The real cost of Android? Potentially $60+ per device in patent fees

For more then a year now, the growth of Google’s Android mobile OS seems unstoppable. It went from from 60K daily activations in February 2010 to 300K in December and 500K now. And it does not show any signs of slowing down. According to Andy Rubin, even from this huge 500K a day base, Android device activations are growing at an amazing 4.4% weekly rate.

But Android has an Achilles Heel, a vulnerability which, if not addressed soon, may bring Android growth to a halt very quickly. This week spot – is a very thin wireless intellectual property portfolio that Google has. And Google’s apparent indifference to the legal IP challenges Android device makers are facing right now.

All of Google’s Android partners are under rapidly growing pressure from multiple patent holders, claiming that Android devices infringe on this patent or that, demanding licensing fees. And, more often then not, Google seems to be content to watch it’s partners struggle from the sidelines , filing occasional brief in their defense, but refusing to commit real cash to cover legal costs or provide guaranties/insurance against damages, if Android is found to be infringing.

Yes, Google did try to buy a huge pool of Nortel patents that would have helped a lot to ease Android patent pain, but it lost the auction to Apple, RIM and Microsoft. And Google is fighting Oracle directly to make some key Android related patents invalidated, with some encouraging developments – USPTO rejecting a lot of Oracle patents/claims after reexamination. But it only takes one really strong and broad patent confirmed, to make all those early victories meaningless.

And that’s about it, as far as active Google involvement in patent fights goes.

Faced with this apparent Google indifference, Android device makers are already starting to fold, agreeing to pay licensing fees for each Android handset they sell. For now, only the most aggressive Android IP licensor –Microsoft – has had any success. And it’s winnings are pretty small. Except for HTC, which last year agreed without any fight to pay licensing fee to Microsoft for each Android handset sold, only a few wireless industry newbies like General Dynamics, Onkyo, Wistron and the likes , agreed to pay up.

But last week Reuters reported that Samsung may be ready to cave in to Microsoft, and is now only negotiating how big it’s license fee per Android device will be. And how to get it lower with promises of future Windows Phone commitment. If this report is true and Samsung signs a licensing deal with Microsoft, these could be a very bad news for the future of Android. Because, if Samsung folds without fight, and starts paying $10 for each Android device it ships, it’s a very strong confirmation that the patents Microsoft is asserting against Android, are really strong.

Samsung is not the industry newbie like HTC or Onkyo, with little to no IP in wireless. They’ve been in this business for almost 20 years, are one of the most prolific patent generators around, and probably have one of the strongest wireless IP portfolio in the industry. Samsung lawyers and engineers may have already looked into Microsoft claims, and decided that there is a very good chance they may lose the court battle, so they better settle it right now. If that happens, I don’t see how any other Android device maker, except Motorola,  can avoid paying a license fee of $10 or more per device to Microsoft.

But the potential Android partner troubles do not end with Microsoft. They are only start there. We are already hearing that Oracle has put up Android IP licensing program, and is approaching Android device makers with an offer to license it’s patents for $15-20 per shipped device.

Then it gets much worse. Microsoft is only one of the big wireless IP holders hostile to Android, and not even the strongest. In anti Android camp we now also have: Nokia, Apple, RIM (with it’s share of 6000 Nortel patents) and HP/Palm. For now, only Apple has joined Microsoft in anti-Android litigation fray.  But you can bet dollars to donuts others will too, soon.

And there is a good reason to believe that each of these players has a wireless IP portfolio, that is at least on par with Microsoft. So they may be able to demand, and get, fees similar to what Microsoft is getting now. Which means, that in a few years, every Android device maker may have to pay an average $10 licensee fee to Apple, Microsoft, Nokia, RIM, HP and Oracle. That’s $60 per device only for the rights to put Android OS on it.

How many device makers can sustain this additional cost? It would be taxing enough for the top of the line Android phones like Samsung Galaxy S2 or HTC Sensation. And it will effectively shut out Android from mid-to low end markets – that are the key for Android to grow or at least sustain the market share it has achieved today.

Which makes apparent Google passivity on this issue very strange.

Since Android exploded, Google already had 2 big opportunities to remedy it’s patent problem. It could have bought Palm last year for something like $1.5 billion. Which would have got them patent portfolio of the smartphone industry pioneer, IP cross-licensing deals with most of the old players,  in addition to all WebOS assets and team.

