Patently Faulty and Discredited Smartphone Licensing Cost Figure in Commissioner Vestager's Speech on Excessive Prices

It was irresponsible of European Competition Commissioner, Margrethe Vestager, to say in a speech about excessive prices last month that “[o]ne recent study shows that 120 dollars of the cost of each smartphone comes from paying royalties for the patents it contains.”

Commissioner Vestager is alleging that licensing prices for standard-essential patents are too high, and she would like them reduced. Nothing could be more important than having reliable support for her allegation. She did not provide this.

To the contrary, the quoted sentence is reprehensible for several reasons:

• The $120 figure, equivalent to a 30 percent aggregate royalty rate on a $400 phone, is wide of the mark. Nobody is paying anywhere near as much. Actual figures paid are, on average, less than one sixth that figure, at under $20 or below 5 percent of total handset costs.
• Her source is not cited. It is obvious to those who focus on smartphone licensing charges that she has plucked the figure from the much-criticized, here, and, here, “Smartphone Royalty Stack” paper by Intel and Wilmer Hale. Without her including any reference to help listeners and readers find the study or those who rebut it, folk might take the greatly-inflated figure at face value.
• The study is not recent and provides no fresh perspective. It was published two and a half years ago, in May 2014.
• It misrepresents the study’s findings. Commissioner Vestager has either ignorantly and unwittingly or sinisterly disregarded how the study cunningly characterizes this $120 figure. That figure does not represent what is actually paid in cash or recorded in financial or management accounts as licensing revenue or licensing expense. It is a notional cost that is not adjusted for what is netted-off in cross-licensing. The study is weasel worded: “setting aside off-sets such as ‘payments’ made in the form of cross-licenses and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone” (underling added for emphasis). This is flawed economics, as well as misleading and disingenuous.
• The study includes various additional systematic errors in its analysis including disregard for clear public evidence that much lower rates are being paid than those it includes in its calculations in most cases.
• Despite seeking and receiving external inputs, the European Commission continues to ignore logical and facts-based assessments of aggregate royalty rates that are in marked disagreement with the study by Intel and Wilmer Hale. The Commission’s DG GROW ran a consultation on patents and standards commencing 2014. My initial estimate of 5 percent aggregate mobile phone royalties was included in my submission to that consultation in February 2015 (pages 21-22). That finding has been reinforced in my subsequent publications and validated by other reputable experts.

Lies, damn lies and misleading or defective analysis

The recent US presidential election and Brexit referendum campaigns were significantly blighted by use of defective or highly misleading “facts” and figures. This “post-truth politics” tactic is nothing new or unique to those seeking votes. It is particularly troubling that public officials are also so inclined to unquestioningly adopt certain figures and ignore others solely based on what supports policy positions, popular beliefs or prejudices, and with disregard for scientific and evidentiary principles in quantitative research.

My extensive analysis shows the Smartphone Royalty Stack paper’s 30 percent royalty rate was defective. In IP Finance, here, in September 2014, I explained how this study was flawed, and, here, in August 2015, I showed in detailed analysis that average aggregate royalty payments were at most around 5 percent and were probably substantially less on mobile phones overall, including smartphones that dominate that product category. The faulty “royalty-stacking” theory upon which this paper by Intel and Wilmer Hale is based, has also been debunked by others. Adding up all the licensors’ listed maximum royalty rates does not provide a suitable indication of royalty costs, let alone an accurate measure of what is actually being paid in licensing fees.

Two separate eminent academic authorities in economics, Criterion Economics and the Hoover Institution, have validated the methodology in my 2015 article in their recent publications since mid-2016. Both studies calculate the majority of royalties in exactly the same way as I have and are broadly in agreement with the results I derived by “following the money,” as authors of the latter study, Haber, Galetovic and Zaretzki, characterise it. They also agree with me that only net royalty payments, after cross-licensing, should be included in aggregate royalty amounts and rates.[1]  Gregory Sidak of Criterion Economics independently checked my assessments and compared these with his own, step-by-step. These studies find that aggregate royalties are approximately 3.3 percent (Hoover Institution) and 4.5 percent (Criterion Economics).

