Behold the Bankruptcy of Software Patents

You may recall back in 2011, there was an extraordinary bidding war for the patents of Nortel Networks: Apple Inc. (AAPL) joined with rivals Microsoft Corp. (MSFT) and Research in Motion Ltd. (RIM) to outbid Google Inc. (GOOG) for a patent...


You may recall back in 2011, there was an extraordinary bidding war for the patents of Nortel Networks:

Apple Inc. (AAPL) joined with rivals Microsoft Corp. (MSFT) and Research in Motion Ltd. (RIM) to outbid Google Inc. (GOOG) for a patent portfolio from Nortel Networks Corp. and gain rights to technologies for mobile phones and tablet computers.

The group, which also includes Sony Corp. (6758), Ericsson AB and EMC Corp., agreed to pay $4.5 billion in cash for the assets, Ontario-based Nortel said in a statement. The companies aim to complete the sale this quarter pending approval from U.S. and Canadian courts, it said.

The purchase will give Apple, RIM and their bidding partners control over more than 6,000 patents and applications that cover wireless and Internet technologies. The winning offer came after several rounds of bidding and was five times the $900 million Google had offered before the auction for Nortel's remaining intellectual property.

A major fear was that these patents would be used not to promote innovation, as theoretically patents are supposed to do, but to hamstring the main rival of the companies in the winning consortium – Google. Here, for example, is what the American Antitrust Institute said at the time:

The consortium membership includes three leading mobile device operating system competitors, and they are the three main commercial rivals to Android, Google's open-source mobile operating system. Each of them already possesses a large portfolio of wireless technology patents and the capability of bidding on its own for a significant portion of the Nortel portfolio. The AAI warns that their collective control over the massive Nortel portfolio could enable and incent them to enforce the patents to suppress mobile device competition generally and open source competition in that field in particular. In these circumstances, the AAI questions why any horizontal collaboration among them with regard to the Nortel portfolio should be allowed.

In the end, the US Department of Justice's Antitrust Division allowed the deal to go through. Here's its justification:

After a thorough review of the proposed transactions, the Antitrust Division has determined that each acquisition is unlikely to substantially lessen competition and has closed these three investigations. In all of the transactions, the division conducted an in-depth analysis into the potential ability and incentives of the acquiring firms to use the patents they proposed acquiring to foreclose competitors. In particular, the division focused on standard essential patents (SEPs) that Motorola Mobility and Nortel had committed to license to industry participants through their participation in standard-setting organizations (SSOs). The division's investigations focused on whether the acquiring firms could use these patents to raise rivals' costs or foreclose competition.

During the course of the division's investigation, several of the principal competitors, including Google, Apple and Microsoft, made commitments concerning their SEP licensing policies. The division's concerns about the potential anticompetitive use of SEPs was lessened by the clear commitments by Apple and Microsoft to license SEPs on fair, reasonable and non-discriminatory terms, as well as their commitments not to seek injunctions in disputes involving SEPs. Google's commitments were more ambiguous and do not provide the same direct confirmation of its SEP licensing policies.

As that makes clear, the Antitrust Division seemed most concernd about "SEPs", and not so worried about all the other patents, of which there are many. That was, of course, foolish, since it was only a matter of time before the consortium, which has since formally morphed into a patent troll whose business model is based purely on demanding licensing fees for patents that it uses in no products whatsoever, never mind innovative ones, went on the offensive:

Rockstar, the consortium that bought the Nortel patents for $4.5 billion, sued Samsung Electronics Co Ltd, HTC Corp, Huawei and four other companies for patent infringement in U.S. District Court in Texas. Rockstar is jointly owned by Apple, Microsoft, Blackberry, Ericsson and Sony.

Google is accused of infringing seven patents. The patents cover technology that helps match Internet search terms with relevant advertising, the lawsuit said, which is the core of Google's search business.

As you can see, this is a direct and targeted attack on Google and its business model. Not uncoincidentally, it comes at a time when both Microsoft and Apple are struggling in the smartphone market, although to differing degrees: Apple is hugely profitable, of course, but losing market share globally, while Microsoft's impact here is simply negligible. It's a clear attempt to undermine Google not by competing with innovative products, but using monopolies on trivial ideas.

Just how trivial they are can be seen from the seven patents: US 6,098,065 (owned by NetStar rather than Rockstar), 7,236,969, 7,469,245, 7,672,970, 7,895,178, 7,895,183 and 7,933,883. These are all minor variations on the same idea (the abstract for each is almost identical), which is itself so trivial that a ten-year-old with a suitable incentive could come up with it. Basically, it's the technique of providing contextual advertisements for search queries. Not only is the idea itself trivial, the implementation is also obvious to anyone with the most rudimentary database programming skills. Here's a sample of the genius distilled by the last patent listed above:

An end user's profile data may contain such information as the make, model and year of automobile he/she owns or leases. When tires are needed, the manufacturers recommended tire types and options may be considered as sort criteria provided within a contextual database. Another example relates to when airline reservations are being sought. All of a person's preferences, which today are normally sorted one by one through a travel agent, could be utilized by the advertising and selling mechanism to provide the informed response.

In addition to the search criterion, as users interacts with the advertising system, it will continue to compile preference data (e.g. a list of keywords) for each user. All preferences, for example, can be left in a type of default mode or even presented to the user for him/her to edit and re-prioritize in order to look for diversity or alternatives. The system can detect exceptions and contradictions so that the end user can be shown immediately that some of the options would violate natural tendencies.

Some of the search patterns or preferences will be keyed off of natural interests also such as: social, family, political, technological, geographical, environmental, educational and so on. Once these preferences are known, then an advertisement or a proposed customized product brochure can be prepared.

The broken nature of a patent system that can even contemplate awarding a monopoly on such ideas – for, be it noted, this is not about some insanely clever, non-obvious way of offering contextual advertisements, but the core idea itself, something that patents allegedly don't do – is evident. The idea that suing Google for an alleged infringement of these patents somehow is promoting innovation – a word that occurs seven times on Rockstar's home page – is simply risible. The only consolation here is that the open source underpinning of Android is not involved – this is purely an attack against Google, not free software (although the fear has to be that will come in due course...)

The current action by Microsoft, Apple et al. is sign not only of their growing inability to compete on a level playing field, but of the utter bankruptcy of the whole idea of software patents. They do not provide incentives to innovate, since that "innovation" is simply the basic act of solving problems through code, something that programmers do routinely every day. Instead, software patents allow companies to impose a government-enforced tax on real innovation carried out by others, an unnecessary cost that is passed on to the public for no benefit whatsoever. Quite simply, software patents are the ultimate in anti-innovation.

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