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Microsoft’s Acquisition of Nokia

This is one of the most interesting and important news in the technology sector. In case you missed it, the story is: Microsoft and Nokia announced on September 3 that Microsoft would be buying Nokia’s handset business and licensing various patents for about $7 billion.

Many industry experts have already started debating about Microsoft’s acquisition of Nokia’s handset division for about $7 billion and whether this purchase can build a strong advertising network. The debate can go further about the advantages and profits Microsoft can have over its competitors by buying patents from Nokia. It is to be remembered that the patents go along with the company’s global handset engineering, manufacturing, sales, and distribution business. These patents from Nokia are going to play a vital role in the market.

While much of the talk surrounding Microsoft’s acquisition of Nokia’s mobile business surrounds the inevitability of end-to-end mobile business models, there are different points that are to be discussed from Microsoft’s acquisition. Along with Nokia’s mobile business, Microsoft got a 10-year license to a massive treasure trove of mobile patents.

By this latest acquisition, we may expect observing two major changes in the market: one, how the ongoing mobile patent war between Microsoft and Google may take an interesting turn, second: what can be the impact on android patent royalties.

Nokia’s patent portfolio:

Ericsson, Nokia, Qualcomm, and Alcatel-Lucent collectively control the majority of patents in the 2G and 3G wireless space supporting mobile handsets, many of which have been the “crux” of ongoing patent wars. Nokia, LG, and Qualcomm alone own more than 43% of all seminal, or strong, patents or also called as standard essential patents.

Of all those standard-essential patents related to mobile technology, patents related to data transfer rates will become the most advantageous. Nokia owns 213 communication patents; 272 related to data transfer rates; 163 related to positioning; 196 related to power management; 381 related to security; and 138 related to services.

As for Nokia, the company accelerated its IP investments between 1997 and 2005. The company tops the list among 2G and 3G patent owners by owning 26% of all standard-essential patents. Nokia is way more ahead of its other competitors, by having 55% more standard-essential patents than Qualcomm, which comes in at No. 2. The analysis was done to understand the quality of the portfolio.

Microsoft and Nokia already had a cross-patent-licensing deal in place, dating back to the two companies’ original agreement via which Nokia went all-in on Windows Phone in 2011. In the recent deal announced on Sept. 3, Microsoft said it would acquire bout 8,500 design patents from Nokia, the physical features distinguishing each mobile device. Microsoft is also licensing on a non-exclusive basis for $2.7 billion another set of 30,000 “utility” patents which Nokia will continue to own. This group of patents encompasses Nokia’s patents except for the Nokia Siemens Network (NSN) telecom infrastructure patents and will be used by Microsoft across a variety of products and devices, not just phones. Microsoft officials have said they’ll be converting the 10-year license it obtained to a perpetual license after the original 10-year license is up. This will mean that Microsoft will have patent coverage for this body of patents for the life of all of those patents.

In a press conference, Microsoft Executive Vice President and General Counsel Brad Smith said that “One of the reasons we focused so much on securing this license, one of the reasons it has a high price tag, is because of the very substantial value of Nokia’s patent portfolio. When we look at the industry, and in particular, when we look at patents that are relevant to wireless connectivity using the CDMA standard or the GSM standard or 3G or 4G technologies, we really believe that Nokia has one of the two most valuable portfolios in the industry. The other is Qualcomm’s.”

Nokia has more than 60 patent licenses with various third parties, company officials have said, and Microsoft gets the protections and benefits of all of these. Qualcomm, with which Nokia negotiated a 15-year license that went into effect in 2008 is one of them. Qualcomm obtained a number of Nokia patents as part of this deal. Microsoft “now benefit(s) from that arrangement,” said Smith.

Florian Mueller, an intellectual property activist turned analyst tells us in a blog post as: “Nokia is also conveying rights under its agreements with IBM, Motorola Mobility, and Motorola Solutions. It means that a Motorola-Nokia license deal struck a few years ago apparently goes with Nokia’s wireless devices business. As a result, Google’s Motorola can’t sue Microsoft’s future smartphone business for the remaining term of that agreement, and Motorola’s patent portfolio gets less valuable by the day.”

Given that Microsoft got licenses to use Nokia’s patents, and not the patents themselves, Microsoft likely saw the patents as a way to hedge against would-be litigants and lower its own IP costs associated with Windows phones.

Impact of acquisition on android patents:

Microsoft earns royalty from sales of both Nokia and Android devices. Comparatively, royalty money for each device of Nokia is much higher to royalty money of each android based device. Even though the royalty amount of each android based device is lower, manufacturing and shipping volumes of android based devices are much higher than that of windows based phone devices, which earns a huge amount of royalty to Microsoft. By combining Nokia, Microsoft can earn more profit but still, it is small compared to its near-term potential to FUD Android distributors into license agreements.

While Microsoft talked up Nokia’s device distribution, sales networks, and other benefits, it was quick to call out the “valuable patent benefits” it derives from the deal. Microsoft walks through the cost benefits it receives from additional patent rights with Qualcomm and others that it receives through the deal.

Microsoft is not the only one who is on the gaining side. Nokia too has earned some brownie points out of this deal. Historically speaking, Nokia has not licensed its patents but instead preferred to use them to defend against competitors. With the sale of its handset business to Microsoft, however, all bets are off, as Nokia spokesperson Mark Durrant acknowledged: “Once we no longer have our own mobile devices business, following the close of the (Microsoft) transaction, we would be able to explore licensing some of those technologies.”

Microsoft has intimated that 80% of Android phones are covered by Microsoft’s patent royalty agreements. Buying Nokia’s patents outright may have given Microsoft an even stronger hand in convincing Android manufacturers to cough up patent royalties, but having Nokia do the same is even better. Microsoft has effectively imposed double taxation on Android licensees, all the while shifting the dirty work to Nokia.

Mueller further stated in his blog post, in 2011, Microsoft and Samsung signed an Android-centric patent license deal, via which Samsung pays Microsoft. That deal will extend to the wireless device business that Microsoft will own after the Nokia deal closes without requiring any additional payments. However, Samsung may still need a license to cover “various Nokia non-standard-essential patents.”

The deal between two industry biggies has earned its own pros and cons, landing a huge amount of money and showing plenty of signs for happening of patent-related deals. But the deal shouldn’t affect the customer value.

About the Author: Mr. Nagaraj Mannikeri, Patent Associate at Khurana & Khurana and can be reached at [email protected]

Follow us on Twitter: @KnKIPLaw

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