Baby boomers and millennials alike probably remember a time when the United States maintained healthy competition in the airline market. Until as recently as 2001, consumers could choose between ten major carriers. Through consolidation and major bankruptcy cases, the U.S. is now home to only four.
While the parallel to a cell phone market that once saw Blackberry or Motorola service wide swaths of consumers is not identical, the similarities are stark.
In April, Nokia purchased France-based telecommunications equipment company Alcatel-Lucent for $16.6 billion. The move is just the latest example of consolidation for one-time giants in pre-Internet telecom infrastructure. For Nokia, once the leader in wireless phone sales, consolidating is merely the next step in the company’s transformation of its business from manufacturing to patent stockpiling – a very relevant topic as U.S. policymakers look to combat abusive patent behavior.
Alcatel-Lucent has more than 33,000 active patents, according to the company’s website, plus 15,000 patent applications pending. The deal will more than double Nokia’s existing ownership of 30,000 patents.
Nokia formally exited the market last year when it sold its handset manufacturing operations to Microsoft. Nokia retained its patent portfolio, however, a decision analysts view as a strategy to rely more on monetizing its intellectual property holdings. As the deal was closing last April, analysts said Nokia was likely to increase its annual patent income from $690 million to $820 million.
The company of course has the right to seek just compensation in the market for its patents. It’s troubling though that the company appears to be overreaching, and is showing a pattern of making questionable assertions over components, software and processes that its patents do not cover. In this, Nokia is acting like a patent troll, exploiting shortcomings in the legal system that place a higher cost burden on patent defendants and leaving them with a perverse incentive to settle out of court rather than litigate, even if they have a strong case.
Nokia made its first move in 2012 by filing lawsuits in the United States and Germany against handset manufacturer HTC, claiming infringement on dozens of patents. Several of the lawsuits were dismissed, but not enough to discourage trolling. This is why efforts at reforming certain aspects of the patent granting process; including harmonization, increased oversight, and more transparency are timely.
The Alcatel deal will give Nokia a huge portfolio of patents for fifth-generation (5G) wireless technology, the next major upgrade of worldwide systems expected to roll out in the next ten years. Analysts suspected, even before the deal was public, that Nokia’s motivations were securing IP dominance. Tech industry types have given a name to companies that shift away from large scale manufacturing, employment and economic growth toward patent assertion and litigation—transformer trolls.
Transformer trolls raise consumer prices and distort markets through unnecessary litigation costs. Often times, productive companies are left to choose between an unreasonable licensing agreement and the threat of litigation. As a result, these companies face greater costs, which translate to higher prices or decreased research and development, thereby harming competition and innovation. It amounts to little more than a hidden “tax” on the price of goods, especially in industries that rely heavily on IP rights in product development, such as consumer electronics.
Nokia is not the first company to take this route. In 2011 Ericsson sold its share of a handset joint venture to its partner, Sony, but retained a large portfolio of wireless patents. “We are not into selling patents,” CEO Hans Vestberg said at the time. “We want to get the recurrent revenue and we want to sit on them.”
Since then, Ericsson has been accused of gouging customers on patent licensing fees. One result has been a series of lawsuits with Apple after negotiations over licensing broke down.
As manufacturers, Nokia and Ericsson participated in mutually beneficial multilateral cross licensing agreements that collected and distributed patent revenues among the many equipment suppliers, all of whom relied on patented innovations developed by individual companies. There’s no such patent peace with transformer trolls. Since they do not manufacturer anything, they do not require any patents owned by others.
The explosion in tech patents and their innate complexity when it comes to asserting validation and infringement in court have unfairly tilted the risk/reward formula of litigation toward trolls. Sound patent reform will rebalance the proposition, still allowing patent owners to profit from their innovations, but it will curtail predatory practices that aim only to exploit weaknesses in the law.