The Patent Battle in Smartphones

A brawl has broken out among cell-phone manufacturers, but it's consumers who may wind up with the black eye. Apple (AAPL), Microsoft (MSFT), Taiwan's HTC, and others are demanding royalties from or suing players across the industry over patents on smartphone technologies. Buyers of cell phones could face higher prices if handset makers end up having to pay more in licensing fees.

Apple has launched or been the target of 23 patent suits so far this year, according to data compiled by Bloomberg. On May 7, Nokia (NOK) sued Apple claiming that the iPhone and iPad violate several of its patents. It is one of five suits and countersuits the two companies have exchanged in the past eight months. In March, Apple sued HTC, alleging it has infringed on 20 Apple patents for touchscreens, menu controls, and other technologies. On May 12, HTC responded, asking for a halt of sales of iPhones, iPods, and iPads in the U.S., arguing that the devices use HTC technology. "This landscape looks like France in 1914," says Eben Moglen, a professor at Columbia Law School.

The hostilities are caused in part by the shifting boundaries between cell phones and computers, which now perform many of the same tasks. "Whenever industries merge, there may be patent litigation," says Gustav Brismark, vice-president for patent strategy and portfolio management at Ericsson (ERIC).

Manufacturers whose phones are powered by Google's (GOOG) Android software have been hit hard by patent battles. (Google itself has not been sued.) Android handsets accounted for 28 percent of U.S. smartphone sales in the first quarter, vs. Apple's 21 percent, according to NPD Group. Apple has filed a complaint with the International Trade Commission, saying several HTC Android phones infringe on its patents. It is also suing HTC in federal court in Delaware. Both companies declined to comment.

Licensing fees now represent less than 10 percent of smartphones' production costs. Yet one Android handset maker has already budgeted for its patent royalty payments to double next year, says an executive, who spoke on condition of anonymity. One beneficiary may be Microsoft, which has blanketed the industry with letters demanding royalties for technologies such as touchscreen menus. "Technology just doesn't appear, fully developed, out of Zeus's head," Microsoft Deputy General Counsel Horacio Gutierrez wrote in a blog post. "It requires lots of hard work and resources to create."

The bottom line: An outbreak of lawsuits could crimp handset makers' profits and may raise prices for consumers.

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