Rivals gang up on Google

The company was left out in the cold when a consortium of its competitors bought up thousands of patents reports Stephen Foley

Now it's time for the odd one out round. Which of the following technology rock stars is the odd man out: Apple, maker of the iPhone; Microsoft, which recently launched a new version of its Windows mobile operating system; Google, creator of the Android platform; and Research in Motion, maker of the BlackBerry?

The answer, as every patent litigator in the US knows, is Google. It is the only one not in the consortium buying a portfolio of thousands of technology patents from the bankrupt Canadian firm Nortel Networks.

The winning consortium comprised the three big operating systems firms plus Sony and Ericsson, handset makers, and EMC, a data storage firm. It called itself Rockstar Bidco, though it might as well have called itself Everyone But Google Inc.

Android may be winning more ground than any other type of smartphone in the battle for consumer loyalty, but on a parallel legal battleground, Google just found itself surrounded by heavy artillery. The outcome of the auction represents the largest competitive threat to Android since its 2008 launch and threatens to derail its sensational growth.

What is certain is that it presages a flare-up in the vicious patent infringement wars being fought between almost every maker of hardware and software in the telecoms industry.

"These companies are suing each other like it is going out of style," says Alexander Poltorak, chief executive of General Patent Corp, an intellectual property adviser. "If you drew a map of who is suing whom, it would look like a spaghetti plate. The reason is that the telcoms industry is in a process of transition and so many players are vying for a piece of a market that is changing so rapidly.

"A patent is an asset, a limited monopoly on an invention and a legal right to exclude competitors. It is a negative right, a licence to sue, a call option on future litigation."

The portfolio is the largest ever to have gone up for auction, and it fetched the highest price ever: $4.5bn (£2.82bn). It includes more than 6,000 patents and patent applications spanning wireless, wireless 4G, data networking, optical, voice, internet, service provider, semiconductors and other patents, Nortel said. It touches nearly every aspect of telecommunications and additional markets as well, including internet search and social networking.

Google, as the newest entrant to the smartphone market, has the weakest portfolio of its own patents, and had hoped to get the keys to the treasure trove. It had started the bidding process earlier this year with a low-ball $900m offer to Nortel's bankruptcy trustees, but as the auction escalated it could not keep pace. Its competitors really wanted to stop it. RIM alone is contributing $770m to Rockstar.

The sensational $4.5bn price tag means Nortel's bondholders might emerge from the bankruptcy process with all of their money back, at least according to the jump in its bond prices after the deal was announced.

The sale was ratified last night at a joint hearing of Canadian and US bankruptcy courts. But the US Justice department, which is in charge of stamping out competition abuses, is believed to be looking into the deal, and anti-monopoly campaigners are up in arms. Albert Foer, the president of the American Antitrust Institute, a pro-competition think-tank, was so alarmed that he wrote to the Justice Department demanding the sale be put on ice.

"The consortium membership includes three leading mobile device operating system competitors – Apple, Microsoft and Research in Motion," he said. "They are the three main commercial rivals to Android, Google's open-source mobile operating system. Each of them already possesses a large portfolio of wireless technology patents; each is capable of bidding on its own for a significant portion of the Nortel portfolio. Each of them, moreover, appears to possess the ability and incentive to use its patents offensively against open-source as well as commercial competitors; their concerted control over the entire Nortel portfolio... at a minimum creates significant risk of spillover collusion, tacit or otherwise."

Just a fortnight ago, Google triumphantly announced some new statistics showing Android's popularity. There are currently 310 Android devices available, and new activations are growing by 4.4 per cent a week. Android now has a 36 per cent share of the smartphone market from a standing start in 2008, according to Gartner, overtaking Apple, which launched its iPhone in 2007. By May of this year, 100m Android devices had been activated.

The loss of the Nortel portfolio casts a pall over its growth prospects, because it runs the risk of changing the financial and legal dynamics of the operating system market. The potency of the patent wars was revealed last month when Apple agreed to pay Nokia an estimated €800m (£705m) plus a further €8 per iPhone sold, in a cross-licensing deal to end litigation between the two companies.

The Nokia-Apple deal, whose terms were not publicly disclosed, emboldened other firms. Samsung immediately demanded Apple be banned from selling iPhones in the US until its claims of patent infringement have been resolved. Apple is also suing Samsung.

The spaghetti plate is as messy as it is because so many companies have been pushing the technological boundaries of telecoms for so many years. A single smartphone might contain 2,000 patented innovations, Mr Poltorak said, and such is the rush to get new inventions out to consumers, companies always opt to ship now and litigate later.

For Google, the disappointment on losing out on the Nortel patent is particularly acute. Android is the only open-source operating system. It gives it away to the phone manufacturers – one of the reasons adoption has been so swift. Google expects to make money instead from the services, such as internet search, that Android users then adopt.

But Android phone manufacturers are already the subject of at least a dozen major US lawsuits, alleging their use of the software infringes other people's patents, and if they end up having to pay royalties, then Android may no longer look free or even all that cheap to them.

Google was left to sound a bitter note. The outcome of the auction, and the ganging up of its competitors against it, was "disappointing for anyone who believes that open innovation benefits users and promotes creativity and competition", it said.

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