05 November 2011

How Apple Punches Above Its Weight in Smartphone Disputes

Apple boxingWe have written previously on this blog about ‘patent analytics’, patent ‘landscapes’ and ‘theme maps’ (see IP Australia on Collision Course with Private Practitioners?).  Tools for mining and analysing patent data, i.e. the contents of the databases maintained by national and international patent authorities, are provided (at not insignificant cost) by companies such as Thomson Reuters, with its Thomson Innovation product.

Thomson’s ThemeScape maps employ a visual analogy with geographic contour maps, to present large quantities of complex information as a two-dimensional ‘landscape’.  As part of some ongoing research for an article likely to be published in the coming months in IAM Magazine, we have been working with our colleagues in the Information Services team at Watermark Intellectual Asset Management on some ThemeScape mapping relevant to the ongoing disputes in the ‘smartphone/tablet’ space involving companies such as Apple, Samsung, Microsoft, Google and Motorola.  The preliminary results of this research are extremely interesting, so we thought we would share a few insights as a taste of what is to come in the final article.

In essence, what the results show so far is that the mobile technology patent landscape is dominated on the ‘hardware’ side by the major traditional manufacturers, such as Samsung and Motorola, and on the ‘software’ side by Microsoft.  And while Apple’s portfolio is small by comparison, its recent successes in various courts around the world are strong evidence that the patents Apple does hold are of particular strategic significance.

THE THEMESCAPE

ThemeScapeIn a ThemeScape, documents are clustered based on their thematic similarity, which the software estimates by analysing the text for similarities and differences.  ‘Dense’ areas, where there are large numbers of similar documents, are represented as snow-capped ‘peaks’, while relatively sparse areas are represented as blue ‘lakes’ or ‘oceans’.  The absolute positioning of each peak and valley is not important, only relative location – the closer together the peaks are located on the map, the more closely the corresponding technologies are related.

In the ThemeScape maps presented here, the underlying ‘landscape’ is made up of a very large number of patents and applications (numbering in the tens of thousands) relating to mobile device and communications technologies, and assigned (originally or currently) to a range of companies including Apple, Samsung, Microsoft, Google, Motorola Mobility and Nortel.

For purposes of the present discussion, the notable features of the landscape are:
  1. a number of peaks located around the periphery of the map, including cluster in the ‘north-east’, which correspond generally with various hardware and telecommunications technology elements of mobile systems; and
  2. a central region of peaks and valleys, which correspond generally with software functions and user experience features of mobile devices.
Due to the very large number of documents included in the mapping, it would be wrong to assume that the blue ‘lakes’ represent areas where there are few patents.  In absolute terms, there are many patents located in the low-lying areas.  Only in relative terms are these areas less densely populated.

SAMSUNG’S HARDWARE DOMINANCE

SamsungSamsung dominates the ThemeScape.  Indeed, without Samsung the patent landscape would look very different.  Its patents contribute significantly to almost every peak on the map.  The only area in which Samsung’s yellow dots do not obscure the geography is within parts of the ‘software zone’ in the central regions of the map.

This is consistent with Samsung’s history as a major player within the hardware space, as a manufacturer of handsets and other mobile devices, as well as integrated circuits implementing various aspects of the mobile communications protocols which can be found in many devices made by other companies (including Apple’s iPhones and iPads).

As a developer and manufacturer of communications chips and devices, Samsung has also been a major contributor to the technical standards governing wireless telecommunications systems, which means that many of its patents cover technology essential to the implementation of those standards (see FRAND Obligations to be Aired in Australian Court for further discussion of the implications of this).

MICROSOFT’S SOFTWARE DOMINANCE

MicrosoftUnsurprisingly, Microsoft’s red dots dominate the central ‘software zone’ of the map.

In particular, Microsoft has the central ‘sea of software’ almost entirely to itself.  As noted above, this is not a region with an insignificant number of patents.  However, they virtually all belong to Microsoft!













