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.

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