Apple v. HTC: A Step Along the Path of Addressing IP Rights in Smartphones


Posted by Horacio Gutierrez 
Corporate Vice President and Deputy General Counsel

Horacio Gutierrez

Horacio Gutierrez, Corporate Vice President and Deputy General Counsel

One of the first things I do every morning once I’ve grabbed my cup of coffee is review what is new and interesting involving IP in the press – as my direct reports know all too well from the links I forward to them.  Over the past two weeks or so, I have followed with interest the coverage of Apple’s suit against HTC.  Reactions to the suit run the gamut from those who defend Apple’s taking steps to protect its IP to those who claim that Apple’s suit will impede further development in the smartphone market.

I don’t agree with the latter viewpoint.  There is a long history of IP litigation in the mobile phone market, and innovation has continued apace.  As the New York Times noted, “Nearly every large mobile phone player . . . has recently been involved in some sort of patent litigation involving mobile technologies.”  Whether it is Nokia v. Apple,RIM v. Motorola, or now Apple v. HTC, companies active in the smartphone space are taking steps to protect their inventions.  To me, the interesting questions are, “Why is this?  And what does it tell us about the evolution of the smartphone market going forward?”

The smartphone market is at an early stage of development.  That may appear to be a surprising statement – after all, mobile phones have been around since the 1970s, and have been common devices since the 1990s, when so-called 2G mobile phones (small handheld phones with similar form factors to what we see today) came on the market.  But the principal functionality of and value proposition for the phone has changed.  With 2G and 2.5G mobile phones, the principal purpose of the device was to make and receive calls.  Whether it was the Nokia candybar-style phones or the Motorola Razr, the value of the successful phones of this era was embodied primarily in the radio stack – the functionality that allowed users to make and receive calls.  Not surprisingly, this was the portion of the phone that commanded – and still commands – the highest patent royalties, on the order of 5% of the price the device manufacturer charges the mobile phone operator.

 

Now, however, as a new category of ‘smart’ devices has emerged, the value proposition has moved to the software stack.  As is clear from advertising by all of the major brands – Apple’s iPhone, RIM’s Blackberry, Palm’s Pre, Motorola’s Droid, and Windows Phones – people buy smartphones because they are fully functional computers that fit in the palm of your hand.  The radio stack is still valuable, as it allows the phone to connect to the Internet.  But what is most valuable is not the connection per se, but the new things that users can do with it – find nearby restaurants and movie theaters, send and receive email, and watch video, just to name a few.  The primary driver for adoption and sales in this market is the software on and available for the device.

The smartphone market is still in a nascent state; much innovation still lies ahead in this field.  In all nascent technology markets, there is a period early where IP rights will be sorted out.  This is particularly true in a market, such as smartphones, in which a number of different technologies previously offered on a standalone basis now converge into a single device.  Indeed, smartphones are a product of the ‘open innovation’ paradigm – device manufacturers do not do all of their development in-house, but add their own innovations to those of others to create a product that users want.  Open innovation is only possible through the licensing of third party IP rights, which ensures that those who develop the building blocks that make a new technology possible are properly compensated for their investments in research and development.  After all, technology just doesn’t appear, fully-developed, from Zeus’s head.  It requires lots of hard work and resources to create. 

We see that in the radio stack.  We also see it in the media stack, where royalties for codecs (which encode and decode digital media) and other technology represent 1-2% of the price to operators.  And now the industry is in the process of sorting out what royalties will be for the software stack, which now represents the principal value proposition for smartphones.  In the next few years, as the IP situation settles in this space and licensing takes off, we will see the patent royalties applicable to the smartphone software stack settle at a level that reflects the increasing importance software has as a portion of the overall value of the device.  In the interim, though, we should expect continued activity.  Apple v. HTC was not the beginning of this process, and it isn’t the end of the story either.

 

Comments (7)

  1. Anonymous says:

    The problem here is that there shouldn't _be_ any IP issues. The patent office is a bit too frivolous with giving out patents. I mean, a patent on their unlock slider? Really? Apple's suit here DOES impede innovation, and makes the market stagnant.    Also as a heads up, you might want to watch out, linked lists were patented 4 years ago, yet another patent that should not have been issued: http://www.patentstorm.us/…/7028023.html. You may not know what a linked list is, but it's one of the first data structures every developer, since 1990 at least i'm guessing, has learned, yet was granted in 2006.