Aggregate Licensing Fee Estimates for Mobile Phones Including Smartphones
in Two Totally Different Ballparks (Applicable Year 2014 or 2015)

Some elements in my 2015 paper were extremely conservative. For example, whereas I used the asking prices of LTE patent pools to derive my estimate of annual royalty payments of less than $4bn (equivalent to 1 percent of aggregate royalties), I note that these pools still seem to have very few or no licensees, and so I conclude the actual figure was and remains much, much closer to zero than it is to $4bn.

Whereas these two recent studies also show that aggregate royalties are conservatively in the “ballpark” of around 5 percent or less, rather than at 30 percent as estimated by Intel and Wilmer Hale, these two recent studies build on my work and seek to estimate the aggregate royalty rate with greater precision while also maintaining a conservatively-high bias in estimates. There are some differences among studies with respect to inclusion of non-mobile SEPs and non-SEPs, feature phones and tablets. These have only secondary effects on overall results and the aggregate percentages estimated.

We have been here before

Other wildly-exaggerated and yet widely-quoted cost figures have included $83 billion in social costs and $29 billion in direct costs annually to patent infringement defendants for the alleged “patent troll” problem estimated by academics James Bessen and Michael Meuer in 2011 and 2012. Such figures were much contested for years and I, among others, was most critical of the adoption of such figures by public bodies including the White House in 2015.

A 2016 study on Patent Assertion Entities by the US Federal Trade Commission presents much lower and far more reliable figures. It found study PAEs generating a total of only $4 billion in licensing over the six-year study period from 2009 to 2014. This is equivalent to less than $700 million per annum. Whereas the FTC study is not exhaustive in scope, it is nevertheless quite broad including 22 responding and 2,500 affiliated entities with 327 of these engaged in “active assertion behaviour” and it appears to have captured a large proportion of PAE licensing transactions. The more than forty-fold difference between annual totals based on extensive documented evidence submitted to the FTC and the estimates in these other studies is irreconcilable.

Post-“post-truth” please

Public officials should be more transparent about where the “facts” and figures they use to support their arguments and wishes come from. They should take the trouble to understand and not misrepresent their sources, even unwittingly. They should make the effort to consider opposing facts, figures and analyses. Some balance might help, but this should not be simply a case of reflecting differing or opposing positions without merit. Public authorities have a duty to find the truth of the matter with accurate and reliable figures, and present this in their public communications. Approximately correct might be fit for purpose and acceptable, whereas precisely wrong is no good at all. Scientific and evidentiary principles must apply.

For a broader critique of Commissioner Vestager’s entire speech, with respect to the competition law and policy issues it raises, I recommend you read this this article by Trevor Soames.

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[1] See footnote 7: “we do not include the opportunity cost borne by a manufacturer that buys patents to prevent claims of infringement, or the opportunity cost borne by manufacturers who cross license their patents (in a cross licensing agreement firms may forego some or any royalty payment in exchange for access to another firm’s portfolio), or the membership subscriptions paid to defensive aggregators of patents. Such expenditures will increase a firm’s fixed costs. They will not, however, affect marginal costs of production, and thus not influence production and pricing decisions at the margin.”

Patents and Share Prices - Ericsson

Apple and Ericsson have been engaged in a number of patent infringement suits over the past few years. Finally, on Monday Ericsson announced that it had reached a settlement with Apple under which Apple would be granted to all of Ericsson's standard-essential patents, as well as to certain other patent rights (which are not named). We've often reported on these patents on this blog and my fellow contributor Keith Mallinson has studied them extensively and their effect on competition.

