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Free Software Foundation Europe concerned about Nortel patent sale

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Executive Summary

Table of Contents

  1. About FSFE
  2. A broad attack on Free Software
  3. Leveraging existing dominant positions
  4. Android as a likely first target
  5. Two lines of attack
  6. Line of attack 1: Blocking distribution
  7. Particular concern: The Linux kernel
  8. Line of attack 2: Raising a tax on Free Software
  9. Attacks by Rockstar members on Android
  10. Further patent-based attacks: Lodsys vs app developers
  11. Fear, Uncertainty and Doubt (FUD) as an anticompetitive strategy
  12. How will Rockstar members generate ROI at such a high price per patent?
  13. Is there a "red line" quantity of patents which can be transferred without harming competition?
  14. Transaction would strengthen existing dominant positions
  15. Conclusions
  16. Recommended course of action

About FSFE

Free Software Foundation Europe (FSFE) is an independent, non-profit, charitable organisation dedicated to Free Software. FSFE maintains that the freedoms to use, study, share and improve software are critical to ensuring equal participation in the information age. We work to create general understanding and support for software freedom in politics, law and society-at-large. We also promote the development of technologies, such as the GNU/Linux operating system, that deliver these freedoms to all participants in digital society.

In pursuit of these goals, we have a long history of active involvement in competition and antitrust proceedings that affect Free Software, starting with our admission as a third party in the European Commission's competition lawsuit against Microsoft in 2001. The acquisition of Nortel's patent portfolio by a consortium of Apple, Microsoft, Research in Motion, EMC, Ericsson and Sony is such a case.

A broad attack on Free Software

Our concerns center around the transfer of a large set of patents, many of which are presumed to relate to basic computing and mobile technologies such as networking, to companies which have a record of aggressively using patents for anticompetive purposes. Additionally, this transfer is taking place in a market where patent aggression has recently reached unprecedented levels.

As noted in our previous submission, the patents sold by Nortel are likely to affect mobile, desktop and server operating systems, along with many other technologies that form the basis of much of the economic activity in today's IT market.

In the hands of large, even dominant companies with a record of patent-based aggressive behaviour, this portfolio could easily wreak havoc on competition in the markets for software and smartphones.

In these markets, Free Software is an important competitive force, as it provides a platform on which businesses can build and deploy their own solutions, provide services, or pursue a variety of other business models. The transfer of Nortel's patents to Microsoft, Apple, RIM, EMC, Sony and Ericsson would significantly increase legal risks for large and small companies operating in Free Software, along with individual developers.

Leveraging existing dominant positions

Mobile devices today account for roughly 2.5% of Internet traffic, with a clear upward trend.

New device form factors such as tablets and smartphones with touchscreen interfaces enable new consumer groups (such as senior citizens) to make use of the latest technology, opening up new markets and contributing to consumer welfare. While mobile devices receive most of the consumer-level attention today, the center of development is likely to shift to other areas in the coming years. These areas are embedded devices, such as household appliances or medical devices, and the "Internet of Things", in which a large number of objects will be uniquely identifiable by computers, enabling a host of new applications.

It is rapidly becoming clear that tablet devices will be the point of convergence for PCs and smartphones. Particularly significant in this regard is the latest iteraction of Microsoft's operating system, Windows 8, with an interface that is clearly directed at touchscreens. This a terrain where Apple's position is threatened by the emergence of various devices powered by Android. The focus on tablets of Windows 8, the latest version of Microsoft's operating system, shows that Microsoft is clearly interested in the tablet market as well.

Nortel's patent portfolio would likely enable some members of the Rockstar consortium to leverage their existing dominance in certain areas (e.g. Microsoft in desktop computing and office productivity), into these new markets. The embedded space would be particularly under threat, as would be the market for smartphones and tablet computers.