Samsung MicrosoftOverlaying the Microsoft and Samsung data results in almost complete coverage of the entire landscape.  If all patents were created equal – in technical quality, and strategic significance – then Microsoft and Samsung between them would rule the mobile world, and none should pass within its borders without bringing their own patents and/or license payments to the gatekeepers!












APPLE’S STRATEGIC PLACEMENT

AppleAs most readers will be aware, Apple’s patent portfolio is not insubstantial in size, but as the purple dots on the map show, it is not even remotely in the same league as either Samsung or Microsoft.

Again, if all patents were created equal, Apple would be paying the piper, not obtaining injunctions barring the piper from playing his own pipe!

But Apple’s patents sit in strategic zones of the map.  The densest areas of purple are gathered near the boundaries between the software and hardware regions, in the fertile hinterlands of the user experience!






GOOGLE’S PROBLEM, AND ITS ‘SOLUTION’

GoogleAs the blue dots on the map show, Google (and, by extension, Android) faces a serious problem in the mobile space, where it has managed to occupy only a small amount of real-estate. 

To make matters worse, the territory Google does hold does not appear to be of great strategic significance – the areas in which Google has most patents are generally even more densely populated by Microsoft.











GoogorolaThis updated map represents ‘Googorola’ – a combination of Google’s existing patents, and those which it will acquire along with Motorola Mobility (see Google Joins the ‘Hardware Club’ While Microsoft Whines).

Clearly, the acquisition of Motorola Mobility will place Google in a similar class to Samsung, and while it will obtain the benefit of all of those ‘hardware’ patents, it will also be encumbered by similar obligations to license standards-essential patents on ‘fair, reasonable and non-discriminatory’ (FRAND) terms.  The strategic value of the acquisition therefore remains to be seen.




THE FRAND FRUSTRATION

One thing that is very clear from the maps is that ‘hardware’ companies, such as Samsung and Motorola, have invested large sums in developing, and protecting, telecommunications technologies and devices, some of which have been deemed sufficiently practical, robust and effective to be incorporated into the very standards – such as those associated with 3G mobile broadband systems – upon which an entire market has been built.

Arguably, their return on this investment has been the market leadership that comes with the special insight they have into the standards and their implementation, which is why Samsung components find their way into competitors’ products, such as Apple’s iPhones.

However, integrated circuits are commodity items.  Volumes may be high, but margins are very low.  The real value-add in a smartphone or tablet lies in the software with which its users interact, and the ecosystems which support the devices with apps and content. 

It is therefore understandable that companies like Samsung want to be in this space.  And yet they are now finding that it is already staked-out by Apple, which could not have developed the market it has without building on the advances in broadband wireless communications in which Samsung and others had invested.

It is therefore ironic – and some might say more than a little unfair – that Apple should be in a position to frustrate Samsung’s attempts to compete against its iPhone and iPad products, while the FRAND obligations associated with Samsung’s much larger patent portfolio leave it in a strategically weakened position.

In this context, it is hardly surprising that Samsung is in the Federal Court of Australia arguing that it should not be barred from obtaining an injunction against the iPhone 4S on the basis of the FRAND status of the patents which it is asserting against Apple.
Acknowledgment / Disclaimer
Dr Mark Summerfield is employed by Watermark Intellectual Asset Management.  The ThemeScape maps shown in this article have been prepared with the generous assistance of Watermark’s Information Services team, and are © Watermark 2011.  The opinions expressed in this article – and any errors – are solely those of the author, and do not necessarily represent a position of Watermark Intellectual Asset Management, its Principals or other employees.

4 comments:

Chris said...

Regarding Samsung not being able to use their FRAND-encumbered patents against Apple, they entered the standards committee fully aware of the licensing obligations imposed on them.

If companies could assert their FRAND-encumbered patents against competitors at their convenience, the ability for standards committees to attract participants would be severely reduced, affecting the quality and availability of standards which are required by consumers.

Patentology (Mark Summerfield) said...

Thanks for your comment, Chris.