The Apple settlement will apparently boost Ericsson's revenue from licensing of intellectual property rights in 2015 to SEK 13-14 b (around USD 1.5 billion) compared to 2014's revenue of SEK 9.9 bn reported here. It's not surprising that Ericsson's share price jumped yesterday from Friday's closing price of USD 9.12 to USD 9.62 at 09.50 Eastern time after announcement and closed today (Tuesday) at USD 9.56. Apple's price did not change much during the same period.

It's clear that licensing revenue is becoming a significant contributor to Ericsson's bottom line. In 2014 operating income was reported to be SEK 11.1 Bn, which included a payment from Samsung for an IPR licence of SEK 2.1 Bn.  The amount paid by Apple remains confidential and will include an ongoing royalty (as does the Samsung agreement) and so there will be further contributions to Ericsson's bottom line over the next few years.

The European Commission, among other organisations, have been concerned that the smartphone patent wars damage competition, as reported in the Financial Times. The Apple/Ericsson agreement show how patent can work - Ericsson receive additional revenue for their work on the development of telecommunication standards and Apple pay for access to this technology.

Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues

As indicated in the recent IP Finance guest posting about the US Court of Appeals judgment in Microsoft Corp. versus Motorola Inc., by Kevin Winters, in some cases there can be a massive difference between what a licensor asks for and what a licensee ends up paying in fees and royalty rates for standard-essential patents. My latest blog posting assesses cumulative royalties paid on SEPs in mobile phones, including multiple licensors, by adding up what is actually paid and what is conservatively the maximum likely to be paid, where actual payment figures are not publicly available. This total is far lower than that calculated by simply piling-up every licensor's rate demands. Expressed as a yield on total mobile handset sales revenues, it is a much smaller percentage than this speculative and defective "royalty stack" calculation.

Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues

Vested interests including leaders at the mobile operator-dominated NGMN Alliance promote the notion that patent licensing fee rates are “perceived” to be too high in mobile technologies; but without substantiation for such claims. Speculation that patent fees, largely for mobile SEPs, may total 30 percent of smartphone costs are projected by Intel and others.[1]  This grossly inflated figure is based on theories of hold-up and royalty stacking that lack empirical support and it ignores marketplace realities including cross licensing and discounting rates for other reasons in patent-licensing agreement negotiations, as I have already noted here and here.  That percentage would equate to more than $110 billion being paid per year in patent fees based on total global handset revenues estimated by Morgan Stanley and IDC to be  $377 billion in 2013 and $410 billion in 2014.

Actual payments are much smaller than such perceptions and projections. The following table summarizes fairly exhaustive analysis of significant mobile-SEP licensing costs based on reported licensing revenues from the audited financial reports of major licensors and other public sources including patent pool rate-card charges.  Based on these figures, it is implausible that total royalties actually paid, including lump sums and running royalties, for standard-essential 2G, 3G, and 4G technologies, amount to more than approximately $20 billion per year. This figure represents a cumulative royalty yield for licensors of around five percent on mobile handset revenues.

Mobile SEP Licensing Fee Revenues and Royalty Yields on Global Handset Market

	2014
	Revenues	Yield*
Major SEP owners with licensing programs: Alcatel-Lucent, Ericsson, Nokia, InterDigital, Qualcomm	$10.6 billion	2.6%
Patent Pools: SIPRO (WCDMA), Via Licensing (LTE), Sisvel (LTE)	<$4 billion	<1%
Others: including Apple, Huawei, RIM, Samsung, LG	<$6 billion	<1.5%
Cumulative maximum:  fees and yield for mobile SEPs	~$20 billion	~5%

* Yields are total licensing fee revenues including lump sums and running royalties as a percentage of $410 billion in total global handset revenues

The majority of mobile-SEP licensing fees are earned by five companies with licensing programs who have collectively contributed most patented technologies to 2G, 3G and 4G standards.  Alcatel-Lucent, Ericsson, InterDigital, Nokia and Qualcomm altogether generate $10.6 billion per year in licensing fees for these and other technologies. Also collectively, this represents a yield of significantly less than three percent of total global revenues for mobile handsets including smartphones.