Android as a likely first target

Google's Android operating system is currently leading the smartphone market in terms of market share. Given that five of the six Rockstar member companies are active in the smartphone business, and three of them (Apple, Microsoft, and RIM) market their own software platfroms, it is widely reckoned that the immediate purpose of the Rockstar consortium members in acquiring Nortel's patent portfolio is to engage in patent litigation against Google and/or the various companies which make and distribute Android devices. In fact, several such lawsuits are already underway in Europe and the US. We will list them in detail below.

Yet we would like to emphasise that the risk which we see in this transaction is by no means limited to Android. Given the fundamental nature of many of the technologies covered by Nortel's patent portfolio, almost any company in the software industry could see itself faced with aggressive behaviour based on these patents. Android is likely to be merely the first target, rather than the only one.

Two lines of attack

If our assumptions about the nature of Nortel's patent portfolio are correct, these patents will put the Rockstar Bidco members in a position to either block the distribution of, potentially extract a tax on pretty much any modern computing device or program. The question will merely be which one they choose to target.

Line of attack 1: Blocking distribution

The first line of attack is that companies such as Microsoft or Apple may use the patents in an attempt to prohibit outright the development and distribution of Free Software programs which compete with their own proprietary offerings. High-profile targets are programs such as the Linux kernel, LibreOffice, and many partParticular concern: The Linux kernels of the GNU/Linux operating system.

In all these cases, software revenue is not based on the number of units or copies sold, but is rather realised through a wide variety of other means. An obligation to pay per-unit royalties in order to distribute Free Software would be fundamentally incompatible with the copyleft nature of the GNU General Public License, covering the Linux kernel and a many other Free Software systems, eliminating the economic benefits available from Free Software -- full competition and greater consumer choice.

The key factor of the GPL's success is that it lets recipients of a program use, study, share and improve the software without restrictions. Everyone is free to redistribute the programs on the terms of the license. Crucially, the GPL forbids adding additional conditions for redistribution, since this would render this copyleft mechanism ineffective.

The obligation to pay a licensing fee in order to redistribute the software is just such a condition. Such a requirement would be fundamentally incompatible with the GPL, with the effect of making it legally impossible to redistribute Free Software. The consequence would be that users and consumers would be denied the possibility to choose Free Software. The existing dominant positions in many markets of Microsoft in particular would be strengthened. Competition would be weakened in various markets for software as key competitors are removed.

The second line of attack, which we discuss in more detail below, is aimed not at removing Free Software competitors from the market. Instead, the goal is to impose a tax on these systems, driving up their price to be equal to or higher than the price of competing proprietary systems offered by the Rockstar member companies.

Particular concern: The Linux kernel

A key reason why we believe that this transaction poses a broader risk to Free Software is that many of Nortel's patents are presumed to read on technologies implemented in the Linux kernel.

The Linux kernel (i.e. the part of the operating system that interacts directly with a computer's hardware) is Free Software. It is distributed under the GNU General Public License version 2. The GNU General Public License (GPL) in its version 2 and 3 is, by a wide margin, the most widely used Free Software license in the world 1.

This kernel is a central component of the GNU/Linux operating system, the most important competitor to the operating systems marketed by Microsoft nd Apple. On the desktop, the GNU/Linux system offers a free (as in freedom) alternative to Microsoft's Windows and Apple's MacOS. On servers, the GNU/Linux operating system forms the basis of the so-called LAMP stack, the most common configuration 2 for web servers3.

In the embedded industry, the Linux kernel is fast becoming the default software which companies use to power their devices. The Linux kernel is in use in a broad range of embedded devices, ranging from televisions to routers to cars and elevators.

Taken together, this means a huge swathe of the IT industry would be negatively affected by a successful patent-based attack on the Linux kernel.

The Linux kernel is also the basis of the Android operating system. Put simply, the Android mobile operating system consists of the Linux kernel and the Dalvik virtual machine. Applications ("apps") on Android run within the Dalvik virtual machine.

Line of attack 2: Raising a tax on Free Software

As previously mentioned, patent litigation in the smartphone industry has recently reached unprecedented levels, with new lawsuits being launched on a weekly basis. The sale of Nortel's patents to the Rockstar consortium would only add fuel to this fire.

