Daniel Eran Dilger
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Why Nokia is suing Apple over iPhone GSM/UMTS patents

October 22nd, 2009

Daniel Eran Dilger

Nokia has filed suit over patent infringement on Apple’ iPhone, claiming that “by refusing to agree appropriate terms for Nokia’s intellectual property, Apple is attempting to get a free ride on the back of Nokia’s innovation.” Actually the reverse is true.

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As the world’s leader in handset sales by a wide margin, Nokia most certainly does have one of the “strongest and broadest patent portfolios in the industry,” as the company says. And having licensed its technology to nearly every mobile maker in the industry, it’s not surprising that Apple will have to pay Nokia to play in the phone market.

However, Nokia is painting a picture that doesn’t doesn’t really mesh with reality, suggesting that Apple is a rogue manufacturer intent on breaking patent laws. In reality, Apple maintains one of the most experienced legal teams in the field of intellectual property, knows how the industry works, and either pays for IP or proves that it doesn’t need to.

Nokia sues Apple over iPhone’s use of patented wireless standards

Apple, tamer of trolls

After all, this is the company that in 2005 outmatched Microsoft in slaying the Burst.com multimedia patent trolls. After Redmond paid out $60 million to Burst, Apple stepped in and invalidated most of the company’s patents and then settled for just a sixth as much, despite the giggles of pundits who hoped Apple would be forced to pay out far more than Microsoft.

Apple also expertly navigated the perilous waters surrounding the iPod, buying out trolls or in some cases partnering with them for mutually beneficial results. That’s what it did when Creative creatively threatened to get an injunction against iPod sales; Apple pulled out its own patents over a Beer Summit and ended up talking Creative into making iPod accessories and liking it.

This is a company that has played both sides of the IP game, contributing its patents to pools and licensing others’ back. An easy example is the MPEG Licensing Authority, which Apple repeatedly had to dicker with to pull licensing down to reasonable levels. In 2002, Apple staunchly refused to ship Quicktime 6 until the MPEG LA agreed to reasonable streaming fees for MEPG-4.

Apple is now gearing up again to battle MPEG LA over H.264 streaming fees set to explode in 2011, while the powerless open source community just curses under its breath, cowers in the shadows, and suggests using Ogg instead.

Apple’s Billion Dollar Patent Bluster
Ogg Theora, H.264 and the HTML 5 Browser Squabble
Why Apple’s Tim Cook Did Not Threaten Palm Pre

When the going gets tough, Nokia gets litigious

Analysts say Apple has similarly been working with Nokia to hash out an acceptable patent agreement for at least a year. So why is Nokia grandstanding about its patent suit to the press for sympathy? Because that’s about all Nokia has left going for it.

The company now sits on at least four operating system strategies: its Nokia OS “no frills” Series 30 and “basic” Series 40 embedded systems for simple phones; Symbian OS, its flagship smartphone system that just converted itself from a commercial enterprise in free fall to an open source giveaway bin; various flavors of Linux that power the company’s not-quite-a-phone devices; Windows 7 on its netback experiment; and rumors about following Sony Ericsson into the fetid swamps of Windows Mobile just to cover all the bases.

Nokia is a lot like the Microsoft of mobile phones: on top of the market for reasons nobody can still remember and yet convinced that things won’t ever change despite clear evidence to the contrary, not the least of which is the company’s frequently absurdist management decisions. Such as partnering with each other to be led out of the pit.

Readers Write About Symbian, OS X and the iPhone
iPhone panic spurs Nokia to dump Symbian on high end

Follow the lack of money

A look at Nokia’s finances is also revealing. While the company sold 108,500,000 phones in the last quarter (an 8% drop from the previous year), a figure that dwarfs Apple’s sales of 7,367,000 iPhones over the same period, Nokia’s average selling price was around $90 compared to Apple’s $612. Nokia sells a lot of crap; Apple only sells the iPhone.

That’s why despite selling a tiny fraction of the volume that Nokia pushed into the channel, Apple’s iPhone brought in revenues of $4.5 billion compared to Nokia Devices and Services’ $9.8 billion, and actually earned gross margins of $2.7 billion compared to Nokia’s $3 billion, and Apple’s EBIT (earnings before interest and taxes; operating profit) was $2 billion to Nokia’s $1 billion.

