by Ansel Halliburton
[Editor's note: Ansel Halliburton is a lawyer at ComputerLaw Group, a boutique law firm in Palo Alto specializing in intellectual property litigation and entrepreneurship.]
Apple (NASDAQ:AAPL) and HTC announced Saturday that they have settled all outstanding patent litigation between them. What little detail the mirror-image press releases contained was that it's a 10-year cross-licensing deal, which means HTC and Apple get licenses to each other's patents.
There has already been quite a bit of speculation about why the deal happened. Some think it means Apple is softening its stance on patents. I disagree. To me, this looks more like Apple going for the jugular of one of Google's (NASDAQ:GOOG) weakened proxies, and, perhaps, the beginning of the endgame in its war on Android.
Because of the sheer number of patents Apple holds (many thousands), as well as the company's perceived strength after a string of big wins, such as the billion-dollar jury verdict against Samsung (OTC:SSNLF) and a recent win at the U.S. International Trade Commission, Apple was clearly in the dominant negotiation position. HTC, on the other hand, had comparatively little to bring to the table, with fewer than 300 U.S. patents and slipping market share. That almost certainly means this deal was not a pure license-for-license deal. Instead, HTC must have agreed to pay Apple a royalty on every Android device it sells.
Microsoft (NASDAQ:MSFT) already has similar deals in place with both HTC and Samsung. Although the numbers are not public, reports say HTC pays Microsoft $5-$10 for every Android phone it sells, and Samsung pays even more. Both those deals happened after Microsoft sued HTC and Samsung for patent infringement and beat the stuffing out of them for a few rounds.
Now HTC will have to pay hefty royalties to both Microsoft and Apple for every Android device it sells. Lawyers call this "royalty stacking," and it can be a big problem in complex industries like smartphones. It's perhaps not surprising, then, that the phone hogging the most real estate on HTC's homepage today is running Windows Phone 8. It may be that the weight of these stacked royalties will effectively push HTC off of Android entirely - something that suits both Apple and Microsoft who are used to co-existing as a duopoly, as in the desktop OS market.
The HTC deal is bad news for Samsung, and even worse news for Google. Whatever royalty HTC agreed to, it sets a floor for any future deal between Apple and Samsung. It's true that Samsung is a far larger company and has its own portfolio of patents to use as bargaining chips. But in the end, Samsung won't be able to get around the fact that this HTC deal happened, and its price tag will carry some weight. Samsung, sooner or later, will end up paying a similar price. The big question is whether Samsung - or anyone else - will be able to still sell Android phones at a profit after paying Apple's and Microsoft's royalties.
Apple and Microsoft both view Google as a strategic threat. With patents - which are, at their essence, a monopoly right - they are attacking Google together in a way they could not otherwise do without running afoul of antitrust laws. Their combined royalties have the potential to squeeze all the profits out of manufacturing Android devices.