'If you want to dance, you must pay the fiddler.'
In the last six weeks, two patent transactions shook the world of mobile communications:
While the size of these transactions is extraordinary, patent transactions and patent-motivated acquisitions are hardly rare. Consider these other less-widely-reported recent events:
- Google acquired more than 1,000 patents from IBM
- Apple acquired more than 200 patents from Freescale
- HTC acquired a portion of the patent portfolio of ADC ($75 million), Dashwire ($18.5 million) and S3 Graphics ($300 million)
- Kodak sold 850 patents for $65 million and is now offering another 1,100 patents for sale
- InterDigital's stock is up more than 50% since it announced plans to sell some or all of its 8,000-strong patent portfolio
So what are we to take from all of this activity? The lesson is really quite simple: Technology isn't free.
Technology is at the heart of competition in a growing number of industries. Companies compete to develop new products and features that will entice customers to buy their products instead of their competitors' and hopefully to pay a premium price for what they have to offer.
To participate in this race and produce a competitive product, companies grab technology and product features wherever they can find them. Some they develop on their own, but inevitably, many come from suppliers or competitors or from the technology ether. No company can possible develop all of the technology it needs to stay in the race all by itself.
And there's the rub. Technology isn't free for the taking. Companies, both large and small, spend vast resources to develop new technology and to improve the performance and features of their products. When they do, they (and their shareholders) rightly expect to profit from those investments. As a result, companies that want to build competitive products are required to pay for the technology they use. Some they pay for through their own R&D budgets, and some costs are embedded in the price of components they buy from suppliers. But some they must pay for through license fees to the companies whose technology they have adopted.
Along comes Google, a wealthy search company that has never participated in the device marketplace and never conducted any significant R&D to develop technology related to operating systems. It decides to enter those markets but unfortunately owns hardly any of the technology it needs to be successful. So it adopts the best technologies and product features available in the ether only to discover that all of it was developed by someone else and that someone else expects to be compensated for its use.
Most companies in the market have technology to trade and end up licensing their technology to each other with relatively few disputes. But when a new entrant with nothing to trade enters the market, the companies who spent billions to develop all the technology that is floating in the ether expect to be compensated for whatever the new entrant uses.
Google may complain loudly about anti-competitive practices and bogus, dubious, questionable patents, but the fact remains: If you want to dance, you must pay the fiddler. Yesterday it did just that. The acquisition of Motorola Mobility will go a long way toward helping Google settle its disputes with players like Apple and Microsoft. It won't solve all of Google's problems (think Oracle), and it remains to be seen how the acquisition will impact the Android ecosystem, but if the deal closes, Google will finally own relevant technology that may change the dynamics in that industry.
New entrants always have this problem. Taiwanese companies HTC (smartphones and tablets) and Vizio (flat-panel TVs) are both struggling with how to pay for the vast amount of others' technologies they've incorporated into their products. After Apple entered the wireless telecom space, it had to pay billions in settlements and ongoing royalties to Nokia who owns a lot of the technology it adopted. Samsung has paid many billions of dollars over the years to license in the technology it needs and has increased its R&D spending and patenting activity exponentially in order to compensate. More recently, Samsung has been on a global patent-buying spree to obtain technology for its next generation of products.
The cost of technology has become a large and rapidly increasing part of the cost of goods sold in the products that we buy. That's not surprising when you consider the amount of technology that's crammed into an Android phone or the many other tech-heavy products we use. Gone are the days when companies competed primarily over manufacturing costs. Today, managing technology acquisition is the essence of modern strategy. Companies that are most successful at developing and owning new technology and acquiring and controlling the cost of technology will win in the marketplace. Those that fail to effectively manage internal and external technology acquisition will fall behind in the technology race and will find that they cannot afford to pay the fiddler.
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