Apple is just now entering its third year as a smartphone vendor and it has already beaten Nokia at its own game. And while Apple’s business is growing dramatically, Nokia’s sales slipped behind in every market it did business in: down 1.1% in Europe, down 6.6% in China, down 8.8% in the Middle East and Africa, down 11.8% in Latin America, and in Apple’s home territory of North America, Nokia was down 31.1%.

Nokia is trying to demand something like $12 per iPhone in royalties, which analysts describe as ridiculous posturing. But that goal indicates that Nokia sees no future in its own ability to innovate, and that it would rather latch onto Apple like a barnacle and live the easy life of a parasite, earning more from each sale of Apple’s iPhone than it makes from selling its own devices.

That’s why claiming that “Apple is attempting to get a free ride on the back of Nokia’s innovation” is about as shamelessly bottom feeding as Nokia could be expected to get.

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  • SunnyGuy53

    Hit the nail on the head — as usual with Daniel.

    Sunny Guy

  • cigaar

    Dear Daniel
    I enjoy your articles. Thanks to you, “pundit” is now my favorite english word. I’m a big fan, really.
    However, please don’t use the word “analyst” without citing sources: who they are, who they’re working for and so on… you’ve done it twice in your article; it’s just too easy and you’re just to good for that.
    Anyway, cheers and keep up the good work. Can’t wait to read your book!

  • http://www.adviespraktijk.info Berend Schotanus

    “on top of the market for reasons nobody can still remember”

    I’m sorry guy, I can!

    Back in the 90’s Nokia was really great stuff, with head and shoulders ahead of their competition. It had a much better user interface than the other phones and was quite nicely designed. While the networks wanted to sell Ericsson, Philips and other crap customers kept asking Nokia until they finally received what they were asking for. And then, when we were ready to exchange our first Nokia for a second one we brought our fist devices back for charity, so they could receive a second life in the developing world thus proliferating the GSM dream and Nokia markets.
    I’m sorry you poor Americans were not part of the developing world and the only thing you could do with your old CDMA devices was bring them to the landfill.

    For the rest: great article ;-)

  • http://www.muir.tumblr.com John Muir

    Nokia is Finland’s crown jewels. There was a time when the company was valued twice as high as the entire Finnish economy:
    http://www.wolframalpha.com/input/?i=Nokia+Market+cap+%2F+Finland+GDP
    Nokia dominates Finland’s workforce too, employing over 120 thousand (worldwide, but most right there) from a total adult population of only 3.5 million.

    I don’t like Nokia — they lost the plot a long time ago — but with clout like that, it’s likely one of the most powerful companies in the European Union. And everyone knows what the EU is good at when it comes to American companies.

    Sure, Microsoft deserves the EU sanctions it gets; so too Intel. But the fact they’re foreign really does factor into the political decision. Nokia probably thinks it has a nuclear option if Apple devastates its European sales. I hope not. But Nokia certainly has allies in the institutions which can give Apple a lot of trouble over here.

    It reminds me of Microsoft and the pardon George Bush Jr. gave them in 2001. Politics is ultimately above corporate law.

  • GoodDoc

    I’m not a patent lawyer or an analyst, but I not sure this is as simple as Daniel suggests.

    Some Analysts (Rupert Godwins @ ZDNet UK) have suggested that as the licensing cost for GSM on a mid range phone can cost $25, Nokia’s claim of $12 per handset may be perfectly reasonably.

    Nokia are clearly in trouble, but that doesn’t mean there is no merit to their case. Mr Godwins article (Nokia vs Apple – the fanboys already know who’s right) makes some interesting points.

  • tonortall

    Daniel,

    this article can be summarised thus:

    1. Nokia wants $12 an iPhone for its patents
    2. Apple have defeated many patent litigators in the past.
    3. Nokia’s marketshare dropped recently.
    4. Therefore Nokia is the parasite, not Apple.

    When you go to court, you don’t plead that you want x, but more if your honour so deigns. You go in high because you are never going to get more than what you initially ask for. To do otherwise is just plain dumb. The goal does nothing like indicate what you suggest. It’s typical practice.

    Nokia and Apple have, apparently, been thrashing this out for up to a year and you correctly suggest there is a price to be paid. It’s not going to be $12 a piece for precisely the reason I suggested – it leaves room to negotiate the ‘correct’ value.

    I don’t expect you to agree with me. That kind of reasoning may play out, but it really can’t be adequately inferred from the behaviours of the parties involved. Time will tell.

