Nokia vs. Apple: the in-depth analysis
By Nilay Patel 
posted Oct 29th 2009 11:00AM
posted Oct 29th 2009 11:00AM
Well, wrong. As usual, the race to hype this dispute as a bitter standoff between two tech giants desperate to destroy one another has all but ignored the reality of how patents -- especially wireless patents -- are licensed, what Nokia's actually asking for, and how it might go about getting it. And as you know, we just don't do things that way, so we've asked our old friend Mathew Gavronski, a patent attorney in the Chicago office of Michael Best & Friedrich, to help us sort things out and figure out what's really going on here -- read on for more.
First, a preliminary note: we're just not going to get into the specifics of Nokia's ten patents, whether they should have been granted, whether they're valid, or whether the patent system itself is a good thing. Each of the ten patents in question covers a highly technical part of wireless communications, and we simply don't have the time to judge them on their merits -- and even if we did, we have no way of knowing how the iPhone's code and chipsets make use of the patented technology. As for the patent system, well, it's what we've got, this case isn't going to change it, and we're not going to begrudge Nokia for taking advantage of the primary means available to protect its billions in R&D. We doubt Steve Jobs feels any differently about things.
So if we can't talk about the patents themselves, what can we talk about? A lot, actually. Contrary to what you may have heard, Nokia isn't after billions of dollars, and it's not trying to stop sales of the iPhone forever. Instead, this case boils down to royalty rates -- Nokia wants Apple to pay a fair price for licensing patents Nokia says are "essential" to using GSM, UMTS, and WiFi. That's all. Nokia isn't even really asking for money damages beyond interest on past due royalties, it just wants a fair license rate for its patents. That may sound simple, but it's really not -- in fact, it's insanely complicated.
Wireless standards and essential patents
A quick look at Nokia's actual complaint (PDF) reveals an impressively tight argument: Nokia says that it committed to licensing several of its patents under "fair, reasonable, and non-discriminatory" terms (or FRAND terms) during the development of the GSM, UMTS, and WiFi standards because those patents are essential to each standard's operation, and since the iPhone uses all three standards, Apple should pay to license the patents. Open and shut, at least if you believe Nokia.
Of course, that's not the whole story. Wireless standards like GSM are developed by a standards-setting body with the cooperation of its members -- in the case of GSM and UMTS, it's the European Telecommunications Standards Institute (ETSI), and with WiFi it's the familiar IEEE. These organizations aren't blind to the fact that its members invest billions into R&D and have lots of patents, but they also recognize the need to develop standards that everyone can use -- so while a standard like GSM is under development, member companies are supposed to declare if they own any patents they think are essential to the standard's operation. What Nokia doesn't say is that there's no independent verification of a patent's essentialness during the standards process -- in other words, the ETSI and the IEEE don't maintain some master list of patents that are actually essential. Instead, each company that participates in developing a standard is basically on the honor system, and they all agree to abide by FRAND principles when negotiating licenses. That means there's a tremendous incentive to declare as many patents as possible to be essential, since anyone who wants to use the spec might have to pay license fees on all those patents, and not declaring a patent essential can result in various other unpleasant consequences. (Legal nerds will remember the Rambus case as an example of this: the short and highly-simplified version is that Rambus didn't declare it had patents on certain types of RAM, and years of litigation ensued.)
As you might imagine, then, determining whether a given patent is actually essential to a standard is pretty damn important, and it's not an easy or exact science. It takes a ton of time, money and specialized effort to examine patents and standards, and the results are rarely published, since they're worth a fortune to the right clients. However, there are a few studies out there that shed some light on Nokia's patent portfolio and GSM, from a boutique research firm called Fairfield Resources International. Fairfield took every patent declared essential to GSM and assigned it to an expert to judge whether or not it was actually essential. The results? Nokia has far and away the most patents judged essential to the operation of GSM, by more than double.
Nokia's in a similar position with UMTS and WiFi -- while some of the patents that it's declared essential to those standards might be fluff, it has many that experts have judged to be actually essential. What's more, Nokia's lawyers have cherry-picked just 10 total patents to sue Apple over, so we're inclined to believe that those are the clearest of the clear -- the ones that simply can't be avoided by GSM, UMTS, or WiFi devices. Based on probability alone, it's almost certain that the iPhone infringes at least some of those 10 patents, regardless of our inability to make that determination directly.
Royalty rates and Apple's next move
So if Apple's using Nokia's tech, and Nokia's obligated by its agreements with ETSI and IEEE to offer licenses to everyone on fair, reasonable, and non-discriminatory terms, why isn't Apple paying? Would you be surprised if we told you that the answer is incredibly complicated? Because really, you shouldn't be -- especially when a word like "fair" is involved.
