Every week we see more companies filing more lawsuits over patents. Microsoft and Oracle sue Google, Apple sues a long list of companies…and they all countersue in a new kind of circular firing squad, a real MAD (Mutually Assured Destruction) conflagration. Soon, high-tech companies will have more lawyers than engineers.
First, a word on the general topic of patents. Feast your eyes on this Wikipedia article and you’ll see that patents, those erstwhile royal decrees, have been around for a long time. In theory, they’re supposed to foster innovation by granting the inventor a monopoly on an original process. In reality, things get complicated. Byzantine patent law has created lifetime employment opportunities for those who are expert in the Talmudic parsing of what is actually, legally patentable.
Back in the tangible, “real-world” days, you could invent a new process to temper steel that would result in taller, safer buildings. In patenting your idea, you’d earn a bit for yourself and encourage others to raise the bar.
Since then, we’ve invented software and, according to some critics, including at least one Nobel Laureate, we made the terrible mistake of allowing patents on these “inventions”. Can you really patent any algorithm, even a simple one, or only those that are complicated and “non-obvious”? What about the program code that realizes the abstract algorithm? And what do you call the formal language used to create an unequivocal description of the algorithm? Just text or a program?
It’s messy. But the mess isn’t new, it’s been with us for decades.
What’s new is the smartphone. A closer look at its complexity and profitability will provide a simple(r) explanation for the new madness.
First, the complexity. I’m one of those who like to call smartphones the Really Personal Computers. This could be misleading as it implies that these ubiquitous devices are like PCs, only smaller. In reality, a smartphone is much more complicated than a PC: accelerometer, gyroscope, compass, two cameras, multiple radios (Wi-Fi flavors, Bluetooth, multi-band cellular radio/modem), light sensor, humidity sensor, capacitive touch screen… All this in one very small and resilient package.
Most of today’s PCs aren’t nearly that complicated, they have fewer “sensory organs”, form factor size is barely an issue. The smartphone, with its richness, complexity, and miniaturization, has required more, newer, smarter inventions…and has spawned many more patents than a PC.
Second, the money. Take a look at the iPhone’s slice of Apple’s income pie. This year, iPhones (and its iOS siblings, the iPod Touch and the iPad) will yield about 65% of Apple’s approximately $100B revenue. See this Asymco chart for Apple’s most recent quarter:
Furthermore, while Apple’s overall Operating Margin hovers around 40%, the number is significantly higher -- upwards of 60% -- for iPhones. A mere four years ago, as the chart shows, there were no iPhone billions -- zero -- Apple was just Macs and iPods.
The Android ecosystem has similarly high stakes. Android devices can’t boast Apple’s Operating Margin, but they make it up in volume – unit sales are much larger than Apple. Add Nokia and RIM and you get an industry that will ship an estimated 475M smartphones this year (see Brian Hall’s post), and growing fast.
That’s a lot of phones, a lot of innovation, and a lot of money. And a lot of money has already changed hands in the smartphone patent wars. In 2006, after years of sometimes dirty pool, RIM agreed to pay NTP, an intellectual property company (a.k.a patent troll), the nice sum of $612M for “full and final settlement of all claims”. More recently, in a little-heralded settlement, Stephen Elop, Nokia’s CEO-for-now, pronounced himself “very pleased to have Apple join the growing number of Nokia licensees.” The unsubstantiated whisper was $600M.
Speaking of those $600M, we didn’t hear David Drummond criticize Nokia for “extorting” Apple. You know, the David Drummond, Google’s Chief Legal Officer, who penned a whiny blog post titled “When patents attack Android”. This was right on the heels of Google’s loss in the auction for Nortel’s patents. It’s rather ironic when considering Google’s fortunes depend on key patents from Stanford, and Applied Semantics for AdSense.
And now, Google buys a patent, turns around and sells it to HTC who promptly uses it to sue Apple, the precise kind of dirty maneuver Drummond shed crocodile tears over. See Philip Elmer-Dewitt choice words: Google gets its hands dirty…
Today, there are about 5 billion cell phone subscriptions in the world, about 30% of which are smartphones (also from Asymco):
The smartphone industry has billions of devices and hundreds of billions of dollars in its future.
Imagine the throng of patent holders trying to extract royalties from each of these smartphones. For reference, Microsoft is rumored to get about $5 in royalties on each Android phone made by HTC and others (which leads to the ironic situation in which the Redmond company makes more money from Android than from its own Windows 7 Phone platform. Hopefully, when the MicroNokia agreement kicks in, this will change).
More patentable content per device, more devices, huge revenue and profit numbers at stake… No wonder the knives -- and the attorneys -- come out. See this detailed, well-written NPR story on patent trolls. After mentioning the $4.5B Nortel patent portfolio purchase by a consortium of companies including RIM, Microsoft, and Apple, the article concludes:
“The big companies — Google, Apple, Microsoft — will probably survive. The likely casualties are the companies out there now that no one's ever heard of that could one day take their place.”
Can we reform this? Should we? No. Band-aids such as the recently-passed First To File reformette won’t quench appetites, nor will it put leg irons on the trolls. Instead, we should rejoice and look at the current agitation as an unavoidable side-effect of the smartphone ecosystem’s prosperity. A robust organism will always attract a number of parasites – pardon – symbionts.
Consider this false legend: In 1899, Charles Duell, Director of the US Patent and Trademark Office, is supposed to have said ‘Everything that can be invented has been invented’. We know this was wrong then, and it’s wrong now. If you think that large companies have a monopoly on invention, you forget how today’s giants -- Google, Apple, Microsoft -- toppled their elders: By imagining the unimaginable, patenting the unpatented.