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Catching a Falling Financial Knife

Mobile Computing Patent Wars Could Cost Google $2 Billion Annually

Companies / Google Jul 19, 2011 - 09:33 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: A mobile computing patent war launched by powerful tech rivals could snatch revenue away from Google Inc.'s (Nasdaq: GOOG) Android platform - and possibly threaten its viability as a free alternative operating system.

The threat to Android endangers as much as $2 billion in annual revenue for the search titan.


Google's rivals - which include such tech giants as Microsoft Corp. (Nasdaq: MSFT), Apple Inc. (Nasdaq: AAPL) and Oracle Corp. (Nasdaq: ORCL) - have filed 48 patent infringement lawsuits against the Mountain View, CA company and many of its hardware partners.

Google rarely countersues, the most common way of battling patent lawsuits, because of its relatively paltry patent portfolio. Google has only about 700 patents, compared to about 4,000 for Apple and more than 17,000 for Microsoft.

So it stung particularly badly when Google lost the most recent patent wars battle by failing to win the auction for bankrupt Nortel Networks Corp.'s (PINK: NRLTQ) 6,000 patents earlier this month.

Instead, a consortium of its mobile computing competitors - Apple, Microsoft, Research in Motion (Nasdaq: RIMM), Sony Corp. (NYSE ADR: SNE) and LM Ericsson (Nasdaq ADR: ERIC) - won the Nortel patents with a bid of $4.5 billion.

"In the patent wars that are raging in the mobile computing world, this could turn out to beGoogle's Waterloo," observed The Financial Times.

U.S. and Canadian judges approved the Nortel sale at a joint hearing July 11.

"Googlelost an unprecedented opportunity to acquire a major bargaining chip that would strengthen it at the mobile industry's intellectual property negotiating table," Florian Mueller, an intellectual property analyst and blogger, told Computerworld. "I'm afraid it won't get a similar opportunity in quantitative and qualitative terms anytime soon."

Threat to Revenue
Although most of Google's profits still come from search, it has invested in ventures like Android to sow the seeds for future revenue growth. But with Google faring badly in the patent wars, revenue from Android may fall far short of expectations.

According to research done earlier this year by Piper Jaffray Companies (NYSE: PJC) analyst Gene Munster, Android generated about $5.90 per user for Google in 2010. That translated to $130 million last year, assuming 22 million users, with the money primarily coming from mobile advertising. Google provides Android itself at no charge.

But Munster's projections show how Android could become a source of much fatter profits. Back in February he estimated Android revenue growing to $9.85 per user in 2012, and growing to 133 million users for revenue of $1.3 billion.

But Android adoption already has exceeded Munster's projections. Google said last week it has 135 million users right now, and new activations are running at a rate of 500,000 per day.

At that rate, Android would have 220 million users by January of 2012, which would push Google's annual mobile revenue past $2 billion. While that's only about 5% of Google's total annual revenue of $36 billion, it does represent revenue from a fresh source.

With Android such a big piece of Google's business strategy, you'd think the company would have done more to defend its intellectual property (IP).

In fact, the Nortel battle was supposed to be Google's counterstrike. The company's "stalking horse" bid of $900 million was thought by most observers to assure Google of victory and give it the ammunition it lacked in the patent wars.

And at first it appeared Google would prevail - it was up against Apple, Intel Corp. (Nasdaq: INTC), and the consortium led by Microsoft. In the fifth and sixth rounds of bidding, however, the players reorganized - Apple joined Microsoft's consortium and Intel partnered with Google.

It was a high-stakes faceoff between the deepest pockets in Silicon Valley, and Google blinked first.

Avalanche of Lawsuits
The loss of the Nortel patents means Google and its hardware partners can look forward to more lawsuits.

Microsoft has led the way so far, successfully suing HTC Corp.n (OTC: HTCXF) and four other smaller companies to extract fees ranging from $5 to $12.50 per handset. Suits against Motorola Mobility Holdings Inc. (NYSE: MMI) and Barnes & Noble Inc. (NYSE: BKS) are pending, and Microsoft is demanding similar fees from Samsung Electronics LTD (PINK: SSNLF).

Oracle, citing patent violations of the Java software it acquired with Sun Microsystems last year, has filed a suit directly against Google as well as against numerous handset makers, from whom it is seeking licensing fees as high as $20 per unit. The Google suit seeks damages "in the billions of dollars."

Apple has sued Samsung, Motorola and HTC, although Apple seems to be more interested in killing its rival's products than extracting licensing fees.

A key goal of the patent wars is to reduce the appeal of Android to the handset makers.

Microsoft, for example, will happily sell a Windows Phone 7 license to a handset maker for a mere $5 to $10 per unit, less than what it likely will cost to pay an array of Android patent licensing fees. And Microsoft indemnifies its licensees against any future patent disputes.

Microsoft is betting most handset makers will adopt Windows Phone 7 as a less expensive and less risky option.

And don't forget how those licensing fees could add up for Microsoft and Oracle (and Apple, if they decide to hop on that bandwagon). Some believe Microsoft could end up with as much as $1 billion in annual Android patent revenue - money that's virtually pure profit.

Although Android has yet to feel the impact of the patent wars - it has quickly grown to run 40% of all smartphones sold - Google's arrogant attitude towards IP and inability to win any battles have placed the innovative operating system in serious jeopardy.

"[Google] had this combination of thinking patents were from the devil, while they were on a mission from God," Ron Laurie, managing director of Inflexion Point Strategy LLC, told Bloomberg News. "After getting attacked so often, they started getting it."

Source :http://moneymorning.com/2011/07/19/mobile-computing-patent-wars-could-cost-google-2-billion-annually/

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