  • ChuckO

    The timing is interesting with iPhone about to launch in China. I gotta think with cheap phones in Asia a big part of Nokia’s business they must be very nervous.

  • ChuckO

    Maybe Apple is holding the release of an iPhone Nano over Nokia’s head in negotiations. “You know guy’s we’ve been thinking about trying out an iPhone Nano in India as a test run. Now how much did you want again?”

  • http://bkpfd.org qka

    @Berend Schotanus

    This Yank agrees with your comments about the backwardness of our mobile phone market, with their variety of standards, etc.

    However, old CDMA phones in the US can be donated to charity for a useful second life, and without a carrier contract.

    By law, all mobile phones, even if they do not have a carrier contract, must be able to reach 911, the universal emergency services number in the US.

    Many civic groups collect used mobile phones for donation to battered women’s shelters and similar organizations. I gave mine to elderly neighbors, for their safety.

    I would strongly encourage anyone is the US with an old cell phone to consider donating it to an individual or organization that could use it for calling 911.

  • ChuckO

    …or how about this Apple comes out with the Indian iPhone which comes pre-loaded with iLife Indian Farmer edition a suite of tools that rural farmers can use to help grow and market their crops plus a special Bollywood edition of iTunes AND comes with a dock for connecting to your TV if you have one. How powerful would that be? You just collapsed a computer, phone, DVD player into one device and changed a lot of lives. Probably an equally valid strategy for rural China. You just need to figure out how to structure the contracts so they are affordable. Apple would rout Nokia in Asia. You talk about not leaving a price umbrella.

  • Espen

    I remember the horrific piece of crap the Nokia 8210 was, and how abysmal Nokias treatment of their customers was back then. I swore I’d never buy anything from them again.

  • prmills

    1. Apple also has a portfolio of patents. It will figure out a way to countersue.
    2. Apple will challenge Nokia’s asserted patents (prior art, obviousness, etc).
    3. Apple will challenge the applicability to the way they do it.
    4. Apple will run the clock. This type of lawsuit takes years.
    5. Apple has enough money to give a little bit to Nokia just before they go to court. Since that could be years away and Nokia in a weakened positiion financially, the settlement then could be less than now.

  • borker

    My first thought was that Nokia was probably looking to gain access to (cross license) what ever interface patents apple has in areas like multi-touch, rather than just reap a cash reward

  • SteveS

    “That’s what it did when Creative creatively threatened to get an injunction against iPod sales; Apple pulled out its own patents over a Beer Summit and ended up talking Creative into making iPod accessories and liking it.”

    Some of us have better memories than that. When you omit details Daniel, the rest of your article becomes questionable. What about the $100 Million Apple had to pay Creative for a patent Apple should have been able to defend? You know the Finder “column” view which predated Creative’s menu system.

    In any case, if Apple is guilty of violating an existing patent, they should pay. It’s that simple. Also, defending one’s intellectual property is not a sign of weakness or that one is not able to innovate. Yes, Nokia may be losing ground and short on innovation, but that has nothing to do with protecting intellectual property.

  • http://crankyoldnutcase.blogspot.com/ The Mad Hatter

    Patents in the United States are supposed to be issued only if they have a positive effect on the commons (go read the Constitution). Since they do not do this, the patent system should be scrapped. In fact the only use for a patent is to fend off competition, which is what Nokia is trying to do.

    If you can’t compete, don’t whine about it. Just close your doors.

  • Steed Hardman

    Daniel, thank you for the wonderful job exposing Nokia’s perfidy. It’s outrageous that they think that they can piggy-back on the monumental success of the iPhone. I’m literally rigid with rage over this.

  • ChuckO

    The Mad Hatter

    Could that really be true? What if as Nokia has stated you invested $40 billion developing technology should others be able to come in and use that technology developed on your dime. Wouldn’t that have a chilling effect on R&D if you had no protection for no period of time?

  • http://crankyoldnutcase.blogspot.com/ The Mad Hatter

    ChuckO,

    Sure it could be true. I started saying this 5 years ago, and back then I was a lone voice in the wilderness, who no one paid any attention to. Now people don’t think I’m quite so crazy. Several Nobel Laureates have said the same thing.

    What I knew intuitively, they’ve proven with the mathematics of economics.

    Heck, even Andy Grove of Intel is in agreement on this, he has said that Patents are like the toxic derivatives that brought down the US economy. And since Andy runs a company that is heavily involved with the US Patent system, I suspect he would know.

