
Apple (NASDAQ:AAPL) under Steve Jobs pursued a policy of going “thermonuclear” on Google (NASDAQ:GOOG) and its Android partners over what Jobs perceived to be the Android platform’s wide-scale theft of iPhone and iOS technologies. Google and its partners, including Motorola Mobility (NYSE:MMI) and Samsung (PINK:SSNLF), stepped up to do battle in court, and they’ve been trading legal blows over patents ever since.
There have been promising signs (such as attempts at negotiation and communication instead of immediate litigation) under Apple CEO Tim Cook’s watch — developments that have raised hope that a ceasefire might be within reach.
But today’s announcement that the European Union’s competition watchdog, the European Commission, is opening two antitrust investigations against Motorola is a splash of cold water: the two sides are still not ready to call a truce. Apple and Microsoft (NASDAQ:MSFT) are at the center of this investigation, after the two companies complained that MMI was illegally using injunctions to halt sales of their products in some countries, while demanding excessive licensing fees for use of its patents related to 2G and 3G wireless connectivity.
Weighing the cost of settlement versus fines
While the investigations won’t directly derail the pending Google purchase of Motorola (that deal was approved by U.S. and European regulators in February), they are likely timed to have an impact.
In hearings, Google promised that it would follow a FRAND (Fair, Reasonable and Nondiscriminatory) licensing policy when it acquired MMI and its technology patents, but regulators seemed suspicious. The current investigations are into MMI’s past and current behavior, and if things go against MMI, the Associated Press points out, the company could be assessed fines amounting to 10% of its annual revenue. Given that Motorola revenues were $13.1 billion for 2011, that represents the potential for a massive penalty.
Would $1.3 billion in fines be enough to make Google rethink its purchase of MMI? Probably not, but depending on the timing of the ruling, it could complicate the deal. And a ruling against MMI in the European court could negatively affect Chinese approval of the Google/Motorola deal, which has not yet been authorized in that country. Apple is no doubt hoping the threat is enough to make Google and Motorola tone down licensing demands.
Evaluating the fairness of a licensing fee
What is at the heart of the MMI patents that Apple (and Microsoft) are so upset about? The patents cover a range of technologies related to wireless 2G and 3G communications, as well as video compression for online and wireless use. Microsoft and Apple argue that these are “essential” patents; under EU law, a company that owns patents to technology that is required in order to meet industry standards must make them available to rivals at a fair price. MMI is asking for 2.25% of net sales per unit as royalties.
In Apple’s case, with a base iPhone 4S going for $649, that represents $14.60 from each handset going to MMI; with four million iPhone 4S phones sold on the device’s opening weekend last year, Apple would have been signing over $58 million of the proceeds to Motorola. Apple feels that nearly $15 per handset (or 3G equipped iPad) is excessive. That royalty would shave roughly a tenth off Apple’s industry-leading 25% profit margin in mobile devices. Microsoft may have it worse, claiming in a Seattle courtroom that MMI’s demands would amount to a payout of $4 billion yearly from sales of its Xbox game console (of $8.9 billion in sales in 2011).
On the other hand, there’s Apple’s ‘swipe to unlock’
At the same time, Apple is demanding amounts ranging from 1% to 2.5% of net sales from Android devices (or roughly $5 to $15 per unit) to settle some of its own patent disputes, such as Apple’s patent on the swipe-to-unlock gesture used to open the iPhone.
So expect the tit-for-tat legal battles to continue for the foreseeable future. Apple, Google, Samsung, and Motorola seem determined to turn this battle into a war of attrition that not only involves national courts, but regulatory bodies with more-sweeping powers.
In the meantime, there’s been one surprise winner out of this entire mobile patent fray — assuming it ultimately escapes paying MMI: Microsoft is collecting royalty payments from a range of Android phone makers including HTC and Samsung, with the HTC deal worth a reported $5 per device. Goldman Sachs thinks Microsoft will end up scooping up $444 million in revenue from its Android patents in 2012. Ironically, that’s roughly what Apple and Samsung alone are estimated to have spent on legal fees during their ongoing legal brawl.
As of this writing Brad Moon did not own a position in any of the stocks named here.