  2. Anonymous says:

    I think this lawsuit is frivolous – after reading many of the patents Apple is claiming over HTC I found many to be extremely broad, vague and many I don't think would stand up in a serious prior art challenge (like multi-touch – which I've seen demo'd long before Apple claimed it).    This sort of thing serves no purpose except to hamper trade, and stifle innovation. If the shoe was on the other foot and Apple was using these patents against Microsoft I'm sure you would agree ;).    Also – all the prior examples you cite about litigation in the smart phone market all happened in the last year or two – none of which have been settled (so no – its not a long history). Nokia arguably has a case simply because Apple did not help them develop GSM (patents cover a collection of hardware and software) – and would not agree to a license agreement. Apple doesn't and won't license their IP.

  3. Anonymous says:

    I like your thoughts on this. I do however hope that you are correct about it not stifling the development of technology in the mobile phone sector.

  4. Anonymous says:

    Well, I hope Microsoft remember the Commerce One patent which is being held by Novell and by extension the OIN? Also remember, the OIN holds some pretty damning patents which can be used any time against anyone…most likely against MSFT    The day Microsoft launches an all out patent war against Linux, expect a ferocious response from the OIN. It'll be MAD…highly undesirable. Microsoft better get back to competing on innovative products…rather than frivolous patent wars.    I hope this post gets published…  

  5. Anonymous says:

    @Anshul:  "expect a ferocious response from the OIN"     Really?  Where's OIN when Apple is going after Android?  Nowhere, that's where.  OIN is a paper tiger.  If OIN had any teeth, it would go after Apple because Apple went after Android which uses the

  6. Anonymous says:

    Open innovation is only possible through the PERMISSIVE licensing of third party IP rights, which ensures that those who develop the building blocks that make a new technology possible are properly PROTECTED for their investments in research and development FROM PATENT TROLLS.      There.  Fixed that for you.    You are right that the software stack is where the most value is added, but I think you are focused too low on that stack, and I'd argue that patent law doesn't (or shouldn't) apply in any sense whatsoever to where it truly matters.    You've already alluded to the value in mobile devices–it enables computing everywhere, from emails to streaming media to location-based SERVICES.  SERVICES is where it is at.  It is the BUSINESS MODEL and the services offered through the business.  Patents do not apply.    Wher patents DO apply they have demonstrated a track record of STIFLING "open innovation".  The more proprietary, the more restrictive and more onerous the licensing terms the slower innovation occurs.  The software lower on the stack, supporting the services (where patents are being wielded unfortunately), is of most benefit when it is commoditised and is developed and maintained collaboratively.  This has been demonstrated with the success of Linux and Apache and other Free software.  They are widely available, solidly built and serve as a dependable platform for everything from driving the user experience of my television set to powering the Google empire.  Even the notoriously restrictive iPhone environment leverages a solid BSD foundation.    I don't get why at this level of the software stack there seems to be this insistance that someone be "compensated" solely for ideas.  The sweat equity is in the implementation (something, by the way, that is amply protected by copyright–so what's with the patents?).  May the best implementation win.  Exacting protection money from those who bring the idea to life in the form of onerous "licensing fees" seems to me not far enough removed from racketeering by mobsters.    I'm wondering how long it will take MSFT to learn its lesson.  They are trying to reign in their platform, keep things very closed, in the mobile space and what has it got them?  Google "gets it" and they went from nothing to quickly rising star with their offering by levereging TRUE open innovation and collaboration, while as time goes on the inward-looking Microsoft suffers from sliding market share and very stale product offerings, even as the very promising Windows Phone 7 looms like a mirage on the horizon–always in sight but tragically slow in coming within arms reach…all because it insists on "re-inventing the wheel" with its very own ecosystem which holds little value to the end user but must be solid enough to support what is truly valued.  

  7. Anonymous says:

    Google's also a part of the OIN. The last I heard, Apple is trying to sue HTC and not Google, although the attack is on the Android. Now, what stops Apple from attacking Google directly, and not HTC? Is that probably because of Google's might and OIN's backing on the Linux kernel?

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