Last week, they could have had 6000 patent strong Nortel portfolio for something upwards of 4.5B. Which sounds pricey, but would have netted to about $25 per Android device for 1 year of production at current 500K a day rate. Accounting for future growth, spreading it over a few more years, this cost per device would have become negligible, easily covered by advertising and other revenue streams Google can generate via Android. But Google let both of these tremendous opportunities slip through it’s fingers.

I don’t know, maybe Google has some secret plan to solve all Android related intellectual property issues and are only biding their time. Let’s hope so. Because it will be a huge loss to all of us if competitors succeed in destroying Android with their patents.

Even if Google’s inaction is partly to blame, the main problem here is the patent system. Instead of promoting innovation, patents today have become an innovation strangling litigation vehicle. If Google’s competitors succeed in derailing Android with them, maybe there is a silver lining to it. Maybe by then enough people in U.S. government will have and love their Droids, to sit up and notice. And start the badly needed real patent reform.

 

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • http://twitter.com/DailyPlunge Michael Henshaw

    Can anyone make a compelling argument for the current patent system? It sounds like the only people happy with this system are lawyers.

  • http://twitter.com/digthenoise Dig The Noise

    The cost of using somebody else’s inventions.

  • Anonymous

    This is the best article I have ever seen on the issue. 

  • Silent Serpent

    This is so ridiculous. Google does not and SHOULD NOT spend any money defending Android. Manufacturers get it for FREE. What more do you want?? Now they should PAY manufacturers a license fee to keep carrying Android to pay off the patent trolls. That’s ridiculous..this is Google we are talking about here..not microsoft.

  • http://www.staska.net Staska

    Ok. Let’s say Google doesn’t spend money defending Android, or buying a strong patent portfolio or something, and it turns out that manufacturers eventually do have to pay upwards of $60 per device to make one. 

    Why would they bother, instead of switching to Windows Phone, or, if HP licenses it – WebOS? Pay $15 or smth licensing fee and not be worried about patent suits.Android rose from nothing to #1 in the market in less then 2 years. If manufacturers decide it’s too expensive and drop it – it might go back to nothing just as fast

  • Anonymous

    Any company that does business via patent wars is a dying company.

  • http://androiddeveloperchronicles.blogspot.com/ eddie

    I am actually learning java right now and I hope to develop for the android market soon. I hope that this won’t effect a future that I may have developing for this platform as I am putting in a lot of hours. 

  • Bmccord

    For more.  Then a year.

  • That Muthafuxxa Vince

    Or how to kill the dream of having a mainstream open source operating system for the first time.
    It’s sad 

  • Eric

    And Apple pays each such journalist a $60 whenever comparative quarterly graphs are released.
     Do you really think we manufacturers have no patents of our own and really pay for every demand from somebody who infringes far more patents themselves?

  • http://www.mobileinfoplanet.com MIP

    Nice write up, and I agree that Google’s silence is a little puzzling, which I wrote about myself just a couple of days ago:

    http://www.mobileinfoplanet.com/2011/07/07/will-google-pay-android-royalties-to-microsoft/

  • http://www.staska.net Staska

    I’m sure manufacturers do have patents. And cross licensing agreements and what not. And I can freely admit the way I arrived to $60 number is a gross over simplification of issues involved.But to explore them in detail would require 20K word article, so sorry – I had to simplify.

    And the facts and/or rather credible assumptions/reports are what they are:

    – HTC has already licensed Microsoft IP for it’s Android phones. (fact) And is already paying MSFT a per handset fee (assumption by several bank analysts)

    – HTC is spending a lot of money (now in hundreds of millions) to buy patent portfolios and will continue to do so (fact) thus admitting that their current patent portfolio is really weak

    – Samsung is almost ready to sign licensing deal with MSFT at $10 per Android handset. (Rumor – but reported by Reuters – so credibility is pretty high. We’ll see how it goes)

    – Just last weak Microsoft licensed it’s IP to a bunch of small Android device makers (fact)

    – Oracle is suing Google for Android patent infringement. The suit is not related directly to mobile and Oracle has very little interests in mobile. (fact) If Oracle wins – every Android maker will have very little relevant patents to fight against Oracle claims (assumption – but I think a rather logical one)

    – Oracle is already approaching Android device makers offering to license their IP at $15-20 per device, the final price is likely to get lower – to $10 range. (Rumor/assumption by bank analysts)

    – Nokia has already been able to make Apple pay a per device fee for it’s IP, confirming the strength of it’s patent portfolio (fact)

    – Some of those Nokia patents may already be part of cross licensing deals with current mobile manufacturers like Samsung, Motorola or HTC. Others may not. In fact , I assume that Nokia will be able to find a bunch of patents to use against Android makers when they decide to move in, especially against those that won’t make Windows Phone.