Attacks by Rockstar members on Android

Several member companies of the Rockstar consortium are currently engaged in a lawsuit against makers of Android devices. In a market where proprietary platforms are the norm, Android acts as a disruptive force. It turns mobile phone operating systems into a zero priced commodity. It also turns over greater power to users and OEMs.

Though Google's services are enabled in Android by default, OEMs are free to remove and replace these with services of their choice. They also have the option of customising the platform to any degree they wish. Exemplifying this, it emerged in August that Samsung Mobile (a large producer of Android phones) has hired Steve 'Cyanogen' Kondik, an expert known for creating the most widely used alternative ("homebrew") version of Android, CyanogenMod.

Microsoft in particular is very active in pushing makers of Android devices into signing licensing agreements and paying royalties, or in pursuing lawsuits against companies which resist signing such an agreement. As a rule, the terms and conditions of these licensing agreements are not made public. Some analysts even believe that Microsoft is currently making more money from Android than from Windows Phone 7, its own mobile platform.

We are currently aware of the following lawsuits by Microsoft against Android device makers:

Apple is similarly active in patent litigation against makers of Android devices:

Additional patent-based activity directed against Android includes an amendment to a lawsuit by Interval Licensing, owned by Microsoft co-founder Paul Allen. "The amended suit targets Google’s Android mobile operating system in a move that could spell trouble for phone manufacturers and app developers." (See PCWorld.)

We are concerned that, given the breadth of Nortel's patent portfolio, this effort to create a tax on the use of Android will serve as a template for similar exercises in the future. This would allow the Rockstar consortium members to levy a tax on software that they had no hand in creating.

If the members of the Rockstar bidding consortium are enabled by the transaction to impose a "tax" on Android, this will remove one of the system's two key advantages; while it would remain highly customisable, it would no longer be gratis to OEMs. As OEMs typically operate in hyper-competitive low margin markets, a price increase of a few cents per unit could already be damaging. Yet Microsoft seems to be targetting licensing fees of 15 US dollars per Android device sold.

While this may be feasible for some makers of high-end smartphones, paying this sort of "tax" would eliminate the margins for devices in the middle and lower market segments, significantly reducing consumer choice. Already at the present stage, Microsoft has effectively gamed the patent system to generate revenue from manufacturers' use of Android.

Further patent-based attacks: Lodsys vs app developers

Another long-standing fear held by software developers recently turned out to be all too real when Lodsys, a non-practicing entity, threatened lawsuits against a raft of iOS application developers in May 2011.4

Apple, recognising a threat to its business model of generating revenue from app sales, stepped in. Lodsys then shifted its activity to Android app developers.

Around the same time, another US-based non-practicing entity called Macrosolve began a set of similar lawsuits against both iOS and Android developers, based on a single patent.5

Fear, Uncertainty and Doubt (FUD) as an anticompetitive strategy

These patent-based attacks cause some immediate damage, insofar as a company targeted in a lawsuit will usually either be obliged to pay damages, or -- more frequently -- will settle out of court. But these attacks also have the much broader effect of creating Fear, Uncertainty and Doubt (FUD) around Android in particular, and Free Software in general. Both effects combine to form what amounts to a tax on the use of Android, levied by companies that had no hand in creating the system.

There already exists a well-known template for this sort of strategy. It is a decade-old effort made by Microsoft to both contain the widespread use of the Linux kernel, and to at the same time extract revenue from it.