Cumulative mobile-SEP fees paid also include less than around one percent of total handset revenues to the three mobile-SEP patent pools plus, at most, one percent or so more to other companies licensing mobile SEPs bilaterally. Patent pools lay out their prices and so these indicate the maximum they might be able to collect with willing and responsive licensees and a lot of licensing effort on the part of the pool administrators. The remaining significant mobile-SEP owners are predominantly handset manufacturers who mainly cross-license to reduce royalty out-payments rather than generate royalty income, and so their royalty fee revenues are relatively small. With each percent of royalty yield on total handset revenues now representing more than $4 billion per year in patent fees, there is insufficient evidence and no justification to conclude that opportunists not included in any of the above categories, including so-called patent trolls, patent-assertion entities and other non-practising entities, yield more than a fraction of a percent of total handset costs.

As a percentage of all consumer charges, including handset costs and $1.13 trillion in mobile operator services (GSMA Wireless Intelligence figures), which are also highly dependent on SEP technologies, the cumulative royalty yield shrinks to 1.3 percent.  Deriving this lower percentage yield figure from the broader revenue base is also applicable because it is the innovative and relatively new SEP-based technologies including 3G HSDPA/HSPA and 4G LTE which enable and drive mobile broadband data service growth. Operator revenues in mobile data services (other than basic SMS text messaging) grew from single-digit percentages of total service revenues until the introduction of HSDPA a decade ago, to around 40 percent across the entire Vodafone Group with many different national operators, for example, in 2015, according to the company's annual reports.

My more detailed and much lengthier analysis is in a pdf here.

[1]  A working paper entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones was published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and Wilmer Hale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone.

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

As I was completing my previous IP Finance posting on alleged royalty stacking in smartphones, last week, it occurred to me I should also write more generally about the massive disruptions in the mobile phone industry resulting from technological changes, new business models and market entry by Apple with its iPhone and many others using the Android operating system. Former market leaders have fallen and consequently exited the market with handset division divestitures by Nokia, Ericsson and Motorola. Challengers are succeeding on the basis of highly-standardized and readily available hardware and software platforms. These are employed by all comers as if they were commodities, but are rich in IP including standard-essential and other technologies which are costly to develop. This is paid for downstream in a variety of ways including: merchant product prices for chips; patent licensing fees for standard-essential patents and the other patents needed to implement the radio communication protocols and various user features consumers expect all smartphones to have; and advertising and apps spending to Google in the case of Android. The following article on all this was first published in mobile industry trade publication FierceWireless Europe.

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

It is remarkable how dramatically and rapidly the fortunes of so many mobile handset vendors have turned with the advance of smartphones. Their marketplace was transformed by Apple's iPhone starting in 2007 and a succession of Android-based smartphone newcomers since 2008.

This has greatly expanded the size of the handset market with global revenues doubling in the last six years, as consumers substitute more expensive smartphones for their feature phones and basic phones. Yet changes have devastated most of the leading incumbent handset vendors.

Former leaders Nokia, Ericsson and Motorola have exited by divesting their handset divisions, and BlackBerry has struggled to survive following its precipitous market share decline, as business models and competitive cost structures have changed. Samsung Electronics is the only incumbent that has really flourished, while LG Electronics has also advanced and HTC has wavered.

How the mighty have fallen

Strategic strengths became liabilities

Seemingly strong brands, product distribution, patent ownership, vertical and horizontal integration with chips, networks and manufacturing have been insufficient to ensure survival, let alone success. The market leavers once had these attributes in spades. For example, Nokia had it all with approaching 50 per cent market share in smartphones and 40 per cent in mobile phones in general up until 2007. It ranked highly in global consumer brand ratings, dominated distribution in Europe and in many other nations worldwide. A cumulative $60 billion spent on R&D funded one of the very strongest patent portfolios and it could exploit various synergies with its network equipment division and in-house baseband modem development capabilities.

