Patent Paying Isn’t the Hardest Part for Apple and Google

Apple Inc. (AAPL) and Google Inc. are learning that spending lots of money to buy patents is the easy part. Doing something with them isn’t.

Google bought mobile-phone pioneer Motorola Mobility Inc. for $12.4 billion in part to get patents on technology underlying all smartphones and related devices. A group including Apple that spent $4.5 billion for patents from bankrupt Nortel Networks Inc. is trying to recoup some of that by filing infringement lawsuits.

The companies paid record prices in the midst of legal battles over smartphone technology to get the upper hand over competitors or force them into a global settlement. Instead, court rulings have undermined the value of those patents and the litigation hasn’t stopped.

“They overpaid because they didn’t know what they were doing,” said Kevin Rivette, a managing partner in the Silicon Valley office of 3LP Advisors LLC, which has counseled companies on patent strategies.

Google and Apple “had a lot of money,” he said. “There’s a learning curve on patents, on what they can and can’t do and how to strategically use them.”

Google, based in Mountain View, California, is selling the phone-manufacturing part of Motorola Mobility to Lenovo Group Ltd. for $2.91 billion. It’s keeping the majority of the patents, which it valued at $5.5 billion when the purchase was announced.

“Given the explosion of patent lawsuits, a strong portfolio helps us enter into cross-licenses and defend our inventions,” Allen Lo, Google’s deputy general counsel for patents, said in an e-mail yesterday. “We’d much rather innovate than litigate.”

Bubble Over

Google’s purchase of Motorola Mobility, as well as the bidding contest in which Apple, Microsoft Corp., BlackBerry Ltd. and Ericsson AB topped Google for Nortel’s patents, created a pricing contest unlikely to be replicated, said Ron Laurie, managing director of Inflexion Point Strategy LLC, which counsels companies on intellectual-property purchases.

“You had very large companies with lots of money and very few patents in the marketplace facing very large companies with lots of patents,” Laurie said. “It takes a lot of momentum to get that kind of bidding war going.”

Kristin Huguet, a spokeswoman for Cupertino, California-based Apple, declined to comment.

For Google, the benefit in its patent purchase lies in what didn’t happen.

‘Level’ Field

No new lawsuits have been filed by competitors against makers of Android phones since Google’s purchase of Motorola Mobility. In a blog posting announcing the Lenovo deal, Google Chief Executive Officer Larry Page said the patents “have helped create a level playing field.”

The acquisition also helped Google tie Samsung Electronics Co. (005930) into using Android through a cross-licensing agreement.

“You’re looking, at the end of day, at a meaningful portfolio that has achieved strategic purposes and was acquired for market value,” said Erin-Michael Gill, managing director of MDB Capital Group, an IP-focused investment bank based in Santa Monica, California.

Many of the Google patents cover fundamental ways phones operate, meaning every manufacturer needs to license the technology. Google acquired them to turn the tables on patent-infringement claims being made against its Android platform, the world’s largest operating system for mobile devices, by Apple and Microsoft Corp.

Limited Power

Instead, courts and regulators have limited the legal and financial power of these so-called standard essential patents to encourage competition.

Whereas Microsoft said Motorola Mobility demanded royalties of 2.25 percent of the retail price of Xbox video-gaming system and computers that run on the Windows operating system -- a figure that could have reached into the billions of dollars -- a federal judge set rates of mere pennies a unit, or about $1.8 million a year.

Rockstar Consortium, the patent-owning entity set up after the Nortel purchase, has shown few tangible results so far, having spent about a year deciding what to do with the patents not chosen by its individual companies. It first sold some of the patents to Spherix Inc. (SPEX), which also been using them to file lawsuits.

Rockstar Sues

The participating companies set up an independent board for Rockstar, which now controls decision-making about the patents, said Kasim Alfalahi, Ericsson’s chief intellectual property officer.

In October, Rockstar sued Android-phone manufacturers, including Samsung, the world’s largest smartphone maker. It also lodged a complaint against Google over its search engine.

Today, only the most valuable patents are able to command top prices, Laurie said.

“Demand will probably not go down because companies still need to bulk up, but price per patent will probably go down,” Laurie said. “There’s a lot of pressure on price.”

Nor are there necessarily many portfolios up for sale at all.

Few companies have the years of research that would create a portfolio of the size and breadth of the one built by Nortel, once North America’s largest phone-equipment maker, or Motorola Mobility.

Nokia Licensing

Nokia Oyj, (NOK1V) the Finnish company that’s selling its mobile-phone division to Microsoft, is one of the biggest owners of phone patents and has said it plans to increase its licensing program. So has Ericsson, another holder of large numbers of phone-technology patents.

InterDigital Inc., which has pending suits against Samsung and Nokia, tried to find a buyer in 2011 without luck and sold about 1,700 patents to Intel Corp. for $375 million. The Wilmington, Delaware-based company has since lost one of its cases against Nokia and Chinese phone maker ZTE Corp.

There aren’t many big patent buyers left, either.

Lenovo gets a fair number of cross-licensing deals with the purchase of Motorola Mobility so has relatively little to worry about when it comes to litigation, Rivette said.

That leaves Huawei Technologies Co. and ZTE, two Chinese companies that may seek a bigger share of the high-profit U.S. and European markets.

“All industries go through this -- patents become valuable in certain industries, it gets hot and then cools it down,” he said. “Will it heat up if Huawei and ZTE try to enter the U.S. and European markets? I don’t think there’s a simple answer.”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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