Did HP buy Palm just for the patents?

Out-Law Analysis | 29 Apr 2010 | 6:43 pm | 3 min. read

OPINION: It has been a long time since handheld-computer pioneer Palm set the consumer or stock markets alight, yet Hewlett-Packard was prepared this week to pay $1.2 billion for it. In cash.

Why? What did it think was so valuable? A phone business that will have to compete with seasoned rivals like Nokia and the whizz-bang marketing phenomenon that is the iPhone? A company with handheld-computer ambitions just as that iPad-dizzy sector becomes more uncertain than ever?

These businesses hardly seem the stuff of chief executive acquisition fantasies. Maybe, though, it is not the business that HP is buying, but the intellectual property.

Today's Securities and Exchange Commission disclosures reveal that Palm has over 1,650 patents, many of them focused on mobile technology. Sure, $1.2bn is a lot of hard cash, but this could be the smartest insurance policy HP ever took out.

Major technology companies don't buy patent-rich companies because they like the look of the inventions they cover. They buy them as weapons in a never-ending battle that rages across Silicon Valley.

HP is set to go head-to-head with Apple's iPad with the launch of its own touchscreen tablet computer, the Slate. It will want to do that without running into the same trouble that HTC faced this week. Microsoft managed to wring a promise of future licensing revenue from handsets sold by phone maker HTC because, it said, the operating system the phones were based on infringed its patents.

If HTC had a long history of product development going back to the dawn of mobile computing, like Palm, then it would have had three options: cave in and pay; fight it out in an uncertain and expensive court battle; or pull out a handful of its 1,650 patents and tell Microsoft that it had better be sure its own technology didn't infringe any of them.

Behind closed boardroom doors, the tech world is a feverish hive of patent activity, with companies claiming, counter-claiming, issuing threats and playing very, very high stakes poker with patent portfolios as cards.

Don't take my word for it, take the word of Jonathan Schwartz, until recently the chief executive of Sun Microsystems, another Silicon Valley veteran company with its own well-stocked patent cabinet.

"I understand the value of patents – offensively and, more importantly, for defensive purposes," said Schwartz in a recent blog post. "Sun had a treasure trove of some of the internet’s most valuable patents – ranging from search to microelectronics – so no one in the technology industry could come after us without fearing an expensive counter assault. And there’s no defense like an obvious offense."

Schwartz tells fascinating tales of personal visits from the likes of Steve Jobs and Bill Gates where they would go eyeball to eyeball with patent threats and, more often than not, walk away grumpily agreeing not to sue each other.

The mobile device sector is red hot with patent activity right now. HTC has a suit from Apple to contend with as well as the recently-settled Microsoft one, and as customers move to smartphone technology, so do the intellectual property law suits.

The New York Times has published a handy summary of who is suing whom, and it is clear from this that a fully-stocked patent portfolio is a must-have for anyone hoping to survive in the mobile device market.

Of course it is not ideal that these companies all spend so much time trying to hinder one another's innovation based on often-ludicrous patents issued by one of the world's most generous patent authorities.

Patent quality at the USPTO is a real issue. It issues patents for software and business processes, letting litigators determine at a later day, and at great expense, whether the patents actually describe eligible subject matter that's new, useful and non-obvious.

Companies don't want to bet their future on an unpredictable patent trial, so they settle, with cash or with cross-licensing.

This is bad for business. The patent market functions like a Valley old boys' club. Only the most established companies have a backlog of patents and the funds to keep it topped up year after year.

Beware relatively new entrants, like HTC. Or beware old ones looking to enter new markets like, perhaps, HP. Does it now look outlandish to pay so much for Palm? That company has been focused on mobile computing since the mid 1990s, when everyone else was still struggling to get their desktop to connect to the internet.

At a stroke, then, HP has put itself in the driving seat. And if Valley legends come knocking on chief executive Mark Hurd's door, he'll be able to look them squarely in the eye and ask them if they feel lucky.

By Struan Robertson, editor of OUT-LAW.COM. The views expressed are Struan's and do not necessarily represent those of Pinsent Masons. You can follow Struan at Twitter.com/struan99.

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