If you buy an Android phone, Microsoft earns money

It is said that as consumers, we vote with our wallets, but in the emerging mobile phone economy, it appears that your vote can benefit the rival candidate too. If you have been following the patent wars among mobile phone manufacturers, you will begin to see the patent (sic) absurdity of the situation. Microsoft already has a patent licensing deal with HTC that earns them $5 for every Android phone sold by the Taiwanese manufacturer. Now the latest buzz is that MS is planning to extract a $15 licensing fee per handset from Samsung. The company has also been on a spree of signing licensing agreements with smaller manufacturers such as Wistron, Velocity Micro and Itronix.

For Microsoft, there is big money to be made from these transactions. According to the latest Comscore figures, 1 in 3 Americans now owns a smartphone and Android with 38.1% market share, is the dominant operating system. Globally too, the picture is rosy for Android, with research firm Gartner predicting  that Android will dominate the global smartphone market with 50% share by 2012. This article in Businessweek predicts that Microsoft could stand to make as much as 1 billion dollars just by collecting royalties from the 36-odd Android licensees who make upto 310 Android devices. Barnes and Noble (Nook) and Motorola are holding out against forking out money to Microsoft, but given the precedent, it appears that some settlement will be reached with them also.

And of course, Microsoft has their own mobile OS, WP7, which currently has a negligible market share. But analysts at companies like Gartner and IDC are predicting that on the back of the tie-up with Nokia, Microsoft could secure as much as 20% of the global smartphone market by 2015. Looks like they have their strategy sown up at both ends. If the competitor gains, they gain. If their own operating system takes off, they gain even more.

Ironically, Google, which developed Android, does not make any money off the operating system directly - the platform is open source. They make money however, from advertising on the platform, and in the future, through closely integrating their cloud services with it. Also note that Google is not obliged to pay Microsoft any money, as Android is not a direct source of profit for them. Probably that was a smart pre-emptive strategy by Google?

In another ironic twist, last month Apple and Nokia settled an ongoing patent litigation, with Apple agreeing to pay an undisclosed lumpsum, and royalties to the Finnish company, as part of a licensing agreement. So effectively, Nokia will make money for every Apple phone which is sold.

It's easy to become righteously indignant at Microsoft, or any other company for making money off their rival's success. But the issue is not a simple one to judge. Bear in mind that all the companies paying royalty to Microsoft are large, reputed and in some case, multinational giants. Most importantly, all of them are profitable, and they have quietly and pragmatically settled the licensing cases rather than choosing the costly litigation route. There is business in the market and money to be made, today, and why not just settle and get on with it, instead of taking a righteous position?

What is more disturbing is the trend of companies whose core business is acquiring patents on technologies which they have not developed themselves (known as patent trolling) and then using this patent portfolio to arm-twist companies into making financial settlements. Neither Microsoft nor Nokia can really be called patent trolls - both companies have invested over the years in building products and software based on patents which they either hold themselves, or acquired. By virtue of long existence in the market, they have built up large patent portfolios and to my mind, they are justified in recovering their investment through licensing agreements. It may not be a great thing for the company image, and it may not be the most admirable way to make money, but they are within the law. If we don't like what's happening, we should change the patent laws.

What disturbed me more was the recent auction of nearly 6000 patents by bankrupt Canadian company Nortel. The patents were acquired by a consortium of tech companies including Apple, Microsoft, RIM and Sony Ericsson in a $4.5 billion deal - Google was left out. (Incidentally, you should read the hilarious story of how Google's bids for the patent portfolio comprised strange figures like pi and Brun's constant. I love their sense of humor!) Nortel's patent portfolio could well be used by Google's competitor's to check their growth - had Google succeeded in acquiring the patents, it might have given some protection to Android from further litigation. This large scale purchasing of patents may be an attempt by these companies to protect themselves, or it may be an attempt to check competition. Either way, it signifies that a large portion of resources are being devoted to aspects other than the core business - R&D, innovation, retailing and marketing of world-class devices and services. It would be a pity if the pure excitement and joy that comes from innovation in a dynamic market got hijacked by an all-enveloping patent war.

If you look at it from the perspective of Apple, RIM, Nokia and Microsoft, you might take a different stance. The HTCs and Samsung's of the world are essentially device manufacturers, riding to fame and fortune on operating systems developed by other companies. Their innovation is curtailed to the hardware - and in some cases, the hardware itself is dangerously imitative of others (Apple is suing Samsung for copying its hardware designs in the popular Galaxy series). Whereas the companies which develop both hardware and software, or only software, invest much more to develop proprietary and license-free technologies. When companies like HTC and Samsung make big money, maybe exploiting and riding on some of these technologies, it is only natural that they should be expected to pay some money for it.

Ultimately, as consumers, any additional costs incurred on royalties, licenses and patents will be passed on to us. Maybe it's time that we consider re-looking the rules of patenting, after understanding how innovation really works in today's times.

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