The Patent Anchor
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
And so begins the end for Eastman Kodak. On August 8th, the former photography giant held its patent auction, with results to be announced August 13th. Kodak has been hoping to get $2.6 billion from two different patent packages. While bidding has reportedly been sluggish, two major groups are expected to bid against each other; don’t be surprised if the initial estimate is met, or surpassed.
It’s been a mighty fall for Kodak. Once digital cameras replaced film for all but the most specialized and professional photography, the writing was on the wall. Kodak had chances to adapt – but did so much too slowly. An attempt to become an online digital photography storage system was undercut by free and freemium services that did the job just as well, or better.
Unable to find a way to monetize digital photography, Kodak eventually went into bankruptcy, with its only profitable property being its patent portfolio. And now, the company is in such straits that it must sell its only money-maker to pay off creditors.
The Kodak Armory
But Kodak’s loss may very well be a big gain for rivals. According to numerous sources, two competing forces have lined up to bid on the patents. On one side is a group led by Google (NASDAQ: GOOG), and on the other, Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) have teamed up to form their own consortium.
It’s always a bit strange when Microsoft and Apple team up – the two companies have been enemies so long, it’s hard to think of them cooperating. However, the landscape is changing – and Microsoft sees more to gain joining with Apple and the iPhone than allowing Google’s Android software to grab a bigger stake in the smartphone and tablet industry.
The patents are worth some coin in royalty payments – but that’s not what this is really about. This is yet another field of battle for the growing patent wars of the tech industry – and Kodak’s portfolio is new ammunition to bring to the field.
The Fight Expands
Apple’s current lawsuit against Samsung is what made news recently, with the two sides locked in a bitter struggle. Samsung may wind up having to pay Apple billions in damages and for future rights – and/or have to give up selling some phones and tablets in certain markets altogether. Already, Apple has gotten an injunction against Samsung’s Nexus devices – which run Android.
Apple, meanwhile, may have to pay royalties to Samsung, thanks to a counter-suit alleging the iPhone makes use of patents Apple doesn’t hold.
Jobs, in his biography, famously said he was willing to ‘go nuclear’ to fight Google’s Android software, which he saw as a blatant rip-off of Apple’s iOS system. The court battle with Samsung is certainly the nuclear option – it’s very rare for patent fights to go unsettled and make it to court. At least, it has been in the past.
We could be seeing a new phase in the war now. When Microsoft accused Google’s Android of using Redmond patents, Google eventually acquiesced. Today, Android manufacturers pay Microsoft around $10-$12 per device sold. Today, that adds up to quite a bit of money – last quarter, Microsoft received $792 million for royalties from just two Android manufacturers, Samsung and HTC. That dwarfs Microsoft’s profits from its own mobile software, Windows Phone.
Google, by comparison, only generated $550 million from Android between 2008 and 2011, according to court documents related to an Oracle patent case settled in March (another suit that made it to court, as is becoming increasingly commonplace). Indeed, Google made more from ads on iPhones than from Android – not entirely surprising since the company gives the software away for free.
A Drag On Innovation
Still, it’s clear that these patent cases aren’t a sideshow – they are big business. Kodak may be able to pay off its debts thanks to this trend but sadly, as the war becomes more litigious, it will both slow innovation, and make our products more expensive.
Indeed, the biggest drag on tech business moving forward is unlikely to be technological limits, but patent fights. If we don’t revamp the system – and no one has proposed a good solution yet – we could very well see progress slow and stall on our handheld devices, if nowhere else.
That might be the biggest obstacle facing the future of the industry – and it isn’t priced into shares yet. In the short term, we can simply watch court cases and try to play them accordingly. In the long run, however, it makes sense to hedge against patent fallout. Money that once went towards the bottom line of these companies is fast going to lawyers instead. Don’t be surprised if we see an earnings miss or ten in the coming months and years, as a result.
letsryan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.