Microsoft claims to 225 patents reading on the Linux kernel, and has built an ongoing campaign of Fear, Uncertainty and Doubt on this claim, pressuring a significant number of companies into signing licensing agreements with Microsoft. So a mere claim, entirely unproven, to hold patents reading on key technologies serves to underpin a campaign to limit competition from platforms based on the Linux kernel. This effect was recognised by the German Federal Competition Office in the context of the acquisition of Novell's patent portfolio by the CPTN consortium:

"These [competition concerns by the DOJ and the German FCO] concerned in particular the markets for operational systems and virtualization software, in which Microsoft and EMC/VMware are, at least, powerful. On these markets, there is a general possibility to apply so-called FUD strategies ("Fear, Uncertainty, Doubt") against smaller competitors, which can be pursued by means of patent actions."6

Today, the Linux kernel is being widely used in the embedded industry. If Nortel's patents were to enable Microsoft to pursue a more effective FUD campaign against the Linux kernel than it does today, this would let the company extract long-term rents from embedded device makers, hampering innovation and competition in the industry.

Given the fundamental nature of many of the technologies which we must presume to be covered by Nortel's patent portfolio, we are extremely concerned that the Rockstar members will turn to attacking core Free Software programs such as the Linux kernel.

Microsoft has every incentive to use this strategy in the various markets where its dominant position is threatened by Free Software competitors, such as office productivity software and workgroup servers; and in markets where it wishes to expand its market share from a low base, such as mobile phones. Allowing Microsoft to acquire Nortel's patents would thus both cement the company's dominant positions where it holds them, and let it acquire dominant positions where it does not yet hold them.

How will Rockstar members generate ROI at such a high price per patent?

The Rockstar consortium is an uncommon gathering of companies which have only one single trait in common: They are disrupted by a new competitor that offers valuable technology at a price of zero. From this point of view, this acquisition is akin to an exclusionary patent pool, an exclusionary one -- something which usually merits close antitrust scrutiny.

From the history of the transaction, it is apparent that the companies have not teamed up to acquire technology in which they are interested. A notable feature about Rockstar's acquisition of Nortel's patent portfolio is the price paid per patent. The headline figure works out at USD 750,000 per patent. A more detailed analysis, however, reveals a far higher price per patent:

look [sic] at patents currently in force drops this number down to 2000, which is the number similarly reported by IAM. At 2000 assets, the price per patent skyrockets to $2.25 MM each. If you would assume that the 1000 or so patents with at least 10 years of term remaining were the primary drivers of the purchase, then double that amount to $4.5 MM each. (See Gamatimeip.)

This contrasts noticeably with the (still impressive) ca. USD 500,000 per patent which the CPTN consortium paid for Novell's patents earlier this year.

The fact that the Rockstar consortium members were willing to pay such a high price per patent indicates that they expect a stronger return on their investment than could be expected from merely using the patents to develop and market new technologies. Such a level of return can only conceivably be generated through aggressive behaviour. Attacking Android appears the most likely option at the moment.

However, given the fundamental nature of some of Nortel's patents, the same strategy could be easily deployed against any other system that competes with the offerings of the Rockstar member companies. Free Software systems such as the Linux kernel, the GNU operating system, and a number of other key Free Software programs might well be next.

Is there a "red line" quantity of patents which can be transferred without harming competition?

From the above analysis, we conclude that the question of whether the Nortel deal poses a risk to competition from Free Software cannot be framed in terms of how many patents the members of Rockstar Bidco are allowed to acquire from Nortel. The Rockstar member companies would be liable to use any part of Nortel's patent portfolio to pursue either one or both lines of attack described above:

The recent patent lawsuits against application developers by Lodsys vividly demonstrates that even a very small number of patents can be used to cause significant disruption in the market.

Transaction would strengthen existing dominant positions

Microsoft in particular already holds dominant positions in a number of markets, such as operating systems and office productivity. The company has a history of leveraging these dominant positions from one market to another. It likely to replicate exactly this strategy with Windows Phone 7, boosted by its recent strategic alliance with Nokia.

Given the recent steps taken by Microsoft and Apple to pressure manufacturers and distributors of Android-based devices into licensing agreements (covering software and devices which neither Microsoft or Apple had any hand in creating), it is likely that the attacks on Free Software will intensify -- first on Android (which from a Free Software perspective leaves much to be desired in terms of the freedom it offers to its users as a system), then on any number of other Free Software programs.