    – Apple did invent multi-touch interface on mobile and it’s IP portfolio on in this is moving through the system and more and more patents get issued. Plus Apple has a bunch of patents in basic computing and from Newton days that probably can be applied to Android devices. Apple is already suing HTC and Samsung. We’ll see how it ends up. My assumption is that both HTC and Samsung, and other Android makers will end up paying Apple per device licensing fee

    – Things with HP and RIM is are a bit more speculative. And old manufacturers Motorola, Samsung and Sony Ericsson may end up cross licensing IP. HTC also may have acquired enough patents not to have pay per device fee by then. But for the rest, and especially those who are new to the industry – it is very likely the’ll end up paying RIM and HP too, if Google doesn’t do anything

  • Anonymous

    Wow.  I have read some reasonable UV articles from time to time.  But this one is out there.

    It’s sensationalistic in that you assume the absolute worst case scenario for every patent lawsuit.  That’s highly unlikely to begin with.  For all their bluster, with the exception of Microsoft, nobody wants to see Android dead.  They just want to make money off it.  So they aren’t put up fees that could kill the goose laying the golden eggs.

    Next, you assume that manufacturers will stop making phones if the license fees are really high.  That’s quite the assumption.  Why would manufacturers stop sellling a product that has demand?  Could they price Android phones higher to recover increased license costs?  Sure.  But would they stop producing phones?  I doubt it.

    And while higher prices might reduce demand for Android, there’s no way to tell if it will kill it off.  Consumers might just be willing to eat the higher costs because they want the phones.  Apple’s toys aren’t cheap and they certainly keep selling them as fast as they can make them.

  • http://www.staska.net Staska

    Sensationalistic? Sure. That’s the name of the game. If the facts and my logical assumptions allow me to make the case for somewhat sensationalistic scenario,  I’ll do it every time. 
    I’ll also admit that my article is oversimplified and doesn’t take into account possible anti trust issues, the length and nature of patent litigation, possible IP cross licensing deals that are already in place between smartphone makers, etc; To cover them all will require an 20K word article or more. 

    The absolute worst case scenario? Certainly not. For the worst case scenario, if we believe rather credible reports that MSFT is demanding $15 fee and Oracle wants $20 per Android device – that’s already $35. Without taking Apple, Nokia, RIM and HP into account. At this fee level – we only need Nokia and Apple to prevail to get over  $60. As a worst case scenario and only with these 6 companies we already get into $90-120 in fees per device. And that’s not counting various patent trolls like Lodsys, Intellectual Ventures and many others coming out of a woodwork. 

    If Google does not get really pro-active on this stuff, $60 might be a really low estimate. 

    As for no one wanting Android dead? That may be true about Oracle, maybe HP. But for Microsoft, Nokia and RIM – their dearest wish is that Android never happened, and will do anything they can get away with to derail it.

    And I didn’t say that everyone will stop making Android phones. What I said is – that $60 and even lower fees will make it impossible to make Android handsets  for mid to low end market, where the main growth will be in the next few years. And will make Android much less attractive even at the high end for manufacturers, especially when they will have good enough cheaper alternatives in Windows Phone and WebOS (if HP decides to license it). 

    And I didn’t say that patents will kill Android off. I only mentioned it in passing as one possibility. The whole point of this article was that patent fees, and Google’s inability to provide protection can drastically slow the growth of Android.   

       

  • Anonymous

    tinyurl.com/5tygvnf 

  • Gfreep2010

    Manufactuers are going to pay to use Android.  This product was based off other products that had already come to market.  Android was never free and other companies have been claiming this close to 2 years now. Manufactures decided to make quick money while they could hoping it would work out.  It will not. The original cost structure for Android will be put in place and the extra cost will take away mid and low end phones. This is where NOKIA is very strong at reaching. Higher cost phones will have to compete with IPhone. This is exactly what Apple wants. I think in 2 years time the number of android phones drop significantly. It will be replaced by Windows Phone and WebOS.

