A New Era of Cooperative Strategies in Cell Phones?

I read about Microsoft’s acquisition of patents from AOL with some interest. They note that this reflects a price of $1.3M/patent and compare it to other recent escalations in the IP arms race. Analysts estimate that Google only paid $400k/patent in the $12B acquisition of Motorola Mobility. Nortel patents recently went for about $750k each. Of course, given the wide variance in the value of a patent, clearly the average is not particularly informative — it treats all of these patents as homogeneous which is certainly not the case. Nevertheless, the escalating prices do suggest that the arms race is unlikely to create much value for the firms (and certainly not for consumers).

However, buried in the stories is another rather interesting observation – some of the key players earn more from selling rivals’ handsets than their own. The article notes that Microsoft earns more from licensing per Android phone than they get from selling an additional Windows phone. Similarly,  Google earns more in ad revenues from each iPhone sold than it gets from selling an incremental Android phone. These different business models for value creation seem to assure that each player benefits from the other’s presence. One might imagine Google entering into a cooperative marketing agreement to sell more iPhones or Microsoft encouraging its customers to consider an Android phone.

Not that I really expect to see this any time soon.

However, it does indicate that the highly competitive dynamics in the industry might cool down a good bit. The different business models seem to create a payoff structure that promotes cooperation. However, these intertwined business models may not be equally stable. For example, Apple is moving to replace Google as the default search engine and Microsoft already uses Bing. Samsung is developing their own operating system. Of course, all of them are scrambling for IP, though sometimes (as in the case of Nortel’s bundle) they cooperate to acquire IP and take it out of the game.

It is an interesting dynamic to watch unfold. Here, the payoff structure seems sufficiently complex, dynamic, and interdependent that outcomes may be hard to predict. At this point the perceived payoff structure seems just as important. For example, with Steve Jobs out of the picture, Apple may exhibit less of a vendetta against Google.

Of course, that remains to be seen. It is unclear whose Karma will prevail…

One Comment on “A New Era of Cooperative Strategies in Cell Phones?”

  1. stevepostrel says:

    There’s some 1980s I.O. work pointing out that patent licensing fees could theoretically be used to set prices to collusive levels. I think Michael Katz was involved. The basic idea is that you can use the royalty rate to make a rival’s marginal revenue at equilibrium look like the marginal revenue of an industry monopolist. I wonder if the Justice Department’s aggressive lawyers will eventually try to claim this is happening in the smartphone world.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s