  • davesmall

    I think borker has this figured out in his post above. Nokia is going to be treading on Apple’s many multi-touch patents when they release touch screen models. This law suit is a bargaining chip.

  • http://www.lowededwookie.com lowededwookie

    I’ve always hated Nokia phones. They’ve all been poorly built, break easily, and crash more often than a one armed driver at NASCAR.

    I used to sell cellphones back around ’96-’98 and out of all the phones we sold Nokias had the highest return rate of them all. Most would come back with smashed screens and yet we sold a cheaper model Motorola that one customer dropped from a 4 story building onto solid concrete and it still worked perfectly except the battery clip broke which was a common fault on those phones. Farmers dropped their phones in troughs because they had them sitting in their shirt pockets and they slid out. Nokias all died but Motorolas after a couple of days in the hot water cabinet still worked perfectly.

    Nokias are the worst phones on the market and the idea that they’re the Microsoft of the cellphone world is bang on.

  • http://www.roughlydrafted.com danieleran

    eWeek threw up a headline saying “Apple Could Owe Nokia as Much $1B, Report Says,” citing but not linking to fluff speculation in another article.

    It then tried to suggest that this was bad timing given the release of Windows 7. Seriously.

    Can you believe that? Microsoft just released more terrible news, and has already presold months of PCs with free W7 licensing in order to prod PC sales, without much success.

    Vista II: Ballmergeddon

  • http://crankyoldnutcase.blogspot.com/ The Mad Hatter

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  • Imapolicecar

    @ ChuckO
    …or how about this Apple comes out with the Indian iPhone which comes pre-loaded with iLife Indian Farmer edition a suite of tools that rural farmers can use to help grow and market their crops plus a special Bollywood edition of iTunes AND comes with a dock for connecting to your TV if you have one. How powerful would that be? You just collapsed a computer, phone, DVD player into one device and changed a lot of lives. Probably an equally valid strategy for rural China. You just need to figure out how to structure the contracts so they are affordable. Apple would rout Nokia in Asia. You talk about not leaving a price umbrella.

    Not for China you wouldn’t ChuckO. Rural China isn’t Apple’s market. Go look at the prices of quality European products there and you are paying a 20% premium over European prices (and that’s in Euro don’t forget). These goods are flying off the shelves. Go look at the technology in display in Shanghai. They built a massive metro extension using Hong Kong technology in a matter of months. half the world’s high-rise cranes are there and they have had one of the few Mag-Levs in the world for several years. Middle class Chinese (and there are a lot) I know have several mobile phones each and many have iPhones. The money is there in China. With a possible middle class (depending on definitions) from 10 – 15% of the population this means big profitability.
    Finally, Apple, because of it’s relatively locked down market, has opportunities in China that Microsoft doesn’t. With most of China stuck in Windows XP SP2 (it’s the only one that’s cracked so it can be installed without a serial number – read free) and unlikely to hit Vista or W7, Apple is competing against much older technology. Strangely, premium and quality goods are something that the Chinese will pay for far more readily than US citizens.

  • ChuckO

    How can they possibly expect XP owners to install Win7 they way they are? Absolute madness. It will make them money but it will take a long time to get people switched. Only an idiot would try to get this on an existing machine so consumers and businesses will wait until they replace machines.

  • Imapolicecar

    @ChuckO
    Many large business will be very legal and run the latest Windows OSes (although Bank of China certainly uses XP). Home users won’t. It’s as simple as that. Go to any of their computer stores (I mean these are vast hypermarkets with hundreds of small independent stores-within-stores) and order any new standard Windows hardware. You pay for the hardware at bottom dollar and the machine comes loaded with software. All illegally. These people won’t update to Vista/W7. Why would they? China sits behind the Great Firewall. Virtually all porn sites are inaccessible (not saying how I know that) ;), so few viruses/malware (although their computers come with cracked Norton also). It’s only when they bring their computers to the west that they themselves get viruses! All their special tools are based on XP and they are locked in with their streaming video on demand, ftp, translation tools etc. I’m reliably informed as these are used by hundreds of millions of users that they are unlikely to seek an upgrade path at any point. As for cracking down on piracy (me hearty) I’ve seen computer shops, DVD shops, shoe shops etc “disappear” for several days because the local police have tipped everyone off about raids.
    They have cheap, state of the art hardware and consumers haven’t changed to Vista (although I have no idea about W7 but have my suspicions they won’t unless it gets cracked) even though they buy new machines quite often.
    Strangely, I have seen several strange mobiles in Nanjing and Shanghai with the Apple logo on them which on closer asking turn out to be very good imitation smart phones. I’m not big on phones but they look like other smart phones which have literally been recased in a full new body. The give-away is not the Apple logo but they they were available in banana yellow and pink :)

