The new front in the mobile phone wars

THE future for companies like Nokia and Motorola, once the great pioneers of the mobile phone industry, has been bleak for some time. The likes of Apple and RIM have eaten away at their share of the high-end smartphone market for several years now, while cheaper Asian manufacturers will soon do the same in the sub-$200 space. We have long argued there is no way back; the adapt or die moment has passed.

Google knows this, yet it is still shelling out $12.5bn on Motorola Mobility. In reality, this deal has very little to do with the US handset maker’s mobile phones, which are frankly pretty terrible. If Google had wanted a device manufacturer it would have plumped for something better like Taiwan’s HTC.

The reason Google made Motorola Mobility its largest-ever acquisition was because it has some incredibly valuable treasure buried in the back garden: 25,000 patents.

Battles over patents have become the new front in the mobile phone wars, because is almost impossible to develop a new handset without infringing on someone else’s intellectual property. Apple owns the intellectual property behind some of the more recent developments, such as touchscreen swiping and scrolling, while Nokia and Motorola hold patents for earlier – although still crucial – technologies.

The battle has been hotting up for a couple of years now. Last April, Apple filed a lawsuit in the US accusing Samsung of copying its iPhone and iPad, a disagreement that has escalated to the point where the two companies are now locked in 20 separate legal disputes in eight different countries. In other cases, rivals have settled out of court. Apple recently paid €800m to Nokia to end a long-running patents dispute, and now pays around €8 in royalties to the Finnish firm for every iPhone it sells.

This is nothing new, of course. Firms that rely on intellectual property have used patents to prevent rivals from ripping them off for several hundred years.

What is different this time round is that mobile phone firms are spending billions of pounds on second-hand patents to pre-emptively protect themselves against legal action. It’s the intellectual property version of an arms race: the more intellectual property you own, the less chance there is of someone suing you. That’s because if you’re a mobile phone firm infringing on someone else’s patent, the chances are they’ll be infringing on one of yours – especially if you own 25,000 of them.

The handset makers that use Google’s Android operating system are particularly vulnerable to legal action, partly because the web giant was a relatively late entrant to the mobile phone industry. According to Ben Wood, an analyst at CCS Insight, the Motorola deal has given Google a much-needed “armory of ammunition” to fend off these lawsuits.

It isn’t the first company to do a deal of this kind. Last month, a consortium led by Apple spent $4.5bn on 6,000 patents owned by the collapsed telecoms firm Nortel Networks. Again, the company was a busted flush, but its intellectual property was still in high demand.

Yesterday, investors turned their attention on other stricken companies that could own valuable patents. Nokia, for example, gained almost 10 per cent.

There’s no rule that says buyers have to be mobile phone firms, however. Private equity groups or investment firms could package up and manage highly-valuable portfolios of patents, and generate profits by extracting royalties and settlements from those who need them.

The arms race for intellectual property has only just begun. Yesterday, Google fired an important opening salvo.
david.crow@cityam.com