Business models and the basis for success in smartphones and mobile phones in general have been revolutionized. Costly supporting and complementary operations soon become major burdens when incumbents were wrong-footed in the market and lost the cash flows required to support all that, while also needing to do things differently. Instead, low costs and much greater reliance on technologies from others are the keys to success for most of the many recent market entrants.

They are exploiting platforms which are open, widely available and cheap to adopt. Apple is something of an exception, having created much of its own ecosystem, but it is also entirely dependent on others for radio technologies and manufacturing. Samsung uniquely remains highly integrated, but also employs outside technology including Android and Qualcomm's baseband chips in many cases.

Challengers rising high

What made the smartphone revolution possible

Smartphones, or at least the precursor to what we regard as such today, have existed for more than decade with Nokia's Communicators from around the dawn of the new millennium and the first cellular BlackBerry in 2002. But these were only niche devices and network service constraints severely limited utility beyond messaging. A combination of many technological advances has made modern smartphones the enormous success they are today. These include much faster networks, as 4G LTE today is 1,000 times faster than 2G GPRS introduced around 2000; fast and yet low-powered application, graphic and digital signal processors; much improved display technology; revolutionary improvements in operating systems and user interfaces; better battery performance; and an extending ecosystem with apps stores and mobile-oriented content.

Smartphone market entry barriers are now relatively low with standardized and openly available technology platforms. Smartphone vendors can capitalize on extensive published standards, market-leading merchant (i.e. off-the-shelf) chips and reference designs provided by these suppliers, and contract manufacturing. Addressable markets have grown to include hundreds of operators and several billions of consumers. Average selling prices, at around $275 for smartphones versus $175 for handsets in general, generate substantial revenues while strong downward pricing trends are maximizing smartphone penetration growth.

Just rewards

Handsome rewards including profits are available to those market leaders that can build a sustainable edge. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013. Reportedly, these are overwhelmingly shared between Apple and Samsung, with others making small profits or losses.

Much of the costly R&D and standardization work required to create the platforms smartphone manufacturers employ is still being borne by network equipment vendors like the diversified former handset leaders above. These are increasingly dependent on technology licensing to help fund ongoing R&D. Similarly, specialized technology vendors such as Qualcomm and InterDigital have business models which are largely dependent on licensing fees. Microsoft also generates income this way as well, licensing its patents to Android device makers. In addition, Google, which provides the Android smartphone platform and its Play app store, generates income from these in various other ways including advertising charges.

It is incorrectly alleged that stacked royalty costs prevent the other smartphone manufacturers from making profits and cause other harms. Evidence does not show that high royalties are paid or that royalty charges undermine profits. Manufacturers that could negotiate the lowest royalty rates through cross licensing, due to owning most standard-essential and other patents, have taken the greatest competitive pounding by Apple, Samsung and various other new entrants selling Android devices. The former lost money because they had obsolete and uncompetitive strategies. Low profits for many newcomers are a function of the open and "commoditized" nature of the business with low barriers to entry, including the standardized and merchandized platforms everybody uses. This makes product differentiation and high-margin pricing difficult to achieve.

It is not possible to determine true profitability on handsets because many manufacturers are reluctant to disclose them, and businesses are mixed with the manufacture and sale of other products and services. Some manufacturers are still benefitting from being in both the handset and network equipment markets. For example, Huawei and ZTE have reported strong profit growth recently. This is due to the boom in LTE network investments, but smartphones are important complements to these companies. Rising star Xiaomi, with a low-cost, Internet-based distribution model, does not formally disclose profits but was reported last year as making a 10 per cent margin.

Stacking the Deck in Analysis of Smartphone Patent Licensing Costs

Estimates of patent licensing costs for smartphone manufacturers are greatly exaggerated. Allegations of excessive fees paid and resulting harm to manufacturer profits, incentives to invest and compete are faulty and unsupported by the facts -- which show much to the contrary.