Conclusions

We can assume that many of Nortel's patents read on technologies which are fundamental to today's information technology. Allowing their sale without conditions to companies with a record of patent-based aggression would pose a considerable risk to Free Software, and to competition in the ICT market.

In the hands of the Rockstar Bidco members, Nortel's patents would form the basis of two lines of attack: either to prevent the development and distribution of Free Software systems through patent claims; or to raise a tax on Free Software systems in order to make Free Software commercially unattractive. Both lines of attack are already being used in practice by the members of Rockstar Bidco. Nortel's patents would also greatly boost campaigns of Fear, Uncertainty and Doubt against Free Software, such as the one against the Linux in which Microsoft has engaged for a decade.

There is no "red line" below which the transfer of Nortel's patents to the Rockstar Bidco members can be assumed not to cause harm to competition in the software and ICT market. As demonstrated by Macrosolve's and Lodsys' recent lawsuit against application developers, even a single patent can be sufficient to cause significant market disruption.

In sum, allowing the sale of Nortel's patents to the Rockstar Bidco members to proceed without modifications or conditions would threaten competition in the market for software and ICT. Free Software, the most vibrant force in these markets today, would be particularly hard hit. The sale would merely serve to strengthen the existing dominant positions of Rockstar Bidco member companies.

There are some relatively simple steps which could be taken to neutralise this threat and prevent damage to competition.

In consequence of the above considerations, we urge the competent competition authorities to carefully scrutinise the proposed acquisition of Nortel's patent portfolio by the Rockstar consortium members. In particular, we believe that it is important to carefully assess the intent of the Rockstar consortium members in acquiring Nortel's patent portfolio.

While we believe that prohibiting the sale could be seen as an appropriate measure, it might be seen too a drastic measure, and probably there are alternative instruments available. We request only that due to the risks of dire consequences that this acquisition is likely to have on competition, and the chilling effects that will ensue, special care should be taken to put in place measures to avoid anticompetitive effects. In case no sufficient guarantees are offered, the acquisition should be prohibited.

One sufficient guarantee from our point of view could be making the patents available for implementation in Free Software under an unlimited royalty-free license compatible with the most widely used Free Software licenses - the GPL (versions 2 and 3), and the Apache License (version 2). This would ensure that Free Software, a critical force for competition in the IT market, would be shielded from patent attacks.

If the transaction is allowed to proceed, negative consequences for the Free Software ecosystem could be avoided in a relatively simple fashion. Similar to the outcome of the Novell / CPTN transaction, the Rockstar consortium members could be required to make the patents in question available for use in Free Software under conditions hich allow their use without limitations in programs distributed under the GNU General Public License and other copyleft licenses.

It is our opinion that such a measure is both less effective and more prone to failure than prohibiting the transaction outright. To compensate for this shortcoming, we recommend that the competent authorities keep the door open to stricter measures in case the above remedy should prove ineffective in protecting competition. This stricter measure could comprise compulsory divestiture of single items or partial unenforceability of one or more patents. Also, there should be some kind of mechanism for reporting (perhaps restricted to OEM and platform developers) and monitoring in place.

  1. One statistic shows 42.77% of Free Software projects using the GPL. The next license in terms of frequency is the MIT license, used by 11.30% of projects.
  2. The current market share of this configuration is approximately 70%, as surveyed by Netcraft.
  3. LAMP stands for a combination of the GNU/Linux operating system, Apache (web server), MySQL (database), PHP (scripting language).
  4. Lodsys claims its patents cover the use of in-app payments technology, which allows users to carry out transactions within the context of an app itself. Countless app developers use in-app payments technology in their applications. Lodsys based its lawsuit on just two US patents: 7,222,078 "Methods and systems for gathering information from units of a commodity across a network", and 7,620,565 "Customer-based product design module".
  5. Macrosolve claimed the four companies have violated U.S. Patent No. 7,822,816 "system and method for data management" which MacroSolve obtained in October 2010.
  6. German Federal Competition Office (Bundeskartellamt), April 20, 2011. http://www.bundeskartellamt.de.