    – Similar to illegal downloads, once people found they could buy songs legally at a fair price for under $1.50 people stop stealing music. Once manufacturers can start selling phones that have the same functionality and more as Android they will cease to make Android phones. Windows Phone 7 will be on this level with the next update this fall.   WebOS could possibly be there now. People will buy these phones.  I predict dramatic changes will be coming.

  • http://knownewtricks.blogspot.com/ Somnath @ Knownewtricks
  • vik

    Just stop selling phones in US then there is no need to pay for silly us patents

  • Anonymous

    look up tragedy of the commons

  • http://twitter.com/mantaspakenas Mantas Pakenas

    There’s something fundamental I don’t understand about the Android’s wireless patent woes no matter how much I read about it… Maybe you can help me?

    1. Android is software, so it can have problems with software patents, e.g. Apple suing for touch interface, Oracle suing for Java, etc.
    2. As software, it interacts with drivers, and drivers interact with hardware. Drivers and hardware come from chip manufacturers, like Qualcom, TI, Samsung, Nvidia, etc. As I understand it, wireless patents could cover something along the lines of “method for grouping commands to a 3G base-station” or some such.

    Now, I don’t understant, how can Android, as [an open source] software, be infringing any wireless patent on its own? Does this mean desktop Linux would also suddenly be sued left and right if it ever became popular? If Samsung dropped Windows and released only laptops with Linux, along with Chromebooks, would it be facing hard disk, memory, and microprocessor related lawsuits?

    Also, how can combined licencing fees reach $60 or $120 if competing operating systems are being licensed for $12? This doesn’t seem to be have economical rationale – let’s say if someone is pirating music, and the record label issuing CD’s sues them, they can’t suddenly claim damages of $50 per pirated album, if they normally sell the CDs for $5? Or I’m missing something here?

    Sorry if I’m asking dumb questions, I consider myself to be very well educated in most of technology related matters, but US patent law is beyond my grasp so far (although it certainly sounds like it’s stupid, outdated and stopping innovation)

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  • http://www.staska.net Staska

    Regarding the technical issues of how is it possible that Microsoft, Nokia and others can sue Android, to tell the truth I have no idea.

    The only thing I know – it is possible. Probably because not everything is done at the device/driver level, and operating system itself does a lot of the work too. E.g in speech coding, encryption and  or data compression/transmission fields. I remember that first iPhones had huge problems signalling the AT&T towers and causing huge data network overloads and that it was fixed via iOS firmware update – so it the data transmission/signalling stuff was corrected/rewritten by Apple,not by whoever supplied the antenna modules. 

    If patent licensing fees could have been avoided just because someone supplies wireless components and have already licensed them – Apple wouldn’t have had to pay up to Nokia as it did just recently. Regarding Samsung/Linux/Chromebook  analogy – probably yes. 

    Regarding the total fees making economic sense – they do not. It’s stupid – but that’s how the patent system works right now. There’s no institution or body who can take all claims into account, determine what a fair licensing fee will be and then distribute it to all who have valid claims. So Google and it’s partners have to fight each set of claims individually, and if they lose – settle or be made to pay for patents in each case individually, regardless of what it pays others. So those payments can add up quickly. 

    Btw, that CD analogy – is a bit wrong too. Copyright system is no less broken then patents.  The fines per pirated song in U.S start from $750  and can reach upwards of $20K. Ye, per song:  http://www.pcworld.com/article/187694/student_facing_music_piracy_fine_hopeful_award_will_be_lowered.html

  • http://www.staska.net Staska

    Regarding the technical issues of how is it possible that Microsoft, Nokia and others can sue Android, to tell the truth I have no idea.

    The only thing I know – it is possible. Probably because not everything is done at the device/driver level, and operating system itself does a lot of the work too. E.g in speech coding, encryption and  or data compression/transmission fields. I remember that first iPhones had huge problems signalling the AT&T towers and causing huge data network overloads and that it was fixed via iOS firmware update – so it the data transmission/signalling stuff was corrected/rewritten by Apple,not by whoever supplied the antenna modules. 

    If patent licensing fees could have been avoided just because someone supplies wireless components and have already licensed them – Apple wouldn’t have had to pay up to Nokia as it did just recently. Regarding Samsung/Linux/Chromebook  analogy – probably yes. 

