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June 27, 2011 2:55 pm
When lawyers rattle on, tech investors, like all of us, would prefer to tune out. This is getting harder to do: fights over intellectual property among large-cap companies are becoming more frequent. Apple, Google, Microsoft and the rest hop from dispute to dispute.
Historically investors have been able to ignore the legal fuss. Yes, damages and royalty settlements have dented some cash flows, and some suits (Research in Motion-NTP, say) have driven significant short-term volatility. And for small companies and IP specialists like Qualcomm, IP wins are crucial. Over the long-term, though, investors in the tech behemoths were rewarded for attending to which ones were bringing innovative products to markets fastest. Legal clarity often arrives after markets have passed judgment: Nokia’s big victory over Apple came when the profitability of Nokia’s phones had already collapsed.
The various IP cases involving Google’s market-leading Android mobile operating system – most prominently Oracle’s claim that Android makes illicit use of Java software – could change this. Google gives away Android to device makers, building share that can be harvested with advertising revenue. The model will have less appeal for gadget manufacturers if they have to pay a royalty to some other patent-holder. And as device prices drop, IP costs become a more significant threat to margins. If Android’s IP proves weak, that could make room for a mobile laggard like Microsoft.
But a defeat handed to Oracle by the US patent office last week is a reminder that this battle will be fought in many venues, over a long period. The stakes are rising, but there is no reason to think that the legal system is any better at keeping up. For now, investors should still focus on the products.
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