A "working paper" entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones has been published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and WilmerHale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone. They conclude that “few suppliers are meeting the basic goal of selling devices for more than the costs incurred in supplying them,” imply that this is due to the alleged royalty stack, and state that “those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete.”

The paper’s economic and empirical analyses are deficient and defective. In contradiction to its findings, evidence shows that licensing fees:

• Are not undermining profits and are not preventing manufacturers from covering more than their costs. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013.
  
• Are not excessive. There is no basis for arbitrary price caps on smartphone patent fees, or limits based on chip manufacturing costs. The latter are unrelated to patented technologies and the value they generate more broadly in the entire device, its use in mobile networks, or across the broader ecosystem including services and applications. Methods of determining charges follow well established principles and benchmarks in bilateral negotiation. Patent licensing fees are analogous to licensing fees for book, music, movie or software publishers, which typically exceed greatly the cost of the physical mediums on which they are published and distributed.
  
• Are nowhere near $120 in aggregate; and there is copious evidence actual payments are much lower than purported. The Paper inexplicably and erroneously disregards fundamental offsets in cross-licensing which greatly reduce or eliminate fees paid to many patent owners. This figure is also systematically biased and inflated by including rates demanded by licensors, even where there is no evidence anybody—including those who have little or nothing to cross license —actually pays such rates. And, where there is, instead, copious evidence that rates actually paid, if at all, are substantially less—orders of magnitude less in some instances. For example, court-adjudicated rates were much lower than “demanded” rates in various cases, and yet the higher figures were used in calculating the above total.
  
• Are helpful, not detrimental, to the highly competitive and flourishing smartphone ecosystem. By every measure the patent system and the risk-reward balance it strikes—spurring innovation, market entry and competition while not overburdening licensees—is unmistakably working very well. 

My full and detailed analysis, in a pdf document, of this working paper by Intel and Wilmer Hale includes copious evidence countering the latter's findings.

This follows a previous my previous IP Finance posting on alleged royalty stacking entitled Theories of Harm with SEP Licensing do not stack up in which I responded to papers co-authored by Mark A. Lemley and Carl Shapiro in 2006 and 2013, and my posting entitled Absurd (F)RAND licensing-rate determinations for SEPs that analyses some U.S. court judgments which have relied on these economists in their royalty rate determinations. 

 

Patent Squatting

Shares in Eastman Kodak have risen 10% on the news that the company has persuaded the US International Trade Commission (ITC) to reconsider its patent infringement case against smartphone manufacturers Apple and Research In Motion. According to Bloomberg Businessweek, the company thinks that it can negotiate royalties worth $1 billion or more if its patent rights are recognised.

Investors have not given the news an unequivocal welcome, however. “Even if Kodak receives the $1 billion in cash, what could it possibly use it to do?” asks InvestorGuide, suggesting that “Kodak has no other game plan except to sit on its patents and sue violators to receive licensing fees to generate capital.” “There is a clear problem with the company’s current patent-squatting strategy – it simply cannot be sustainable,” it notes.

"However, if Kodak invests wisely in research and development to strike back at its currently crippled Japanese camera rivals, such as Sony, Fujifilm, Panasonic and Canon, it could reestablish itself as a formidable camera manufacturer. Kodak has a strong brand name which has been synonymous with cameras for decades, and it wouldn’t be too late to stage a late game comeback."

Does this mark a change in investor attitudes from the early noughties when books such as "Rembrandts in the Attic" and "Edison in the Boardroom" lauded the $4 billion in royalties earned by Texas Instruments (TI) from licensing its patent portfolio? Or is it an acknowledgement that, in 2010, the lion's share of TI's operating profit came from the design and manufacture of semiconductors, with patent royalties being lumped together with "smaller semiconductor operating segments", ASICs and calculators under the heading of "Other" in the 2010 accounts?

Pre and Pixi smartphones to go to HP

Another challenge seems to come up for Microsoft with the news this week that Hewlett-Packard intends to acquire Palm for US$1.2 billion - a decision for Palm's operating system WebOS as the basis for new generation consumer smartphones and against Microsoft’s Windows.

