Brad Smith, general counsel of Microsoft
Brad Smith, general counsel of Microsoft

The technology space changes seemingly as fast as a data packet travels on a 100Gb Ethernet line, and even the largest companies in the industry need to take a careful look at their strategies in the ever-evolving marketplace. Perhaps the biggest concern on the plates of the legal departments of tech giants is the issue of patents. Patent litigation consumes a great deal of time, energy and money, as companies such as Google, Apple, Samsung, HTC and others face infringement suits brought on by other tech companies. Unfortunately, the America Invents Act did nothing to stem this tide.

While businesses could, theoretically, wait for the government to enact patent reform, that process is slow and, in many cases, ineffective. In some cases, tech companies take steps to avoid patent lawsuits that will drain resources. One such solution is a licensing agreement. Take, for example, the Android operating system. Android represents a cash cow for Microsoft, which could earn an estimated $3.4 billion from sales of devices with that operating system in 2013.

If you think the above copy is some kind of mistake, and that it should say Google—the creator of the Android operating system—is poised to make billions from device sales, think again. For years, Microsoft has contended that Linux, the operating system that is the foundation of Android, violates a number of patents. Rather than engage in a protracted legal battle over these patents, device manufacturers including Samsung, Foxconn, ZTE and others pay a licensing fee to Microsoft for each Android device sold.

The licensing strategy allows device manufacturers to avoid lengthy and expensive court battles and this represents a nice revenue stream for Microsoft, which needs to do little more than sit back and count the profits.

While licensing is one tack that companies can take to navigate the IP waters, it’s far from being the only option. Some companies view mergers and acquisitions as a way to implement either an offensive or defensive strategy. Microsoft’s recent acquisition of Nokia, and the associated licensing agreement between the two, is an example of a large enterprise attempting to leverage technology and patents to improve its place in the market.

Brad Smith speaks

Based on an exclusive interview with Brad Smith, executive vice president and general counsel at Microsoft, it’s clear that the company is working to make itself relevant for years to come.

Smith says that Microsoft’s acquisition of Nokia represents a horizontal play. “It gives us the chance to add a business that is complementary to our own, transitioning us from a pure software company to a devices and services company.”

The decision to acquire Nokia was driven, in part, by issues of speed.

“We see this acquisition enabling us to innovate faster, bringing hardware and software together to ensure a better experience for customers, improve economics in the market, grow market share and be a more profitable player in the mobile space,” Smith explains.

The acquisition deal also includes an approximately $2 billion agreement to license Nokia’s patent portfolio. Smith explains that there are two companies that have patent portfolios that are important to wireless devices: Qualcomm and Nokia. Nokia has an existing agreement with Qualcomm, which will be assigned as part of this transaction. Microsoft needed an agreement with Nokia as well, for use of Nokia patents in the hardware Microsoft acquired.

According to Smith, Microsoft considered a number of broad strategic questions when making a cost/benefit analysis of the acquisition. “Do we need to get into the phone hardware business? Did it make more sense to build or acquire? Should we do an acquisition that built on our existing partnership with Nokia?”

Smith and his team worked their way through a number of important and complex IP issues and, ultimately, Microsoft decided that acquiring Nokia was the best way to improve the company’s success in the phone space, which would lead to success in the tablet and PC space as well.

The deal will not be finalized, of course, until it receives regulatory approval, but in this area, Smith is confident. He sees Microsoft and Nokia as two businesses that are complementary, with little overlap. In addition, he thinks it will add competition to the near-duopoly in the smartphone market. “Microsoft is a small participant in a marketplace dominated by Google and Apple. This acquisition will add competition to the market, and regulators like to see acquisitions that add competition to the market, so there is a lot for people to like about this.”

And, perhaps most of all, this influx of hardware patents and software licenses will give Microsoft the hardware and intellectual property it needs to make itself a major player in the mobile space. That should make the company executives—and its shareholders— pretty happy.