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International Business Machines Corp
Android, the mobile operating system from Google (GOOG), has been on a tear over the past two years. Its share of the smartphone market rocketed from less than 3 percent to 48 percent during that time, according to research firm Canalys. Some analysts even think Android could one day be as dominant in mobile as Microsoft (MSFT) was on desktops in the 1990s.
Yet there’s one thing that may stop, or at least slow, Android’s ascent: patent fights. Google and HTC, Motorola (MOT), and Samsung, the three largest manufacturers of Android handsets, have each been hit with lawsuits claiming their mobile software violates others’ patents. To some extent, this is normal. Silicon Valley powerhouses have long wielded their patent portfolios to extract concessions from rivals. But Google, with fewer patents of its own and lots of enemies, is in a uniquely poor position. “This is an arms race,” says Christopher Marlett, chief executive of investment bank MDB Capital Group. “Other companies have more bombs than Google—and they’re not afraid to use them.”
An abbreviated list of the ongoing litigation: Oracle (ORCL) is demanding the search giant pay $6 billion for using its Java mobile software. Apple (AAPL) has sued Taiwan-based HTC for violating its patents, and on July 15 a judge found in favor of the iPhone maker, which could result in a American import ban on certain HTC phones. In a similar suit in Australia, Samsung agreed on Aug. 1 not to import a version of its iPad-like Galaxy Tab. In a company blog post on Aug. 3, David Drummond, Google’s chief legal officer, called these suits “a hostile, organized campaign against Android … waged through bogus patents.”
Patent lawsuits are often predictable. Company A sues Company B for copying an invention or proprietary technology. Company B digs through its own patent hoard, finds one it can accuse Company A of violating, and countersues. The two parties end up signing cross-licensing agreements that give the companies the rights to each other’s patents.
Google, a relative tech newcomer, has had less time to stockpile patents—especially in the mobile world, which it didn’t enter until 2008. And experts say that Google has historically treated patents and royalties as an afterthought. Like many young companies, “they have an attitude of, ‘Let’s generate revenue first and ask questions later,’ ” says Joseph Siino, chief IP officer for patent consulting firm Pendrell (PCO). According to MDB, Google has applied for or received a total of 307 mobile-related patents, compared with 3,134 for Research In Motion (RIM), 2,655 for Nokia (NOK), and 2,594 for Microsoft.
Google is trying to address that imbalance. In July it kicked off the bidding for the patent portfolio of Nortel, the bankrupt telecom equipment maker. Its $900 million offer lost out to a $4.5 billion bid from a consortium that includes Apple, Microsoft, RIM, and Sony (SNE), though Google that same month did purchase 1,000 patents from IBM (IBM). Shares of cellular technology developer InterDigital (IDCC) have leapt 59 percent since it announced it was putting itself up for sale, with many investors expecting Apple and Google to battle over the company’s patents.
Intellectual property experts don’t think Google or its partners will be sued into submission, or that Android will succumb to death by a thousand lawsuits. Few patents in tech history have been so fundamental that they couldn’t be worked around, says Marshall Phelps, the lawyer credited with pioneering the patent monetization business when he worked for IBM in the early 1990s.
But the lawsuits could substantially raise the cost of making Android phones. To settle an infringement claim, HTC last year agreed to pay Microsoft $5 for every handset it sells, according to estimates from Citibank Global Markets (C) analyst Walter H. Pritchard. If other claims are successful, the total royalty bill could make Android hardware makers consider alternative phone software—including Microsoft’s—says Kevin Rivette, managing partner at 3LP Advisors. “Patents are the only card left for these established companies to play—and it’s an ace,” says Rivette. “Google has to figure out its hand, ASAP.”
Any loss of momentum now could have a major impact on the pecking order in mobile for years to come. “That’s how this patent game is played—at a very high level, by very smart people,” says Rivette. “It reshaped industries before, and it will reshape the mobile industry.”
The bottom line: Google and its Android partners are in a weak position when it comes to patent infringement claims.