The deal is expected to provide a lifeline to struggling Palm - their share price went down over 53% this year - and gives HP the chance to concentrate on the smartphone consumer market owning the end product.

According to the New York Times, Palm has 452 patents and another 406 applications on file. Research firm MDB Capital was reported to value Palm’s portfolio of patents at approximately US$1.4 billion; they believe the value of Palm’s IP alone is worth between US$8 and US$9 per share.

More information can be found here and here.

Can Branding Save Motorola's Handset Business?

The handset, and more particularly, the smartphone industry, is particularly interesting from the IP point of view. I can think of no consumer hi tech industry in recent times where there is such a variety of competitors, and such an interdependency with third parties, all wrapped-up in a melange of various IP rights. "That all sounds nebulous to me", you might say. So let's try to give some focus to my thoughts, centering on a piece that appeared in the 3 August edition of Business Week entitled "Motorola Has One Bullet Left in Its Gun."

The Business Week article describes Motorola's almost desperate strategy to reinvigorate its mobile phone business. It is difficult to believe, but it was not that many years ago that the Motorola RAZR was all the rage, particularly due to the success of its slim, distinctive design. That seems to be the problem; the product was longer on design than on functionality. As the Mobile Gazette wrote on May 16, 2007 here,

"although the RAZR looked high-tech on the outside, the handset's specification was a straight copy of [models] ... which had been around since 2003. So it wasn't a very new phone underneath, even though it was still quite competitive. However other features proved to be a disappointment, such as the pretty-but-difficult keypad and the poor user interface. The RAZR also lacked an MP3 player, expandable memory or a decent camera which became more marked as the competition evolved ... and the RAZR did not."

Roughly speaking, when the design no longer conferred a market premium for the market, and with no discernible advantage in its product functionality, Motorola entered in an inexorable decline for that market.

Fast forward to 2009, and to the intensified efforts of Motorola to recapture its glory, in particular with respect to smartphones. Ah, but what a crowded field we find-- iPhones, Blackberrry, Palm Pre, HTC, Samsung, LG (have I listed them all?). These are not fungible products at the moment (although there seems to be greater convergence); so the iPhone has materially different features, and different types of users, from the Blackberry. And how will Motorola play this? According to Business Week, it has reached a strategic decision to develop a new generation of products that rely on the Google-supported Android operating system.

Remember that Android is an open source system, supported by Google, and was developed as an alternative to the proprietary operating systems available on the market. When launched, the rationale was that Android would increase search and other on-line usage on handsets for which Google could profit, while at the same time preventing anyone else from gaining proprietary control of the handset operating system. For whatever reason, perhaps cost, perhaps something else (the article does not specify), Motorola is prepared to adopt, indeed to be dependent upon Android, upon the development of a critical mass of Android-based applications (to compete with AppStore, the RIM equivalent and so on) even though the Android is itself a work in progress, and even though Android serves Google's broader business strategy, which might include direct involvement in the handset business at some future time. The harsh truth is that, while Motorola apparently has decided that it needs Google, Google scarcely needs Motorola, except as another cog in the Android network.


So what does Motorola bring to the table? It is not clear. The article states that the analysts, "briefed on Motorola's phones", are of the view that the phones are

"impressive. ... sleek touchscreen phone with qwerty keyboards that slide out of the body of the device for easier typing."

Those seem like nice features. Still, for Motorola's sake, I hope that there is meaningful protectable IP in these features. The article does not mention patents or even any indication that patent protection is part of the company's strategy with these products. As Motorola has learned, design itself won't do it and, unless Motorola obtains an exclusive IP position with respect to at least some of these features, any advantage in this direction would seem to be short-lived.

