Daily Archives: April 28, 2010

What’s Behind Microsoft’s Patent-Licensing Deal with HTC?

Jared Newman of PC World expounds on two possible scenarios behind Microsoft’s agreement to license unspecified patents to handset vendor HTC for use with that company’s Android-based smartphones.

Quoting directly from Newman’s article:

Here are two possible scenarios behind the HTC-Microsoft agreement:

The first is a conservative view. HTC’s phones may infringe on Microsoft patents. Rather than engage in two legal battles at once, HTC quickly agreed to license Microsoft’s patents before Redmond went after it. This spares HTC from another attack in court, while giving Microsoft a sort of insurance plan on HTC’s increasingly popular Android phones along with securing royalties.

The second possibility is more intriguing. Microsoft is throwing HTC a life preserver, letting the phone maker use Microsoft patents as a way to fend off Apple and its iPhone. I see it as an escape plan if HTC’s case against Apple goes south. If the possibility of a court-ordered injunction against HTC Android phones becomes real, HTC could simply say it’s using Microsoft’s patents instead, adjusting the design of its phones accordingly. This assumes that there’s overlap between Apple’s and Microsoft’s smartphone patents, and we don’t know because Microsoft didn’t get into details.

There is a third scenario, though, and it was mentioned in an IDG News Service item that quoted Francisco Jeronimo, an IDC research manager. To wit:

The fact that HTC, Samsung and Sony Ericsson also make Windows phones may make any discussions with Microsoft easier to resolve, according to Francisco Jeronimo, research manager at IDC. He said he wouldn’t be surprised if the vendors can get discounts related to how they are going to push devices based on Windows Phone 7.

Indeed, I think we have a winner.

While HTC can expect no mercy from Apple and its patent lawyers regarding alleged infringements occasioned by the former’s Google Android handsets, Microsoft is a different beast entirely. As I’ve said before, Google stands to make its mobile-platform gains at Microsoft’s expense, not at Apple’s. That’s because Google and Microsoft both count on patronage from handset vendors that license their mobile operating systems. Apple, as a vertically integrated player (providing operating system, handset, and online applications and content) doesn’t need handset vendors. It is its own handset vendor.

Consequently, Microsoft and Google are direct mobile competitors in a way that neither competes against Apple. In the battle between Microsoft and Google for the affections of handset vendors, it’s a zero-sum game. If a handset vendor, such as Motorola, defects from Microsoft to the Google camp, that’s lost business for Microsoft, and a lost service conduit to consumers.

What’s Microsoft to do? Some of the handset vendors — HTC, Samsung, Sony Ericsson — are hedging their bets, with feet in both camps. Microsoft wants to keep their business. To do so, it will be inclined to use every instrument and mechanism at its disposal, carrots and sticks. The threat of patent-infringement lawsuits might be a compelling stick to wield, just as sweet deals on patent licensing, with certain strings attached, might represent a tasty carrot.

It isn’t difficult to envision a Microsoft negotiating team making the following pitch to HTC: “You’re infringing on our patents with those Android-based handsets, and we intend to rectify the situation. Rather than pursue litigation that nobody wants, we’re willing to give you a great licensing deal . . . on the condition that you continue to develop and effectively market Microsoft-based handsets. What do you think?”

That’s the basic outline, anyway. The specifics of the deal might look a little different, but the essential idea is that Microsoft uses patents and litigation as bargaining chips to keep handset vendors in the Windows Phone 7 Series stable.

China’s New Encryption Rules Favor Homegrown Vendors

As if to illustrate the point I made in my earlier post today about China’s far-reaching industrial strategy in the technology sector, the Wall Street Journal reports that Cisco will be among the companies affected by new rules that will require vendors of six categories of technology products — including smart cards, firewalls, and routers — to disclose encryption codes to Chinese authorities as a certification precondition for sales to government accounts.

As the WSJ reports, encryption codes are closely guarded by technology vendors for both competitive and security reasons. Although the product categories covered by the new encryption rules account for, at most, hundreds of millions of dollars in sales to the Chinese government — a small fraction of what China’s government spends on technology — the dispute is the latest flashpoint between China and foreign technology companies.

