Austin vs. Zhuhai: Round 1 goes to Texas

Winning the patent battle, but losing the MP3 chip war?

By Andrew Leonard
March 31, 2006 2:40AM (UTC)
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At How the World Works, I've made no attempt to hide my disdain for "patent trolls" -- that breed of high-tech capitalist who specialize in simply amassing a bunch of patents and then suing everybody in sight. Sure, intellectual property is valuable and defending it vigorously can be critical to a company's business model. But I'm also sympathetic to the argument that was made before the Supreme Court earlier this week by lawyers for eBay: Patent protection is too strong right now, and the constant threat of patent litigation hampers innovation that would benefit everyone.

That being said, I feel duty bound to report that Sigmatel, an MP3 chip designer that I labeled a "patent hoarder" in January, has received a favorable preliminary ruling from a judge at the International Trade Commission. The judge ruled that Actions Semiconductor, an up-and-coming Chinese chip designer, infringed on two of Sigmatel's patents. Since I gave play to Actions' charge that Sigmatel had sued Actions mainly because the Chinese company was cutting into Sigmatel's market share, it's only fair to note that, pending appeal, Actions has been found guilty. The judge ordered that devices containing Actions' infringing chips be blocked from the U.S. market.


Sigmatel's CEO, Ron Edgerton, was suitably exuberant about the ruling. But he didn't have much time to enjoy it. This week, Sigmatel's shares have been hammered by analysts, who greeted the company's dismal quarterly results with a fanfare of dire predictions. Noting that the Austin, Texas, company is losing out at the top end to PortalPlayer (which designs most of Apple's iPod chips) and at the bottom end to Actions, and also appears to be hemorrhaging cash, one analyst, Wedtech Morgan's Craig Berger, was quoted as saying Sigmatel "is in significant, possibly irreversible financial peril."

But no analyst has suggested that Sigmatel's woes are due to Actions' patent infringement. The plunging price of flash memory chips and Sigmatel's failure to introduce a crucial new product on time are being pinpointed as the real problems. Meanwhile, Actions breezily noted in a press release responding to the ITC ruling that the U.S. was only 10 percent of its market, and that the next generation of its chips would be free of any legal entanglements. (Actions' fiscal quarter ends tomorrow.)

It's tempting to wonder whether Sigmatel would be in healthier shape if it had put more effort into getting out its next chip on time than in assembling a massive MP3 patent portfolio. But that's probably unfair. In any event, one lesson seems clear -- enforcing intellectual property alone may not be enough to compete with China's rising high-tech companies.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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