The nature of the standards process means that when big telecom players (like, say, Nokia and Qualcomm) come to the table to hash out patent licensing agreements, each side has a pretty hefty portfolio of "essential" patents to bargain with, and they can walk away with a cross-licensing agreement instead of having to make huge royalty payments to each other. Cross-licensing agreements are incredibly common in the wireless industry, and we as consumers basically depend on them operating behind the scenes to make all these standards work. Of course, cross-licensing can break down as well -- Nokia and Qualcomm have been suing the pants off each other for years now, after all.
But Apple doesn't have a huge portfolio of patents on wireless technologies to cross-license with Nokia -- the majority of its patents are on devices and interactions, and we don't think anyone in Cupertino is too anxious to share those. So it's got to be cash, and even if Apple's willing to pay a straight cash royalty for Nokia's patents, negotiating that price is anything but easy -- FRAND is basically what wireless industry licensing executives have to believe so they can sleep at night. In reality FRAND is nebulous and undefined, with almost no specific rules for determining what a "fair, reasonable, and non-discriminatory" license actually is. Nokia could be asking for $1 per iPhone -- chump change for
We're inclined to believe Nokia's picked 10 rock-solid patents out of its collection of some 11,000. |
So what's Apple's next move? Well, it has several options: first, it will likely say that it's not infringing the patents at all -- either because it believes the patents aren't actually essential to the standards, or because Apple bought the chips and components that use the patented technology from a licensed supplier. Nokia doesn't get to double-dip and be paid twice if Apple's suppliers have a license to use Nokia's patents and Cupertino's just buying phone components without dictating design. Again, we simply don't know the answer here -- we'll have to wait for Apple's reply to find out what tactic it decides to take, but we'd expect this to be the first line of defense.
Second, it can try to to convince the court that Nokia's patents aren't valid, which would be the worst-case scenario for Espoo. Like we've said before, suing over patents is a big gamble because they might end up invalidated and no longer generate lucrative licensing revenue -- another reason we're inclined to believe Nokia's picked 10 rock-solid patents out of its collection of some 11,000. But invalidation doesn't really make tactical sense, considering all Nokia wants is a royalty -- if invalidation is Apple's strategy we'd say we're in for an easy decade of litigation, and that's not going to be cheap.
And finally, Apple can just pay. We spoke to several experts in the field during the course of our research into this piece, and almost all of them were surprised that Apple hadn't already coughed up the green. Again, we don't know the royalty rates Nokia's demanding, but it's a little strange that Apple isn't using its enormous cash reserves to just make this disappear. The main issue we can see is that whatever rate gets set in this case will be the basis of all future license negotiations, and Apple's got to be careful with that -- unlike almost every other company in the space, it's become a major player in the phone market virtually overnight, and setting this precedent properly is an important step. That said, Nokia's got to feel pretty good about the rates they've offered Apple here -- filing a lawsuit means Nokia's license agreements with other companies will eventually be examined, so it'll be obvious right away if Espoo's not offering similar terms to Cupertino. Let's just say this: it's not going to happen anytime soon, but we wouldn't be surprised if Steve ends up writing a check somewhere down the line.
Wrap-up
Okay, that's a lot to think about, but let's just back up a second here and consider the big picture: this has nothing to do with Nokia's handsets versus the iPhone in the marketplace, and everything to do with the fact that Nokia's intellectual property is a critical part of making modern mobile phones work. The real questions are how much of that intellectual property is in the iPhone, and how much Apple's willing to pay -- and neither has a simple answer. Believe it when we say we've just barely scratched the first layer of complexity when it comes to patent licensing and wireless standards, and we've left out a ton of angles and strategies both Apple and Nokia could pursue. And even if we did know everything, at this point it's simply impossible to predict how this case will play out -- it could settle tomorrow, it could go on for two years, or it could linger on for two decades. As always, our hope is that both sides come to the table, figure out a royalty that makes sense, and get on with the business of developing innovative new technology -- like we've said before, the lawyers get paid that way too.
Disclaimer: Although Matt and Nilay are lawyers, they're not your lawyers, and this isn't formal legal advice or analysis. To the extent this article might contain any statements regarding infringement of a particular patent by a particular device or what those patents cover, those statements are attributable to Nilay, not Matt, who still makes a living by giving actual legal advice to actual clients.
Chop Chop. I want the money in 50's.
Nothing more entertaining than watching corporates wash dirty linen in public.... Go boys!
*meanwhile Android slowly & silently gobbles marketshare....quietly brilliant*
is there a scoreboard? we should get one
"Double Dipping" and "Apples Success"
1) The double dipping defense makes clear sense.
The manufacturer of the chip sets allowing for Wifi, 3G, etc. have paid there licensing.
Apple is purchasing those chip sets at a price that includes all their functionality.