There is one ray of IP hope however--branding. Perhaps, just perhaps, Motorola might be able to successfully roll its new products out in a way that will capture the fancy of at least a commercially viable critical mass of handset users who will come to prefer the Motorola-branded products. This will then allow Motorola to be able to roll out new features on an incremental basis, rely on its burnished brand image (assuming that it can be reestablished) and thereby not have to seek some likely unattainable holy grail of IP exclusivity.

Something like that was suggested by the Apple presentation about the iPod product that took place several days ago. None of the features that Apple introduced for its iPod product seems to be a blockbuster. Indeed, some features, at least with respect to the Nano iPod, were described as common fare on many MP3 devices. No matter. The idea is that Apple is Apple, and it is enough that it continues to roll out incremental improvements for its flagship products.

Duplicating that dynamic will be ever so difficult for Motorola. The RAZR models were top of the class less than five years ago, but Motorola could not leverage that goodwill more generally, and the Motorola brand is light-years behind Apple in brand strength. But with the operating system in the hands of an open source developer community, behind which lies an 800-pound business gorilla with its own business agenda, with no apparent patents to rely on, with the awareness that designs are fleeting at best, brand development may be the last best IP hope for the company in the handset industry.

So You Want to be a Developer of a Smartphone Application?

Few current topics offer as many interesting angles as the cell phone business. Historically (to the extent one can talk about the "history" of this nascent industry), the business focused on the system operator, handset manufacturer and purveyor of the computer operating system. More recently, the rise of the Smartphone, the increasing importance of application programs, and the challenge of the Android operating system have all pushed IP to a more central role in the industry.

Following on my previous post of February 28th on the possible patent aspect of the iPhone and its competitors, my attention was drawn to an article that appeared in The Marker, the business daily published together with the Israel newspaper Haaretz. The article, entitled (in English translation) "How to Make Money from iPhone Applications", contains a large number of interesting nuggets about the emerging industry of iPhone application programs, where copyright reigns supreme. Let me mention several of the points made in the article.

While Smartphone applications are developed by companies with dedicated staff, successful applications have been developed by an individual or two, often working in his/their spare time for several months. One such example is iFog, which was developed by two individuals over a two-month period. Reportedly ranked no. 20 on the list of most downloaded applications on AppStore and iPhone, the iFog has been downloaded over 150,000 times, at a price of $1 per download.

Find the Fog in iFog

Seen from another angle, each of the top ten downloads can earn $3,000 a day for its developer, while the number 1 download is reported to earn $15,000 a day. Of course, there can be only a single no. 1, and over 15,000 applications are reportedly competing for downloads by the iPhone users. Neverthless, perhaps (perhaps not) with a tinge of exaggeration, one of the iFog developers observed that one can earn sums similar to producers or artists in the music business. That said, even the most successful developer will admit that the half-life of application is not overly long, and the odds of coming up with a second (or third) hit would not seem to be overly high.

There appear to be several business models for the developer of the application to monetize his product. Marketing the application through the operator or integrator is reported to split revenues 70-30 in favor of the operator/integrator. On the contrary, distribution via iTunes or the AppStore splits revenues 70-30 in favor the developer. There also appear to be applications that are distributed for free, with monetization realized either by the provision of add-on services or from advertising.

The application must further take into consideration the characteristics of the typical user of the particular system. Thus, the Blackberry user is overwhelmingly a business type, while the iPhone has not (at least yet) been embraced by the business community. Further, the developer is advised to make his product compatible for different platforms, for use with both proprietary and open source operating systems. Moreover, the AppStore will likely encounter additional competitors. The article noted that Samsung, Nokia, RIM, PocketGear and Palm are all contemplating application stores, which provides further channels for sale and distribution for potential developers.

So what do I tell my son when he comes into my study tomorrow, asking advice on how to get into the Smartphone applications business? Young man, it is a tough, competitive business, but it is also an attractive way to channel your creative digital juices in a way that is both financially and aesthetically attractive. And who knows--maybe you will find that pot of gold at the end of the copyright rainbow that has eluded so many an author in the oh-so-yesterday publishing business.

I found my copyright pot of gold