Google’s Android Growth Threatened By Apple’s Patent Victory

Apple Inc. (AAPL)’s victory over HTC Corp. (2498) in a patent dispute at the U.S. International Trade Commission may slow the advance of rival Google Inc.’s fast-growing Android operating system for mobile phones and tablets.

A trade judge found on July 15 that HTC infringed two patents owned by Apple, whose iPhone competes with Android-based devices, including those made by HTC. If his decision is upheld, HTC may be prevented from bringing phones into the U.S., and companies such as Samsung Electronics Co. and Motorola Mobility Holdings Inc. may find it more expensive to sell Android phones.

Android is poised to be the most-used smartphone software in a mobile market that may reach $206.6 billion worldwide this year, according to IHS Inc. Google (GOOG) is under attack from rivals including Apple and Microsoft Corp. that allege infringement by handset makers that use Android. The ruling may embolden Apple to sue more vendors and even Google, said Michael Bettinger, a patent lawyer with K&L Gates who focuses on cases at the ITC.

“They either make global peace or it will be a war of attrition,” Bettinger, who is based in San Francisco, said in an interview. Apple “put a chink in the armor,” he said.

The U.S. International Trade Commission ruled Friday that HTC infringed two Apple Inc. patents. Photo: Maurice Tsai/Bloomberg Close

The U.S. International Trade Commission ruled Friday that HTC infringed two Apple Inc.... Read More

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The U.S. International Trade Commission ruled Friday that HTC infringed two Apple Inc. patents. Photo: Maurice Tsai/Bloomberg

Apple, which also has pending legal fights with Samsung and Motorola, is looking to thwart rivals rather than extract payment for use of the patents, making it more likely to hold out for a ban on imports, said Ron Laurie, managing director of Inflexion Point Strategy LLC, which counsels companies on purchasing intellectual property.

“This is not about money,” Laurie, a former patent lawyer who is based in Palo Alto, California, said in an interview. “This is about market share in the hottest market out there.”

HTC’s Appeal

Taiwan-based HTC said it will appeal Administrative Law Judge Carl Charneski’s finding, which is subject to review by the full six-member commission in Washington. The smartphone maker, Asia’s second-biggest, denied violating Apple’s patents and said it will use “all means possible” to defend itself in a statement after the ruling.

One of the patents in the HTC case involved data-detection technology used in e-mail and text messages, while another related to a data-transmission system.

Charneski found that two other Apple patents, one related to an operating system and one for a type of programming, weren’t infringed. The ITC staff, which acts as a third party in the case, had recommended that Apple lose on all claims. The staff’s position isn’t binding on the agency.

Google, Apple

“We are confident the commission will ultimately agree with the ITC staff’s finding that HTC does not violate any of Apple’s patents,” Aaron Zamost, a spokesman for Google, said in an e-mail.

Google Chairman Eric Schmidt, speaking at a Google Mobile Revolution conference in Tokyo yesterday, said he was “not too worried” about the litigation over Android.

“We have seen an explosion of Android devices entering the market and, because of our successes, competitors are responding with lawsuits as they cannot respond through innovations,” Schmidt said, according to ZDNet Asia. He said Google would support HTC, without providing details.

Android is the fastest-growing operating system in the smartphone market, according to researcher Gartner Inc. Google’s software powered half of all smartphones bought in the U.S. in the six months that ended in March, Nielsen Inc. said.

Any Android license payments to Cupertino, California-based Apple may not immediately impact phone prices. Still, with some patent license fees already agreed upon and other suits wending their way through the courts, prices for Android phones over time may rise to reflect the costs.

Few HTC Patents

Among large Android phone makers, HTC faces the biggest hurdles, because it holds few patents of its own to tempt Apple into a cross-licensing agreement. Apple may even refuse to license the patents, said Will Stofega, a program manager at researcher IDC, leaving HTC struggling to produce a phone that works around them.

“I don’t see Apple giving an inch,” Stofega said in an interview.

Apple may be more likely to sign a license accord with Samsung (005930) or Motorola. Still, such deals may involve payments to Apple that would be passed along to Android customers, said Florian Mueller, a Munich-based consultant.

“I don’t think we will see Android demand dwindling anytime soon,” he said in an interview. “The question is two years down the road, and there is reason for profound concern at that point.”

Other Android Claims

Many of Google’s 39 licensees to make phones based on Android are smaller manufacturers that have far less cash than HTC, Motorola and Samsung to defend against suits and pay fees to patent holders, Mueller said. That may prompt some to switch to making phones for systems other than Android.

Mountain View, California-based Google also faces other claims that Android encroaches on patents. Microsoft (MSFT), which makes a rival Windows system for mobile phones, signed four patent licenses with Android device makers in the past month and already has a deal with HTC.

Microsoft also sued Barnes & Noble Inc. (BKS) after the bookseller refused to sign a license for sales of the Android- powered Nook reader. Oracle Corp. (ORCL) contends that Google used code from the Java operating system without permission and is seeking billions of dollars in royalties.

‘Mutually Assured Destruction’

The patent world operates like a “nuclear arms race,” said Inflexion’s Laurie. Companies such as Microsoft or Apple rarely go nuclear on each other, because each company holds enough patents to make a raft of claims against the other’s products, leading to “mutually assured destruction” if the balance is threatened, he said. Instead, the parties sign agreements letting them develop products that make use of the other’s intellectual property.

Google lacks the patent cache to strike those kinds of bargains, and its attempts to purchase patents to catch up have foundered. The company failed in a bid last month to buy the $4.5 billion patent portfolio of Nortel Networks Corp., losing out to a group of companies that included Apple and Microsoft.

“Apple’s got all the missiles,” Laurie said.

HTC may have some leverage in its dispute with Apple. The company agreed earlier this month to buy S3 Graphics Co., which won an ITC patent ruling against Apple in June. HTC also has its own pending case against Apple.

‘Defend Our Portfolio’

A final decision in the Apple-HTC case will take months. The six-member commission is expected to complete the case by December. If the panel agrees with the judge’s finding, it may block HTC’s Android phone imports to the U.S. HTC also may seek an order to delay any import ban until the appeals court rules, which might take a year or more.

Apple Chief Operating Officer Tim Cook was asked about the various patent disputes involving Apple during the company’s earnings conference call yesterday.

“We love competition,” he said. “We think it’s great for us and everyone. But we want people to invent their own stuff. We’re going to make sure we defend our portfolio.”

The case is In the Matter Of Certain Personal Data and Mobile Communications Devices and Related Software, 337-710, U.S. International Trade Commission (Washington).

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Allan Holmes at aholmes25@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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