Apple 2.0

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Nokia vs. Apple: $12 per iPhone

October 22, 2009: 12:55 PM ET

The iPhone's had a "free ride" on its patents since 2007, claims a Nokia lawsuit

Nokia wordmark.svgWho can blame Nokia (NOK) if its nose is out of joint. The Finnish telecommunications giant is used to dominating the global cellphone market, and it still commands a 36.8% share, according to Gartner.

But that's down from 39.5% a year ago. Worse still, Nokia has been getting its clock cleaned by Apple (AAPL) and Research in Motion (RIMM) in smartphones, the fastest growing part of the business. Last week it reported a loss of $886 million as its smartphone share fell from 41% to 35% in the space of three months

So on Thursday it struck back, filing suit against Apple in a Delaware federal court claiming infringement on patents it holds on the integration of GSM, UMTS and wireless LAN -- technologies at the heart of Apple's iPhone.

What's at stake, according to Piper Jaffray's Gene Munster, is 1% to 2% of the cost of an iPhone, or in the worst case, about $12 per unit.

Nokia vice president Ilkka Rahnasto, in a prepared statement, put it more grandly:

"The basic principle in the mobile industry is that those companies who contribute in technology development to establish standards create intellectual property, which others then need to compensate for. Apple is also expected to follow this principle. 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."

The operative phrase in that statement is "appropriate terms." According to Munster, Nokia has been in talks with Apple over royalty payments for more than a year. Forty other manufacturers have ponied up, but someone in Cupertino -- Steve Jobs? Tim Cook? -- must have told Nokia to go jump in a fjord.

Nokia is not claiming ownership of GSM, UMTS and WLAN per se. The GSM protocol, for example, is an internationally adopted standard based on the work of a Norwegian engineer, Torleiv Maseng.

Rather, Nokia is invoking 10 patents on technologies that enable devices to integrate those standards. "The patents," according to Nokia, "cover wireless data, speech coding, security and encryption and are infringed by all Apple iPhone models shipped since the iPhone was introduced in 2007."

Munster believes Nokia is looking for a "commercial settlement" and won't take the extreme step of seeking an injunction that would bring iPhone sales to a halt.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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