If Nokia is trying to double dip (get paid by the chip set manufacturers AND THEN get paid by the companies that buy those chip sets), what's to keep them from sending you or me an invoice, since by purchasing an iPhone, we too are using their licensed technology?
2) It is about the $success$ of the iPhone. When ANYBODY decides to sue, their must be $$$ to go after.
Apple is making significant caching on their iPhones. No one sues a penniless bum.
@iGO
"No one sues a penniless bum."
Except maybe the RIAA.
"Double dipping" is called "patent exhaustion" in the courts and this concept was recently strengthened by the U.S. Supreme Court in LG v. Quanta.
I doubt Apple's best interest is served by letting a jury of 12 laypeople or 1 federal district court judge set the "reasonable royalty" for licensing Nokia's patents.
iGO: You're assuming that Nokia's lawyers are the worst in the world, and Apple's are the best.
I'll bet you dollars to donuts that Nokia is aware of that, and double dipping won't be a valid defense.
Why is iGO being down ranked? "double dipping" or "patent exhaustion" seems like the most sensible argument here. Do you really think that a company like Apple, one that's been around since the beginning of all this personal electronics business (and probably the most anal when it comes to details), would be so painfully oblivious to requirements like paying for patented technology when they need to? Apple isn't making any of the physical hardware in the iPhone and the companies that are, obviously have to pay for the technologies they're using. Nokia demanding money at every step of the manufacturing process is ridiculous at best.
And stop pretending like the sour grapes argument has no validity. The iPhone has been out for YEARS and they're just now getting to this? You can bet your ass that if it ended up being only as successful as the Storm or Pre, Nokia wouldn't even be wasting their time. Would all of you honestly not agree that we would rather see them waste the millions of dollars they're going to spend on this lawsuit on making a truly amazing device instead? They need to spend less time in the courtroom and more of it in the R&D department. Even if they're 100% right and Apple ends up paying a royalty for every iPhone sold, it's not going to turn things around for them overnight. People are moving en mass to smartphones and once they can't keep relying on selling cheap, single function phones (typically given away for free with plans, one of the biggest reasons they have the market share that they do) no amount of lawsuits will save them. Who knows, this might even be their version of balloon boy, just a pathetic publicity stunt to get some coverage.
"Alan Strangis", you're assuming that people don't threaten, or even go through with, totally frivolous lawsuits in an effort to strong arm others into just giving in to their demands. Don't assume for one second that just because they're going to court, they have a watertight case.
@Alex
I doubt Nokia just filed this yesterday. Takes a long time for these things to get through the system. They could have very well started this process years ago.
Not saying they did, but its possible
"Chop Chop. I want the money in 50's."
Would you like your iFries with that?
On a serious note, do you think Nokia / Apple are setting this thing up like MSFT did couple of years back? Apple settles with Nokia for chump change and then Nokia goes out and sues everyone else using this settlement as a legal precedent? Apple for all its troubles gets a "fair" share in those future settlements. Like Nilay says "Again, we simply don't know the answer here -- "
@indiatech:
RTFA
Nope - Nokia's already agreed to licensing fees with everyone else.
-Low long whistle-
Hope there's an App for this...
are you kidding?
app store now has 100k apps...
they even got an app that rejects apps...
In Soviet Russia, App rejects you!
There's probably an app whose sole function is to obnoxiously pipe up with "there's an app for that!" whenever anyone says anything.
If there isn't, there should be. ;-)
Wow a neutral article from Engadget, this will be remembered in history books.
Not THAT rare... Nilay's good at breaking down the tech-legalese.
Of course, anybody without a horse in this race could safely bet on Nokia getting a settlement out of Apple.
just when i had written off Engadget as a hack website just collecting news and posting it , they go and write a neutral , concise article....
Yes, very good article - it sets the record straight and calls out the various knee-jerk commentry's without making wild predictions of its own. Of course Apple can afford to pay the royalty but at what rate? Should this be based on device cost? If so why (since Apple will claim much of the cost has nothing to do with telephony per se - memory, iPod circuitry, camera, GPS, etc). No company lets another dictate to it and every company wants to make money. RIM should probably have settled its dispute long before it did, but in that case, the suing company wasn't in the business and paying for something that an inventor (who'd died) had never actualized seemed wrong to the guys who'd mortgaged their houses to build RIM. This may also have something to do with bitch-slapping a newbie to telecom, Apple, who waltzed in and acted as if it owned the market.
@uberfu - I truly don't understand why more people aren't coming to your same conclusion. Apple doesn't make any of the hardware in their devices, especially not any of the hardware in question, so why would they owe money on top of what those manufacturers paid?
And why now? Why not back when the phone was first released? Nokia would have a lot more credibility if this lawsuit came around in 2006, not 3 YEARS later.
