BREAKINGVIEWS - Apple, Google and Microsoft revalue smartphone DNA

Fri Jul 29, 2011 10:28pm IST

The Apple Inc. logo is seen in the lobby of New York City's flagship Apple store January 18, 2011. REUTERS/Mike Segar/Files

The Apple Inc. logo is seen in the lobby of New York City's flagship Apple store January 18, 2011.

Credit: Reuters/Mike Segar/Files

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Robert Cyran

NEW YORK (Reuters Breakingviews) - A battle royale has recalibrated the market for smartphone DNA. With Apple, Google and Microsoft duking it out for control of the mobile market, each needs or desires more and better patents for supremacy. Without them, their devices are vulnerable to shakedowns for royalties or, worse, demands to stop using the innovations. This has sparked a mad dash to acquire such portfolios -- for use as both a saber and a shield.

The auction of some 6,000 patents from bankrupt Nortel in late June lit the fuse. Google's stalking-horse bid set a floor price of $900 million. But when the gavel came down, a group including Apple and Microsoft, as well as Ericsson, Research In Motion and others, walked off with the portfolio for an unexpected fortune of $4.5 billion. Since then, InterDigital, an owner of wireless intellectual property, put itself up for sale and Carl Icahn, the uppity 75-year-old billionaire, has pressured Motorola Mobility to sell its patent portfolio. And Google recently bought over 1,000 patents from IBM covering multiple areas of technology to bolster its relatively weak war chest.

The valuation calculus has changed, and quickly. Such patents, which cover everything from app icons to address books, could very well dictate the future of the rapidly growing smartphone market. Though once appraised almost exclusively based on their royalty streams, mobile-related patents now command healthy strategic premiums.

Qualcomm helps to illustrate the point. The wireless chip maker owns an important collection of patents for next-generation 4G handsets. But with a $95 billion market capitalization, no one will be swooping in for a Qualcomm takeover any time soon. Its value -- and therefore presumably that of its patent portfolio, too -- has hardly budged since the Nortel auction. Yet InterDigital's has soared more than 60 percent and Motorola Mobility's rose more than 20 percent on Icahn's demand, before falling back somewhat.

Potential buyers secure two major benefits from adding to their collection of patents. First, the new owner pays fewer royalties and can make itself subject to fewer lawsuits. More importantly, tolls can be levied on rivals. Microsoft is asking Samsung to pony up as much as $15 for each device using Google's Android software because of alleged infringement. With so many millions of phones being manufactured monthly, the cash can add up.

The fees can also reduce a phone's consumer appeal. An iPhone, say, might wind up costing less than a rival device or have more features because of fewer patent considerations. More significantly, in lieu of earning a small patent royalty fee from a customer buying a rival phone, Apple could instead perhaps pocket 10 times as much profit upfront from an iPhone sale, and earn potentially much more from advertising, music, app and other sales.

The winner-take-all nature of technology also plays a part. If control of intellectual property can nudge customers toward a particular smartphone, it might establish the shape of the market for a decade. That could be worth hundreds of billions of dollars. Just look at what the rollout of the iPhone did to Apple's market capitalization.

That explains why Google might dig deep to acquire InterDigital's or Motorola's intellectual property -- and why Microsoft and Apple would be equally amenable to paying up to keep it out of the hands of rivals. The three tech giants combined do have more than $160 billion of cash on their balance sheets.

With big buyers willing to pay over the odds, it's no wonder Icahn has pushed Motorola to sell its portfolio and InterDigital is shopping itself. Motorola has more than 17,000 patents, mostly in wireless. InterDigital, meanwhile, has 50 percent more patents than Nortel did, yet its market value is less than $3 billion when adjusted for its cash.

Even with the renewed fever for patents, there may yet be roadblocks to acquisitions. Motorola is an operating company. Selling its portfolio could leave it without an armory to protect its handset operations against lawsuits from rivals. Structuring a deal could prove exceedingly knotty.

As for InterDigital, and other similar patent holders, it's a question of whether the inventions are sufficiently important. Can they, for example, be used to block Nortel's? Assessments vary. After all, analyzing thousands of patents is a complex undertaking. The future of smartphones is still rapidly evolving. The value of a 4G patent depends on how fast operators roll out the standard.

Either way, the final answers will almost certainly come from the executive suites of Google, Microsoft and Apple. Where they go, the future value of patents will follow.

CONTEXT NEWS

-- Google purchased more than 1,000 patents from IBM in mid-July. They covered areas ranging from database software design to making Web searches more efficient. This news was first reported by the blog SEO by the Sea.

-- Motorola Mobility shares gained more than 20 percent on July 21 after activist investor Carl Icahn urged the wireless company to consider shopping its portfolio of patents. The company holds more than 17,000 of them, mostly in the areas of wireless and cable technologies.

-- InterDigital, which owns some 9,000 patents, many of which relate to mobile phones, said on July 19 it was considering a sale of the company. Since the announcement, the company's market capitalization has increased nearly 75 percent to $3.3 billion.

-- A consortium made up of Apple, EMC, Ericsson, Microsoft, Research In Motion and Sony paid $4.5 billion for 6,000 patents and patent applications held by Nortel, the networking company said on June 30.

(Editing by Jeffrey Goldfarb and Martin Langfield)

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