China obtains patent concessions in return for approving Microsoft-Nokia deal

China has given conditional approval to Microsoft's purchase of Nokia's handset business, in return for promises on fair patent licensing

China is requiring Microsoft and Nokia to make promises on fair patent use, fearing that the proposed acquisition between the two companies could spell trouble for the nation's Android device makers.

On Tuesday, China's Ministry of Commerce gave conditional regulatory approval to Microsoft's purchase of Nokia's Devices & Services business. The US$7.2 billion deal means that Microsoft could very soon produce its own smartphones using the Windows Phone operating system.

China, however, remained one of the last markets to approve the deal, and demanded more time to study its effects, the commerce ministry said in an online posting. The nation is both the largest producer of smartphones, and the largest market for them, and authorities believed the deal could have a far-reaching effect on the industry, the ministry added.

In particular, Chinese regulators are concerned Microsoft could use its patents to gain an edge in the local market. Over 80 percent of Chinese smartphones run Android, which Microsoft claims contains certain technologies on which it holds patents.

In the past, Microsoft has sued Android device vendors, alleging patent infringement. The company has also created a program giving manufacturers access to a patent license covering the Android and Chrome operating systems.

China's commerce ministry, however, fears the patent enforcement could go too far. Because Microsoft is entering the smartphone business, the company has the incentive to raise its patent licensing fees as a way to stifle the competition. Android makers could be forced out of the market, or pass the costs on to the consumer, the ministry added.

To prevent the patent abuse, Microsoft has promised it won't use so-called "fundamental patents" to seek a product ban on Android handset makers. Nor will the company seek to increase their patent licensing fees following the acquisition.

In cases involving less important patents, Microsoft can seek a product ban if the vendor conducted "negotiations not in good faith," according to the ministry. Microsoft's promise on fundamental patents will last indefinitely; the promise on non-fundamental patents for eight years.

In addition, Nokia has also agreed to license its fundamental patents fairly to vendors.

On Tuesday, Microsoft could not be reached for immediate comment, but Nokia has said it expects the acquisition to be completed later this month. 15 different markets have given regulatory approval to Microsoft's purchase, according to China's commerce ministry. But Nokia declined to say which remaining market is still scrutinizing the deal.

Despite China's concern with the proposed acquisition, both Nokia and Microsoft have struggled in China's smartphone market, and failed to match Android's popularity. In the fourth quarter, both Nokia smartphones and the Windows Phone OS had a less than 1 percent market share in the country, according to research firm Canalys.

Tags business issuesregulationMicrosoftNokiagovernmentMergers and acquisitions

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Michael Kan

IDG News Service

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