By MG Siegler
Buried in all the intrigue surrounding the Nortel patent auction was an interesting tidbit: Microsoft (NASDAQ:MSFT) did not have to bid on the patents, but they did anyway. Why? As far as I can tell, it’s one of two reasons. One is evil. The other is evil genius. Either Microsoft really wants to kill Android. Or, if Android continues to thrive, Microsoft wants to be the ones that make billions of dollars off of its success.
Back in June, we noted that it seemed unlikely that Microsoft would enter this high-stakes patent bidding process for the simple reason that they already had patent licensing agreements with Nortel. We were told these agreements would transfer over when the patents changed hands. But several days later, Microsoft began complaining that the eventual winner may be able to void their licensing agreements. Still, we were told this would not be the case. But surely Microsoft had to know that as well. So why were they complaining? They were playing mind games, attempting to mess with Google (NASDAQ:GOOG), says one source.
But then something funny happened. Microsoft did end up bidding on the patents. As a part of Rockstar Bidco (the group that eventually won the auction), Microsoft joined up with several other tech giants (and rivals) to put together billions of dollars to bid with. Of course, Rockstar Bidco bowed out of the auction when things started heating up. But then Apple (NASDAQ:AAPL) stepped in with an offer to stake them. Together, they rode the hot hand to victory.
The victory likely has major ramifications in the mobile space, so you’d think several other players would complain and try to get the courts to void or alter the deal. And the truth is that some did complain. Namely, Verizon (NYSE:VZ) and HP (NYSE:HPQ) objected to the deal alongside Google, reports Reuters. But the deal sailed through the courts in both the U.S. and Canada in just 10 days. Why? Because once the judge reiterated that the sale would not negate existing licensing agreements, Verizon and HP dropped their objections.
Microsoft, which again, also had Nortel patent licensing agreements, would have also fallen into this category. Again, they did not need to bid. So why did they?
Because if Google had won the patents, while Microsoft still would have had the right to use the patents, they would have lost a significant part of their leverage over Google. Prior to the Nortel (NYSE:NTL) deal, Microsoft had something like 17,000 patents, while Google had something like 700. Had Google won the 6,000+ Nortel patents, they would have effectively gained some deterrence from many of the lawsuits being hurled their way. And because the majority of the Nortel patents are in the mobile space, this may have meant an end to Microsoft’s pressuring of Google’s Android partners to sign licensing agreements with them.
And that’s a problem for Microsoft because as we’re now seeing, this is potentially a massive business opportunity for them. Sure, they’d prefer that Android (which killed Windows Mobile) would die and Windows Phone would take it’s place. But the next best option is to catch a free ride on the Android train. Patent licensing deals already in place with HTC, General Dynamics (NYSE:GD), and others could mean revenues of over $1 billion by next year, as Forbes reports. And if they’re able to convince Samsung to sign one as well (which could effectively force every Android partner to sign one), we could be talking multiple billions of dollars of revenue each year.
Had Google won the Nortel auction, all of that would have gone up in smoke.
Yes, this strategy is extremely lame on Microsoft’s part. Instead of focusing on winning by out-innovating Google in the mobile space, they’re focusing on milking revenues off of a freely distributed operating system that they don’t actually make. When Apple takes these agressive approaches on patents, it’s no more right, but at least they can argue that they have a winning product (the iPhone) that they’re trying to protect. Their goal isn’t to get other companies licensing their patents, it’s to run those guys out of the market (which doesn’t always work).
Microsoft’s intent here is pure evil genius. “It’s not like Android’s free. Android has a patent fee. You do have to license patents,” Microsoft CEO Steve Ballmer said last year. What he didn’t explicitly say is that you’d have to pay Microsoft and not Google for those patents. Think about this for a second: it’s entirely possible that Microsoft is going to end up making more money — perhaps significantly more — from Android than Google will. A year ago, such a statement would have seemed like a joke. But now it’s becoming reality. And it must be the ultimate nightmare for Google.
By being a part of the winning team, and not allowing Google to get Nortel’s patents, Microsoft put themselves in a win-win situation. If their continued threats to Google’s Android partners force those partners to reconsider their Android commitments, well there’s Windows Phone waiting with opened arms. If the threats lead to licensing agreements and the continued rise of Android, well there’s a huge pile of money from each participating OEM.
So no, Microsoft did not have to bid on the Nortel patents. But doing so may prove to be one of the best moves Microsoft has never made. And strangely enough, they have Apple to thank. Of course, they’re likely playing their own little game in this situation. Keep your enemies closer. Or keep them fighting.