Google (Nasdaq: GOOG) wants a pound of flesh from Apple Inc. (Nasdaq: AAPL) for the use of patents owned by the wireless handset manufacturer Motorola Mobility Inc. (NYSE: MMI), which Google has offered to buy.
Reports indicate Google may demand that Apple and other rivals in the mobile handset market pay as much as 2.25 percent of the unit price of their products for the use of Motorola patents. Apple and the rest of the competition are bound to challenge this request in court and press for concessions based on patents they control, but recent court rulings have shifted the advantage heavily in Google's favor.
At best, Google could end up with billions in annual royalty receipts from competitors. At worst, the deep Motorola intellectual property portfolio could help Google ease out of its court problems with Apple and continue advancing the Android operating system without fear of constant challenges. This, of course, would also help Android licensees like Samsung Electronics Co. Ltd. (Korea: SEC) reduce or eliminate royalty payments to companies like Microsoft Corp. (Nasdaq: MSFT).
A letter sent yesterday to Gordon Day, president of the IEEE, spelled out how that future is likely to unfold. It detailed Google's terms for the use of Motorola patents by other technology companies after the acquisition, which is expected to close this quarter. Google didn't mention any current or potential patent users by name, but it's clear that Apple and Microsoft are most likely to be impacted.
Motorola is locked in a patent war with both Apple and Microsoft. It clinched victory in one courtroom battle in Europe when a German court ruled that Apple was in violation of a Motorola patent related to the iCloud service. Motorola won another case in Germany recently, this one focused on cellular communications. The ruling in that case has been suspended pending an appeal, and Motorola has to post Ä100 million ($132 million) in collateral if it wants to enforce the iCloud injunction.
Clearly, the players in this war have become more aggressive in the last year. They have shifted from simply winning customers' hearts and minds to using legal tactics to cripple the competition. Apple, Google, Microsoft, HTC, and Samsung are locked in numerous lawsuits in courts worldwide. Apple has won injunctions against Samsung in Australia and Germany, but it has been dealt setbacks by courts in both countries in its efforts to curb alleged infringements of its patents.
Google's latest move raised the stakes significantly for all parties involved, but especially for Apple, which in some ways has become the biggest competitive target as a result of its overwhelming success in the smartphone and tablet markets. In fact, Google and Apple are arch-enemies -- in his authorized biography, the late Apple CEO Steve Jobs vowed to do whatever he could to clip Google's wings.
It's understandable, therefore, that Google would be aiming its biggest guns at Apple. Buying Motorola would add tremendous firepower to Google's arsenal. The thousands of patents in that kitty would help Google protect itself against legal actions and put a squeeze on Apple.
Google has already started tightening the screws. The letter to the IEEE purportedly showed its commitment to the industrywide practice of FRAND (fair, reasonable, and nondiscriminatory) use of engineering patents. But it also served as a warning to the competition that Google expects to be compensated for the use of the patents.
In the letter, Google wrote that it would honor Motorola's "commitments to license the acquired MMI Essential Patent Claims on RAND terms," though it would require payment of "a maximum per-unit royalty of 2.25% of the net selling price for the relevant end product on a go-forward basis, subject to offsets for the value of any cross-licenses or other consideration received from the licensee."
What this means in practical terms is that Apple could end up paying 2.25 percent, or as much as $15 per iPhone, to Google if it uses or infringes upon any of the Motorola patents. This could add up to hundreds of millions of dollars quickly if Apple continues to sell tens of millions of iPhones and iPads each quarter. Additionally, enforcing the patents could give Google considerable leverage in negotiations for cross-licensing agreements with Apple.
I believe we are entering a new phase in this patent war that could lead to the end. There will be additional skirmishes, but in the end, it is in the best interests of all the parties to settle, agree to cross-licensing of disputed patents, and focus their energies on beating rivals squarely on the strength of their products.