Microsoft Defends Patent-Licensing Strategy

Amidst the flurry of patent cases among the lot of mobile technology companies, it is difficult to keep track of who is bringing whom to court. In light of the sheer number of cases and their ever growing international scope, even the use of flow charts cannot fully rescue our collectively boggled minds from the convoluted and fast evolving relationships of these entities. On this basis alone, many would say that without a serious overhaul, the patent system risks completely stymieing its objective of fostering innovation – at least in the mobile business where companies appear more preoccupied by legal disputes than research and development.

According to Microsoft Deputy General Counsel Horacio Gutiérrez, however, such legal wrangling is an expected consequence following the introduction of any new and disruptive technology. In an interview with the San Francisco Chronicle, the lawyer in charge of Microsoft’s Intellectual Property and Licensing group compared the court battles around smart phone technologies with the patent disputes that arose after the invention of the telegraph. Gutiérrez also defended the Redmond firm’s aggressive patent-licensing strategy with respect to the Android operating system.

The onslaught of patent infringement actions launched or threatened against Android phone manufacturers has resulted in a number of licensing settlements, whereby Microsoft extracts a royalty from each device that runs Android. Most recently, Samsung and Compal became the latest companies to opt for a patent-licensing arrangement instead of a protracted court battle with the tech giant. The pair joined a line-up of Android device producers signed to licensing deals by Microsoft, including Acer, General Dynamics Itronix, HTC, Onkyo, Quanta Computer, Velocity Micro, ViewSonic and Wistron. There are also ongoing litigations alleging patent violations against Motorola and Barnes & Noble.

At the heart of the issue is the contention that the Android – a mobile OS developed and offered to manufacturers at no cost by Google – contains features that infringe upon technologies invented and patented by Microsoft. When asked about this issue in the interview, Gutiérrez referred to “a number of technologies that have to do with really critical features that make smart phones what they are today”. He also singled out the ability to synchronize content, and alluded in general to “other features that just make the phone much more efficient”. Further examples of the allegedly infringed patents can be found here.

The fact that these asserted patents often appear to lack novelty to the public – for instance, the litigation against Barnes & Noble involves a graphical indicator of when a webpage is loading – has attracted much criticism of Microsoft’s approach. Some critics even draw comparisons with patent trolling. Nonetheless, Gutiérrez asserted “Microsoft has invested for decades more money than anyone else in research and development directed toward the efficiency of operating systems”, and that Android stands on Microsoft’s shoulders.

Although the exact details of the licensing deals are unknown, it is safe to say that Microsoft’s patent-licensing approach is paying dividend. First, the strategic benefits gained in the process could be quite significant. According to David Martin, chairman of M-CAM Inc., Microsoft can achieve two main legal advantages:

• In preparation of an eventual show-down with Google, Microsoft can isolate Google from the best patent lawyers who have been involved in negotiating settlements due to conflict of interest.
• By expanding the number of cross-licensing deals with manufacturers, Microsoft reduces Google’s ability to launch a class action law suit in the future.

Both Google and Microsoft have disputed this analysis. However, it is unquestionable that patent-licensing is turning into a vastly profitable venture. Through the latest Compal deal, Microsoft’s licensing agreements now cover more than half of all Android devices. Using Google’s figure of 500,000 new devices per day and an estimate of $5 per license, these agreements would generate over $460 million a year.

Arguments may be made that while it is a profitable business maneuver in the short term, the aggressive use of patent-licensing to exempt competitors from law suits may not be a sustainable long term strategy for doing business. As Android devices continue to pick up market share, the Windows Phone 7 languishes in sales. It is telling that Microsoft now takes in more profit from licensing IP to smart phone competitors than from its mobile devices. In view of the approaching expiry of many of the patents asserted against Android, the gains made through licensing agreements may be short lived if Microsoft does not advance drastic innovation and improvements to its line of mobile products.