Alex, Nokia's license agreements do not necessarily exhaust the patents - it is possible to license a patent to one party in a way that does not necessarily apply downstream, e.g., licensing claims infringed by one device alone but not those infringed by the combination of that device with others, etc.
And Nokia's claims are no weaker for having waited except to the extent that Apple may argue for waiver or that damages over 6 years old are now presumptively barred (a concept called laches) - for all we know, they've been negotiating for years and have only now finally given up after a good faith attempt to get Apple to pay.
I would not assume Nokia's case is weak or weakened by their actions here, and if the rest of the industry is paying, you can bet that some strong legal minds have examined the patents and concluded that there's a reason to pay.
@Alex - Just because they don't make it doesn't mean they didn't have a hand in designing the components used in the iPhone. If they helped design it then they could have infringed on Nokia's patents.
As for why now? Perhaps some feature of the iPhone 3Gs, which could be new, is the problem. Likewise it may have taken a couple years for Nokia to discover the infringements. It's not like Apple called them up and said "nyah, nyah, we're infringing on your patents"
tl;dr
Just look at the pie chart, if the text is too long. Says pretty much everything.
Um..........Kumbaya
Thanks for the article, not a bad read.
Unfortunately fanboys will continue to believe "Nokia = sour grapes" is the only acceptable answer.
Nooo, nobody can think so...
-> word @ Oct 29th 2009 11:13AM
Indeed this is one of the best articles i´ve read in ages on Engadget. I hope Engadget crew takes the comments here to the heart and keeps producing more high quality articles. Maybe a thought would be a ´serious´ tab on Engadget. This would could be posted without problems at slashdot which is imo a standard regarding technews.
"As usual, the race to hype this dispute as a bitter standoff between two tech giants desperate to destroy one another has all but..."
Wow guys, way to call yourselves out.
Including this one, we've written two posts on this, and the first was just to note that the suit was filed: http://www.engadget.com/2009/10/22/nokia-sues-apple-says-iphone-infringes-ten-patents/
So... what are you talking about?
...you completely missed the sense of the sentence. let me continue what you left out. "...has all but ignored the reality of how patents -- especially wireless patents -- are licensed"
they are saying that everyone blindingly hyping up the point of view that this is a bitter standoff between two companies are missing the point of what's actually going on here
He thinks the writers are spinning this, when in actuality it is the COMMENTATORS. Don't be confused, Nilay.
I love when Nilay comes and shuts the idiots up. The best!
Woah, he just got anNIhiLAted.
You forgot a letter there.
Oooh, it burns!
@microlomaniac: where, exactly? =]
@Chris Zeigler
You should probably get that checked out man. Burning sensations are never good.
Yeah, sure, but why now? I mean, the iPhone is about 2 years old, and Nokia was doing good until then. It's not doing good anymore. I'm inclined to think that they didn't see Apple as important and now that it is, they want a share of their success.
Why now? Because these things take years to negotiate before they get to the point where one or both sides files a lawsuit.
Nokia was probably trying to get Apple to agree to a deal for years, before they even thought about suing.
If you followed the story, you'd know that Nokia claims they had been in negotiations with Apple for some time.
Apple doesn't want to pay whatever Nokia was asking.
Whether this goes all the way through court, or it's settled before that, Apple's got to pony up something. That's as clear as day. If they were smart, they'd work out a deal, to save on legal fees AND get a settlement that's probably going to be better than what they'd have to pony up if (when?) they lose.
It may have taken Nokia that long to build up their case and there is always the possibility of behind the scenes negotiations that have stalled and Nokia wanting to pursue to the next level.
I don't see how Apple could fight this but for sheer bloody-mindedness
Its not like Nokia want them to stop selling anything, they just want the money that's (allegedly) theirs.
As the article said, we have no way of knowing if Nokia is asking a fair price or not. It's not just "the" money, it's how much money, and on what terms, and for what reasons.
Apple are very sneaky. There's a loophole somewhere that they will try to sniff out and exploit. They want to try and smash all GSM license agreements knowing them.
...OR, y'know, you could...read the article. At all. Just throwing that out there.
Seriously iPhone should sue the crap outta nokia. iPhone unveiled in Jan of 07.
Nokia n900.,2009 ambient light sensor proximity sensor accelorometer visual voicemail. Prior to iPhone this was just a wet dream for bloggers.
Dude...what? We're talking about GSM, UMTS (3G) and WiFi here, not accelerometers and ambient light sensors. Even though I haven't done research on this, I'm going to take a wild guess and say Nokia MAY have had a GSM/UMTS phone or two out before the iPhone.
A device (iPhone) can't technically sue anyone you moron... It would have to be Apple to sue.
...my Xbox360 should kick the crap out of you troll!