Photographer: Andrew Harrer/Bloomberg

Xiaomi's Microsoft Patent Buy-Up Is Part of Its Global Push

For decades, Chinese disregard for trademarks, copyrights, and other intellectual property has frustrated U.S. technology, entertainment and other companies. The next wave of intellectual-property conflict in China won't be fights over pirated software or unauthorized downloads. Microsoft, which has been a leader in fighting Chinese pirates, this week announced a deal with Xiaomi, maker of some of China's most popular smartphones, to put Skype and Microsoft Office on Xiaomi's Android phones. As part of the deal, Xiaomi is buying nearly 1,500 of Microsoft's patents, covering wireless communications, video, cloud, and multimedia technology.

The fact that Microsoft can find in Xiaomi a ready buyer for a bunch of its patents is a sign of the growing importance Chinese companies now put on intellectual property. This is particularly true of tech companies trying to develop global brands. Xiaomi wants to build sales with consumers outside China, and part of that push means accumulating more patents.

"They have beefed up their portfolios," said Haifeng Huang, a partner with Jones Day in Hong Kong. Some, like Shenzhen-based Huawei Technologies, have done that by investing in R&D. Others, like Xiaomi, have gone shopping. "Chinese companies tend to look around and see if there are opportunities to acquire patents from other parties," said Huang. "They are willing to pay a lot."

Having a big patent portfolio is an important part of the go-abroad strategy for the Chinese government, which wants local champions to become top brands worldwide. The government is encouraging tech companies not only to file for patents but also find ways to make money from them, said Ningling Wang, a partner in Shanghai with the law firm Finnegan, Henderson, Farabow, Garrett & Dunner. The goal is to "extract value from high-quality patents," she said.

"Historically, Chinese companies have tended to use patents solely for defensive purposes, but now Chinese companies are becoming more sophisticated."

A better negotiating position

And when it comes to patent portfolios, size matters. That's because a company like Xiaomi needs a big chunk of patents to improve its negotiating position against rivals that are demanding royalties for use of their own intellectual property. "It's very difficult to measure the value of each company's portfolio, so one measure is quantity," said Matthew Laight, head of the intellectual-property group in Asia Pacific for law firm Bird & Bird. Quality matters, too: If a company has one or two patents that are particularly strong, they increase the value of the whole patent portfolio.

Either way, the goal is to have more leverage when negotiating cross-licensing deals. Typically, Chinese companies have been on the receiving end of legal challenges. Huawei, however, the Shenzhen-based maker of networking equipment, mobile phones, and other tech products, went on the offensive. On May 24, Huawei filed a lawsuit against Samsung Electronics in federal court in San Francisco, claiming the South Korean tech giants infringed on as many as 11 patents related to 4G mobile devices. "We will thoroughly review the complaint and take appropriate action to defend Samsung's business interests," Samsung Electronics said in an emailed statement.

While such cases are common among tech companies, it's unusual for a Chinese company to be the plaintiff. The Chinese are usually the ones accused of being the copycats. By taking on Samsung, Huawei is taking "a very pioneering move," said Wang.

Chinese companies are likely to use Huawei as a model and become more aggressive in challenging foreign companies about their use of Chinese-owned patents, according to John Wu, director of product development with Iptalent Consulting, an intellectual property advisory firm in Beijing. "Everyone wants to make money from the patents," he said.

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