    Regarding the total fees making economic sense – they do not. It’s stupid – but that’s how the patent system works right now. There’s no institution or body who can take all claims into account, determine what a fair licensing fee will be and then distribute it to all who have valid claims. So Google and it’s partners have to fight each set of claims individually, and if they lose – settle or be made to pay for patents in each case individually, regardless of what it pays others. So those payments can add up quickly. 

    Btw, that CD analogy – is a bit wrong too. Copyright system is no less broken then patents.  The fines per pirated song in U.S start from $750  and can reach upwards of $20K. Ye, per song:  http://www.pcworld.com/article/187694/student_facing_music_piracy_fine_hopeful_award_will_be_lowered.html

  • Anonymous

    “Now, I don’t understant, how can Android, as [an open source] software, be infringing any wireless patent on its own?

    Oracle went after Google for Java in an embedded environment and Google is claiming a clean-room re-implementation.  Not a wireless situation.  Being quasi open-source, Oracle went after the distributer of the code base.  They did this probably because Google gave Sun the finger in the original Java talks.

    Nokia went after Apple for Wireless.  Apple uses off the shelf components from QualComm and such but that is only a part of the issue.  Antenna design (something Motorola will also get Apple on) can also be patented as are many of the actual data protocols.  Nokia spent 10’s of thousands of hours in conferences, labs, meetings, simulations getting the tech behind WireLess working and they deserve to be compensated for this work when others use it.

    Apple is hitting Samsung and HTC for implementations within Android and this make more sense than going After Google in a weird way.  Since Google did not go out and acquire any licenses for any of the technology they provide a “use at your own risk” warrantee.  As Mantas called out perfectly, Apple is also using many of those Newton patents to good effect.  Apple spent lots of money on FingerWorks along with 10’s of thousands of hours in the lab and were the first to get capacitive multi-touch working.  Likewise, is it fair for others to simply come along and use this tech without providing some of the sweat?

    I think SE and LG got a free pass from Apple 2 weeks ago and they will be able to start pushing out Android handsets without issues from Apple (and posibly RIM and MS and Nokia).  SE and LG may have bought themselve a whole lot of love.

    So it is not simply the piece parts but the function that those pieces do when combined that can get you.

  • Anonymous

    I will be the first to say there are tons of junk crap and I firmly believe you need skin in the game to play and this rules out IP holding companies.

    But if a company spends 40,000 man hours (a team of 20 people for a year or about 2.5 million USD) to prototype 20 different implementations (something Apple is known to do.  Lots and lots of different layouts and implementations of the same thing) of something.  Document it.  Bring it to market.

    Once seen, this feature (take recognizing address and phone numbers and zip codes and such in plain text) looks pretty darn cool and makes life lots easier.  The cool thing is, once the implementation is seen and is seen to work well, you no longer have to prototype anything.  You already know the answer to how to do it.

    So now, you simply copy the implementation that has been shown to work.  It only takes a team of 2 working 6 months to get it running pretty well.  You know about 100K or so.

    So now, the company that actually did all the seat and tears to come-up with a really cool and unique way of interacting with data.  The company that has 2.5 million simply can’t sell anything because the copy-cat company stole the entire thing and sells it for 30% less money.

    Good for the consumer but only in the short run.  After a few years of this, companies will realize that putting any money into R&D trying to establish new paradigms of working with computers is a loosing proposition and all innovation will come to a screeching halt.

    There is a general consensus, especially in the software socialist circles like FOSS, that all software patents are bad and hold back innovation.  If you look at the top software power companies on the planet:

    Microsoft
    Apple
    Google
    Amazon (coming on line soon)

    They are all US companies.  All in a country that permits software patents.

  • http://www.facebook.com/michael.skelton.9 Michael Skelton

    It would also put developers off making apps for the Android if apple and microsofts smart phones got a large proportion of the market and this would further deter new buyers from android devices.

    microsoft could be mid-low end pricing, while having similar hardware capabilitys to highly priced androids. most people would be oblivious to why they’re priced so high and would just move into MS and Apples market.

  • olivia

    Hi, i would like to know something that i would like to have clear, if a company is developing some kind of equipment, and the equipment will run Android built from AOSP, does the company have to pay some kind of license or something like that if the equipment is going to be launched to the market???

  • Physalis

    Two years are gone by from you comment… and Android gets stronger and stronger…