Why Nokia deal with Apple may spark mobile patent war

Missile launch by Steve JurvetsonAfter a protracted period of patent warfare, Nokia and Apple appear to have settled their differences — with a bundle of cash. Nokia boss Stephen Elop says the two companies have agreed to drop their lawsuits against each other, with Apple paying a one-time sum and a regular license fee to use Nokia’s technology.

“We are very pleased to have Apple join the growing number of Nokia licensees,” said Elop in the announcement, before suggesting that Nokia might be able to use its apparent victory to prize some money out of the hands of other companies as well. That means Android, in particular, could be in the firing line.

So far Apple remains silent on the nature of the deal, but it has to be said that the move comes something of a surprise given that the US International Trade Commission had previously ruled that the American company had not infringed a number of Nokia patents. Still, it may have proved easier for both sides to settle and move on than continue a war that showed few signs of ending, despite entering a second year of litigation.

The agreement and payments end all patent cases between the two companies, but there’s still one major unanswered question: exactly how much is the deal for. That’s being kept tightly under wraps, but there is a hint in Nokia’s statement that the deal will be a significant boost to its bottom line. The release says “this agreement is expected to have a positive financial impact on Nokia’s recently revised outlook for the second quarter 2011 of around break-even non-IFRS operating margin for Devices & Services.”

Sifting through the jargon, that seems to imply that Apple’s payments will make up some of the expected deficit in sales of handsets and software, which is the largest part of Nokia’s business. Last month Nokia had said that it was downgrading its expectations, after lack luster sales meant it was losing as much as 9 percent of its profits in the handset business. It’s not clear how much of that shortfall this deal will make up, but my back of the envelope calculations suggest a wide range that reaches as high as $900 million (though it is most likely lower).

Beyond the immediate news, there are also longer-term issues to consider. First, there’s the effect on Apple. I think those are minimal: the company has huge cash reserves and now has ended almost all possibility of further litigation from Nokia in this area.

More importantly, there’s the impact on Nokia and its image. While the payments may help the company right itself temporarily (remember, the company says the money is only going to shore up its dismal Q2 results) they may betray a deeper issue — that it is becoming reliant on others. Regardless of the rights and wrongs of the case, it’s going to be hard to fight the image that everybody else is now keeping Nokia afloat through their payments. After all, these millions from Apple come on top of billions from Microsoft.

Perhaps the most important long-term impact could be that this victory encourages Nokia to launch more lawsuits. Some suggest that Android, for example, could now be a prime target. Nokia has already launched cases against the likes of Samsung, LG, Sharp and Toshiba, and — as Florian Mueller of the FOSS Patents blog points out — Nokia is preparing to go on the warpath.

Having proven its ability to defeat Apple — after the most bitterly contest patent dispute that this industry has seen to date — is a clear proof of concept. Other companies whom Nokia will ask to pay royalties will have to think very hard whether to pay or pick a fight.

Maximizing cash from its patent portfolio is an expensive and time-consuming gambit, but it seems to have paid off for Nokia so far. In fact, perhaps even more than Stephen Elop’s famous “burning platform” memo, this situation encapsulates Nokia’s ongoing problems more succinctly than almost anything else: as the company that comes up with technology that everybody else manages to exploit better than it can.

Photograph used under Creative Commons license courtesy of Steve Jurvetson