The next major patent skirmish is already hereAugust 27, 2012: 7:02 AM ET
So-called LTE networks promise to dramatically speed up the mobile Internet. Too bad patent squabbles may muck things up.
By Yewon Kang, contributor
FORTUNE -- As dramatically shown in Apple and Samsung's epic legal conflict, patents have become the new currency among tech giants. Dull-sounding legal instruments have become all-important, not necessarily because of their financial worth but for their strategic and marketing value. Simply put, patents are a means to gaining a competitive advantage.
A verdict in that marquee case seems to have done little to alter that trend. So-called LTE -- the term stands for "long-term evolution" -- is the next wireless technology that IT industry leaders from device makers to software developers and network operators are pursuing as consumers demand faster and more reliable networks. LTE technology also provides second-tier players such as LG Electronics and Nokia (NOK) who lagged badly during the heyday of 3G devices an attempt to catch up with the likes of Samsung and Apple (AAPL), which together own more than half of the current smartphone market.
LG Electronics, for one, recently boasted that it holds the largest number of LTE patents, estimated to be worth around $8 billion according to intellectual property consulting firms. "Since the smartphone boom, the most efficient way to affirm their position is patents," says Alex Lee, an IP strategy expert at TechIPm, of technology companies. "LG has a good strategy to position [itself] with strong 4G portfolios...it has more than $40 million of base value, and it can utilize the patents for licensing or sell them, the values would be huge," Lee adds. (The terms 4G and LTE are often used interchangeably.)
On the other hand, some criticize the hype of strategic value of patents. In other words, LG will have to honor its licensing commitments. "As a result, it will get some financial value out of those patents, but it won't be able to leverage them against a rival such as Apple," Florian Mueller, a patent expert, wrote in an email. And since companies in most patent lawsuits end up settling for cross-licensing deals, the only clear winners in the end may be the lawyers, notes Lee Sun Tae, an analyst at NH Securities and Investment in Seoul.
And yet, major companies have increasingly struck deals involving wireless technology patents in the last few years. Just last month, Intel (INTC) bought $375 million worth of patents on 3G, 4G LTE and Wi-Fi technologies from InterDigital, a wireless technology developer and licensor. More notably last year, bankrupt Nortel Networks auctioned off its LTE patents to a consortium of key players including Apple, EMC (EMC), Ericsson, Microsoft (MSFT), Research In Motion (RIMM) and Sony (SNE) for a total price of $4.5 billion. Google (GOOG) boosted its patent cache by acquiring Motorola Mobility for $12.5 billion last August.
Why has LTE proved so central? LTE technologies are at the nexus of some of the most important trends in technology. These include spectrum efficiency, data transfer and speed, and power management of devices, according to Neil Shah, a senior analyst with Strategy Analytics. In effect, LTE patents permeate nearly every aspect of popular consumer gizmos and services.
For instance, to increase data speed, operators are working to improve spectrum efficiency by using a technology dubbed carrier aggregation, which combines multiple bandwidths into one data link. Another technology to improve quality and speed of data transfer involves what's called "multiple input multiple output," or MIMO, which employs multiple antennas in cell towers and on devices to transfer more data at the same time. Currently, LTE networks use two antennas and are expected to expand to eight in the future. The challenge lies with hardware makers trying to pack more advanced components into phones that are always becoming thinner.
In addition to speed and reliable networks, consumers are demanding longer battery life. Although achieving both strong performance and long-lasting power has been the challenge, the leading chipset makers like Qualcomm (QCOM) and Nvidia (NVDA) are becoming more advanced with quad-core processors that can be integrated into LTE-capable smartphones. For example, Samsung's Galaxy S III runs on Qualcomm's quad-core Snapdragon processor and offers a 4G LTE connection, although only in parts of Asia and Europe for now. Not surprisingly, the technical wizardry to pull this off is heavily patented.
Based on technologies like these, many patent research firms are actually rating tech companies by their patent portfolios as much as anything else. Although the list varies by different surveying firms, according to Article One Partners, Qualcomm and Nokia ranked the top with the most essential LTE patents, followed by Samsung and LG.
The drawn-out Apple-Samsung patent saga may be an one-time showdown. Its aftermath is sure to last. Lee with TechIPm argues the epic battle will help further cement the role of patents in reshaping the value chains in the smartphone markets. On the other hand, it's only been in the last two years that patents have become a such hot button issue, says Shah with Strategy Analytics. Differences of opinion notwithstanding, LTE could very well be the next headline-creating flash point in high-tech.