Apple 2.0

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Nokia patent settlement a 'sweet defeat' for Apple

June 14, 2011: 5:56 AM ET

Having overpowered the iPhone's design patents, Nokia likely now to go after Android

The settlement of its epic 20-month patent dispute with Apple (AAPL) that Nokia (NOK) announced early Tuesday could spell trouble for the makers of Android phones.

There's no question Apple lost the legal battle that pitted its significant intellectual property holdings against Nokia's even deeper patent portfolio. The terms of the settlement were not disclosed, but they require Apple to make a one-time payment and ongoing royalties large enough to materially improve Nokia's earnings for the quarter. Nokia's stock was up 3% in European trading.

Apple shares also rose on the Frankfurt exchange Tuesday, however. According to FOSS Patents' Florian Mueller, who had predicted this outcome, it frees up resources for both companies.

"Apple is embroiled in litigation with the three leading Android device makers (Motorola, HTC and Samsung). Nokia doesn't have any litigation worries at the moment, but part of its new strategy is to ratchet up the monetization of its patent portfolio. The fact that Nokia has demonstrated its ability to defeat Apple -- after the most bitterly contested patent dispute that this industry has seen to date -- is a clear proof of concept. Other companies whom Nokia will ask to pay royalties will have to think very hard whether to pay or pick a fight."

Mueller says Nokia's next target is likely to be the cellphone manufacturers that have hitched their smartphone strategies on Google's (GOOG) software. "Given that Android is in many ways a rip-off of Apple's operating software," he writes, "Android-based devices are highly likely to infringe on largely the same Nokia patents that Apple now felt forced to pay for."

In prepared statements, Nokia declared victory and Apple expressed relief.

"We are very pleased to have Apple join the growing number of Nokia licensees," said Nokia CEO Stephen Elop. "This settlement demonstrates Nokia's industry leading patent portfolio and enables us to focus on further licensing opportunities in the mobile communications market."

"Apple and Nokia have agreed to drop all of our current lawsuits and enter into a license covering some of each others' patents, but not the majority of the innovations that make the iPhone unique," an Apple spokesman told the Wall Street Journal's AllThingsD. "We're glad to put this behind us and get back to focusing on our respective businesses."

The dispute that started in Oct. 2009 when Nokia claimed that the iPhone was infringing on 10 patents Nokia holds on the integration of GSM, UMTS and wireless LAN, grew through suit and countersuit to the point where it covered a total of 75 patents in seven different legal venues, from Delaware to Dusseldorf.

Source: FOSS Patents

Mueller, who was tracking the case as closely as anyone outside of Apple and Nokia's legal departments, diagrammed the issues at stake in a series of battlemaps like the one at right. You can see the March 31, 2011 version here.

"I don't hold shares in any tech company," Mueller writes in his post-decision analysis, "but if I were an Apple shareholder, I would probably view this outcome favorably. Nokia emerges victorious, but this is a sweet defeat for Apple because its competitors -- especially those building Android-based devices -- will also have to pay Nokia, and most if not all of them will likely have to pay more on a per-unit basis because they don't bring as much intellectual property to the table as Apple definitely did. So from a competitive point of view, I don't think Apple loses much. On the bottom line its profitability may even benefit from this because Apple's margins face no greater threat than Android-style commoditization of smartphone technologies."

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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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