The whole debate began when Oracle alleged that Google violated several of its patents, namely Google’s Davlik process virtualization machine. Java was used to develop the “VM” which also serves as the Android operating system’s backbone. According to Oracle, damages totaled billions of dollars. The company then requested termination of every infringed product. But Google denied any guilt and claimed that some of the Java files that it copied were simply test files.
Oracle further argued that Google stole only the best parts and used them to create plenty of other application programming interfaces that were incompatible for Android. Because of this, many Java written programs failed to work with Android. Likewise, many Android programs will not work with Java platforms. Oracle is basically arguing that Google used this move as a strategy and to isolate Oracle. The company is further stating that because of Google’s infringements, Oracle cannot enter the mobile market, mostly because of the competition from Android.
Google since requested that the U.S. Patent and Trademark Office re-examine all of the patents that Oracle claimed were in violation. Judgment leaned in Google’s favor, forcing Oracle to reduce its copyright violation claims from six to two.
Further complicating matters was when the argument started to favor Oracle. The smoking bullet was an e-mail acquired by Oracle sent by an executive at the head of Google's Android division, showing that Google knew that it needed a license for Java. Although Oracle seemed to be winning the argument, it did not last long. A U.S. district judge ruled that $6.1 billion in damage claims were outrageous. Google proposed paying a total of $2.8 million for the two patents combined as well as paying Oracle 0.5% of all future Android revenue on one of the patents until December of this year. They would then pay 0.015% for the second patent, expiring in April of 2018. Oracle shut the offer down, saying that it was too low. This move by Oracle in turn ruined any chance of future negotiations.
Both Google and Oracle were reprimanded for wasting time; Google has recently asked to shorten the case, as well as appear in front of a judge as opposed to a jury. I think that the court will rule in Google’s favor in that regard. Also benefiting Google is the fact that Oracle changed its mind about the number of copyright infringements.
It seems to me that Oracle was rather foolish to jump into this agreement without establishing clear permission and an agreement about royalty payments to the copyright holders. But if Oracle wins this, companies like Apple (AAPL) and Microsoft (MSFT) could benefit, since they are so strict about copyright protection. Apple and Microsoft have also been accused by Google of attacking its Android platform by use of patent litigation instead of creating better, more competitive products.
Apple is no stranger to patent infringement after all and probably the reason for all of these lawsuits. The company is currently suing Samsung, a major manufacturer of Apple components. Apple iPhone and iPad production would be in deep water without Samsung, yet the company is still suing the Korean manufacturer for close to $7 billion.
It is not just Samsung and Google that Apple is playing the victim to: Motorola (MMI) and HTC are also the bullies on the playground, according to Apple. But when HTC was blamed for violating ten patents, the Taiwanese fought back hard. It hired the same legal counsel that had represented Google. HTC claimed its innocence, claiming that the only reason Apple was taking it to court was to delete HTC as a competitor. By the end of last year, it was concluded that it only violated a very minor feature of only one patent. This decision coupled with a stock buyback announcement helped HTC shares increase by 7% on the Taiwan Stock Exchange, the maximum allowed in a single day.
Not only did HTC profit from Apple’s false claims, it and other smartphone makers started filing their own patent infringement claims against Apple. In fall of 2010, Motorola filed three lawsuits and an ITC complaint against Apple. In return, Apple filed its own ITC complaint that Motorola phones that ran Android copied the iPhone. Just last month, a judge ruled that Apple failed to prove that there were any violations by Motorola, with the commission judging in Motorola’s favor.
In the absence of the legal battles, I would consider Oracle a buy, but a weak buy. Until this works its way out of the courts, however, I would leave it alone. If its earnings and cash flow keep increasing despite the legal issues, I would consider it a strong buy. But it is not just the legal issues hurting the company.
According to a recent Wall Street Journal article, the company’s unstructured data is forcing it to be left out of the “big data” phenomenon that surrounds enterprise computing. Rolfe Winkler of the WSJ observed that much of Oracle’s data is difficult to categorize into spreadsheets. He also states that the company’s hardware and software products are not efficient enough to solve the problem.
For those familiar with big data, this may make sense. To the rest of us, it is just another nail in Oracle’s coffin. While some analysts would disagree, I would recommend shying away from Oracle for a while: maybe even running away.
About the author:I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.