Quoting from the article:

Industry observers who follow the issue say that the regulation appears to be part of a broader effort by Beijing to promote domestic enterprises. Foreign executives say such regulations make it increasingly difficult for foreign companies to compete fairly in one of the world’s most important markets.

Assuming Cisco does not acquiesce to the new rules, it would be one of the companies most affected. Cisco has declined to comment on the matter.

The WSJ reports that, as of last night, a government list of companies certified under the new rules included — surprise! — only Chinese companies. Foremost among those companies was Huawei and Leadsec Technologies Co., an Internet-security subsidiary of Lenovo Group Ltd.

Understanding Implications of China’s Technology Ambitions

Today I want to expand on ideas I have presented previously. I think these concepts, relating to China’s industrial strategy for its technology sector, are important for readers to understand and internalize. Eventually, they will affect most o us, one way or another.

I’ve written often about how the Western companies seeking to sell their products in China confront a genuine dilemma. They really must choose between two outcomes that are likely to be undesirable: They can enter the Chinese market at the risk of losing intellectual property and long-term competitive advantage, or they can refrain from playing in China, perhaps retaining their IP and competitive advantage in other markets but surrendering short-term gains in China to others.

In the end, no matter what path they take, they still might find themselves threatened on the global stage by vendors from China.

Most public companies, with institutional investors breathing down their necks, will plunge headlong into China for the near-term pop. Most of these companies, facing quarterly pressures to deliver results, will not consider, or will choose to studiously ignore, the long-term implications of their decision to play in China by China’s rules. In their minds, they have no choice but to play the game. They don’t want to explain to shareholders why they aren’t chasing what is ostensibly the biggest technology growth market in the world.

Other companies, admittedly in the minority, will choose not to play in China or will limit their exposure there. In limiting their exposure, they’ll also limit their near-term gains, but they’ll also keep most of their core IP and have a better chance of holding off Chinese technology competitors when those players seek hegemony beyond their home base.

And make no mistake: China is pursuing nationalist mercantilism as industrial strategy for its technology sector. China aspirations for the technology sector aren’t limited to its current stereotype as the world’s low-cost manufacturer of consumer electronics, computers, and networking gear. For China, development of its technology sector — encompassing cleantech as well as strategic aspects of information technology and communications — is integral to its long-term economic, industrial, political, and social stability.

China goal isn’t to let Google, Cisco, HP, Applied Materials, Microsoft, Apple, and Nokia boost their stock prices on Chinese’s sales. Instead, China wishes to create its own Google, Ciscos, Applied Materials. And China has created an industrial policy, within the framework of a concept called “indigenous innovation,” to achieve that goal.

Toward that end, China not only promotes companies, such as Huawei, that it wants to grow into world leaders, but it also develops a regulatory structure that inhibits and restricts that gains that foreign companies can make on its soil. In this respect, the aim is to ensure that Chinese companies dominate China’s markets, as Baidu did against Google, and as Huawei is doing against HP and Cisco.

With is “China Out” strategy, 3Com’s H3C master plan was not dissimilar from the national technology blueprint of China itself. There are differences, of course. 3Com is but one company, and it’s less Chinese now, after being bought by HP, than it was before, as an entity that grew from 3Com’s joint venture with Huawei. What’s more, 3Com has less power and fewer resources at its disposal. It essentially wanted to win early customers with low-cost, good-quality products in China, then use economies of scale and aggressive pricing to capture market share elsewhere.

China wants to do essentially the same thing for its technology companies, but it has tremendous power, influence, and resources at its disposal. It can use regulations, policies, and prohibitions to condition the result it desires. It can make life easier for indigenous companies while making life much harder for Western firms operating on Chinese soil. It can devise and enforce rules that require Western companies to disclose intellectual property or other trade secrets as conditions of selling products or winning accounts in the country. It can, and does, establish intellectual-property laws that favor the home side.

I think it’s critical for denizens of the technology industry to fully appreciate what China is trying to achieve. This is not business as usual.