  • ChuckO

    Imapolicecar

    I’m not saying Apple doesn’t keep going after the Indian and Chinese middle/upper class that’s a no-brainer I’m just saying I think there’s an enormous potential for the iPhone to meet a lot of needs with the iPhone with the rural poor in those areas. The equivelent of $500 probably makes a lot more sense when you think of it as something that does phone, computing (special apps for farmers) and rents movies (if you can build a hookup for non hidef TV’s) for those folks. Also the phone companies have to structure the contracts to spread out the pain of the cost. I suspect that’s all possible. I think it’s short sighted to pigeonhole Apple as just for cosmopolitan, design freaks at this point. They’ve been selling iPhone at Walmart in the US for a while now after all. I think Job’s vision is a lot more egalitarian than most people give him credit for he is a Levi jean man after all.

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  • Gwydion

    Instead of Dan’s poor documented and hatred entries one could read this
    http://www.engadget.com/2009/10/29/nokia-vs-apple-the-in-depth-analysis/

    Yes I recommend reading the Engadget piece if you want to read miles of baseless speculation provided by a patent attorney who isn’t involved in the actual case, part of which includes a conclusion reached on the basis of numerical probability . For everyone else, the article is a boring waste of time that says nothing new. – Dan

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  • http://crankyoldnutcase.blogspot.com/ The Mad Hatter

    Gwydion,

    You’ve just proved that you don’t know anything about the patent system. Or the legal system. Answer these questions:

    1) Does Apple make the chips in the IPhone?
    2) If Apple didn’t make the chips, did the chip manufacturer license the patents from Nokia?
    3) If the chip manufacturer licensed the patents from Nokia, why is Nokia suing Apple?
    4) If the chip manufacturer didn’t license the patents from Nokia, why is Nokia suing Apple?
    5) If the patent was for a hardware based device, and the function has been translated to software, does the patent cover the software implementation?
    6) Are software patents legal in your jurisdiction (they aren’t in Canada, but are in the USA, which may be why Nokia is suing there).
    7) Is the timing of the case related to in re Bilski?

    Engadget tried pretty hard to come up with a good article, however on this one they blew it.

  • Gwydion

    1) No
    2) I don’t know but is irelevant
    3) It’s not related
    4) It’s not related
    5) It’s not related
    6) It’s not related because they aren’t software patents.
    7) It’s note related.

    Perhaps I don’t know so much about patent system but you don’t know abou telecom system and technologies.

    The patents Nokia is suing Apple are patents related to software implementation in the firmware so chip manufacturers don’t count nothing.

    And they’re not software patents, are patents about technology

    But well,m as Dan said, it’s a boring a useless crap of article and hi is who has the truth.

    Well, time to erase this blog from Google Reader, it’s only a waste of time.

  • http://crankyoldnutcase.blogspot.com/ The Mad Hatter

    Gwydion;

    1) Apple may not be the correct party to sue.
    2) The license fees may have already been paid.
    3) If the license fees were not paid, and the product was not made in the USA, US law may not apply.
    4) Again, Apple may not be the correct party to sue.
    5) Software implementations of hardware, are generally not considered covered by the hardware patent.
    6) As I said, note that they suit was brought in the United States, not Europe, which is Nokia’s home base.
    7) How do you know that the timing of the suit is not related? A bunch of suites launched in the Eastern District of Texas appeared to be timed to go to trial before the Supreme Court hears Bilski.

    This section of his response is hilarious:

    The patents Nokia is suing Apple are patents related to software implementation in the firmware so chip manufacturers don’t count nothing. And they’re not software patents, are patents about technology.

    Software implementation in firmware? If it walks like a duck, and quacks like a duck, it’s usually a duck.

    Note that I haven’t read the patents in question, and I am not a lawyer, but what I have read (this article and Engadget), makes me wonder what Nokia is trying to accomplish – it sounds a lot like Microsoft’s lawsuit against TomTom.

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