I agree with you that Samsung should not be permitted to evade its FRAND licensing obligations, for all of the reasons you have identified.  However, the situation is quite complex, and I do not think it is entirely clear how those obligations should apply.

Taking the DVD/MPEG-2 standards as a comparative example, the holders of essential patents collect royalties totalling around $5-$10 on every player sold, as well as royalties totalling around $0.10-$0.15 on each DVD disc sold. 

From the consumer's persepctive, it is a bit like we are paying multiple times for the right to use the patented methods required to decode the contents of the discs.  But from the patent-holders' perspective it is simply the way they have chosen to monetise their technical contributions to the standards.  Some of the income stream derives from hardware (smaller volumes, higher margins), while some derives from software (higher volumes, lower margins).

According to research company iSuppli, the total value of the wireless section of the iPhone 4S is about $23.  This includes the Qualcomm baseband processor, which Apple says is already licensed and that therefore they are not obliged to pay further royalties to Samsung.  This might be correct, however I think there is a genuine issue here for the court to decide.

Clearly a reasonable royalty on a part costing some fraction of $23 is lower that the reasonable royalty on a smartphone costing $800.  If the court were to decide that Apple should be paying, say, $5.00 per unit to Samsung, this would obviously either reduce Apple's margins, or push up the price of the phone.  In this case, a better option for Apple may be to cross-license its own patents in order to reduce, or eliminate, the royalties payable to Samsung. 

That is, of course, a commercial decision for Apple to make, however at the moment their position is that they simply do not have to pay in any form.  Just because a patent is subject to FRAND licensing obligations does not mean that you can just ignore it!

Chris said...

Hi Mark, thanks for your reply.

I am certainly not an expert on these matters, so I appreciate your detailed reply.

Regarding the FRAND licensing, from your reply my understanding is that Apple purchased a Qualcomm baseband chip (or perhaps IP core) and used this in their products. In this case, I imagine that Qualcomm already licensed the patent and built the cost into the sale price. I believe the patent right is then 'exhausted' and the purchaser of the device can use it without fear of infringing any already-licensed patents. In this case I believe Apple couldn't be found to have infringed the patent.

Alternatively, if for some reason Apple are required to separately license the patent for the purpose of implementing the standard, I believe Samsung would be required to accept the license fee from anyone who wanted to implement it.

Regarding the MPEG-2/DVD comparison - I did not know that each discs required an additional license fee. It is an interesting comparison, since the disc is just a container for data - it can't encode or decode the data by itself. It's interesting to think how that can apply to the baseband case, operating on a standard-compliant signal. It also makes me wonder if there is a way that Samsung can somehow still control use of their rights (in a discriminatory way) while still complying with whatever terms they agreed to by participating in standards committee.

Patentology (Mark Summerfield) said...

The exhaustion of rights issue is not as simple as you might think.  Generally, a full sale of a patented product (such as a DVD player) does exhaust the patent rights, so the purchaser can resell without paying a further license fee.  However, a patent is effectively a 'bundle' of rights, and the patentee need not license all of those rights at once.  So, for example, for a lower license fee, the licensee may acquire a more limited set of rights, which may or may not be transferable to the licensee's customers.

In other words, it might depend upon the terms of a particular license agreement.

There is also no established legal position regarding international exhaustion of patent rights, i.e. whether a product legitimately manufactured and/or sold under license in one country is automatically immune from infringement of corresponding patents in other countries.

If Apple requires a license to a FRAND-encumbered patent, Samsung certainly cannot refuse.  However, there may still be a dispute over whether the terms offered are indeed reasonable and non-discriminatory.

If Samsung were able to assert rights over standards-compliant signals (and I am not aware that they are), I do not think this would be relevant in the present case.  These would be rights that Samsung would need to assert against end users and telcos, i.e. the parties that actually generate the signals.  The analogy with MPEG-2 is digital TV transmission, and I believe that it is the case that broadcasters of digital video are indeed required to pay ongoing FRAND license fees for the right to transmit MPEG-2-compliant signals.

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