Google/Motorola offer H.264 patent settlement; Microsoft chuckles

Patent suits and related injunctions and import bans are running rampant among mobile device OEMs and software vendors. Google's Motorola unit is at the heart of several and, in particular, is embroiled in a suit and countersuit with Microsoft over Motorola's H.264 video standard and ActiveSync, respectively. Yesterday, Motorola made a new settlement offer to Microsoft, modifying its demands over the video codec and seeking to prevent an injunction from going into effect next month that would prevent Android phones manufactured by Motorola from entering the country.

Needless to say, Microsoft rejected the settlement. As Businessweek reported, Microsoft "asked if the offer was serious."

At issue is the use of the H.264 video standard (around which Motorola, and therefore Google, holds several patents) in PCs and XBox game consoles. This same issue resulted in an injunction in Germany early last month that would have prevented the sale of Windows 7 and XBox game consoles in the country if a US court had not blocked it. Motorola maintains that Microsoft included the patents in the products without permission or appropriate licensing and was originally asking for nearly $4 billion annually in royalties.

Yesterday's proposal is still considered far above market value, both by Microsoft and by some analysts (note that the referenced analyst has ties to both Microsoft and Oracle, but the article itself is useful in its descriptions of the various patents involved). At the core of Microsoft's argument is the nature of Motorola's intellectual property, which are considered "Standard Essential Patents" (SEP). In other words, because a widely used standard depends on the patents, Motorola has an obligation to charge a "fair and reasonable" price for their use. $4 billion a year, apparently, was not fair or reasonable. Neither was yesterday's proposal, according to the company. The revised proposal requested 2.25% of the retail price of all XBox consoles sold (this part of the proposed settled didn't change) and $0.50 a piece for all computers running Windows 7 (down from 2.25% of the retail price, or $12.50/computer assuming an average price of $500/machine).

In exchange for this concession, Motorola offered to pay Microsoft $0.33 per Android phone to end the dispute over ActiveSync. Businessweek quoted Horacio Gutierrez, Microsoft’s deputy general counsel for intellectual property, as saying,

While we welcome any good faith settlement effort, it’s hard to apply that label to a demand that Microsoft pay royalties to Google far in excess of market rates, that refuses to license all the Microsoft patents infringed by Motorola."

Indeed.

So are Google/Motorola's demands unfair? Or is Microsoft refusing to bargain in good faith as Google suggests? It has been pointed out that MPEG-LA receives far lower royalty payments for its related patent pool, but Google's patent pool for H.264 may actually be more valuable given the nature of its standards essential patents. Microsoft, not surprisingly, sees it differently, believing that Motorola is unfairly leveraging its patents that are so critical to the popular video standard. Motorola, for its part, maintains that 2.25% is its going rate for all licensing deals.

In fact, the answer is quite unclear. The only thing that is clear is that this is far more likely to be settled by a judge than at the bargaining table.