Winners/losers in Apple-Samsung
The news that an American jury returned what appears like a decisive victory to US-based company Apple against its Korean rival, Samsung, comes with little surprise. However, it comes with a number of winners and losers that go far beyond the two companies. Today, both Apple and Samsung probably changed their facebook relationship status to “it’s complicated.”
The biggest winners in this fight may include Apple but Apple is just one of a large class of winners. Basically, if you own a patent connected to smartphones today, the value of that patent has gone up tremendously as the lawsuit validates that even the smallest patent can have a very large value. Apple’s US$1.05 billion award was over violation of 6 patents, roughly putting the value of those patents at over US$150 million each. While not every patent is going to be worth that much, patent portfolio holders can now demonstrate to potential buyers (and after this decision, there will be another flurry of patent purchases as the giants in the smartphone market will try to arm themselves with more ammunition) that patents can be worth a lot of money.
Expect to see more companies filing patents for what some may see as small inconsequential things (for example, did you know that zooming in on a picture by spreading your fingers apart is covered under an Apple patent Samsung infringed on). Today, the smallest detail, when grouped with other small details, could result in major damage awards.
Now that an American jury has handed an American company a verdict that forced its Korean based competitor to pay over US$1 billion in damages, it would seem Apple is the big winner. The case appears to prove that the patenting of things like the bouncing effect when you reach the bottom of a page or list can be protected by patents and any application that uses them will have to pay fees to Apple in order to be compliant. While the jury returned a real eye-opener of a damage award (this is the largest award ever in an intelectual property case), it is far short of the US$2.5 billion Apple was seeking and represents less than 1/17th of Samsung’s mobile revenue last year.
It is, however, a validation of Apple’s strategy in the mobile space and an affirmation of Steve Jobs’ strategy of patenting a lot of the technology around the iPhone. Armed with such a heavy arsenal, Apple can take just about anyone to court and, if covered by a favorable jury, win.
While it is not getting any money from this effort, Microsoft may be one of the biggest winner and possibly THE biggest one in this fight. As a rule of thumb, Microsoft tends to thrive as a company when its competitors fall on hard times (eg. Xbox vs. Playstation). With Samsung and Apple now battling things out around the globe (and the battle will be long and expensive for both players, with no guarantee for either as the score currently is 1 win for Apple (in the US), 1 win for Samsung (in South Korea), and 3 draws (in UK, Germany, and Australia)), Microsoft can focus on moving its platform as the “safe” alternative to iOS.
While Windows 7.5 only commands about 3% of the market today, it is a platform free of lawsuits and if there is one thing Microsoft knows better than Apple, it is the legal arena, a space where it bested Apple in the past over cases similar to what Apple and Samsung are fighting (back in the PC days, Apple accused Microsoft several times of copying the look and feel of its operating system. Microsoft won every case Apple brought against it.)
The company can also show that because it has gone with a radically different user experience on its devices, it is sitting in a substantially better space than Google is when it comes to providing an operating system to third parties. Samsung and HTC will probably start looking more seriously at their Windows Phone strategy as they now have to consider the dangers of being on Android, a platform that may have too similar a look to iOS.
When Nokia decided to go with Microsoft instead of Android, many considered the move foolish. With Android now dealt a major legal blow by Apple, the move looks like genius. The company does not have to worry about Apple coming after it with as many patent claims and can clearly show that its products are radically different. With uncertainty over the evolution (or even support) of Samsung products in the marketplace (while the case will surely go to appeal, further wins for Apple could force Samsung to pull its products from the American market), carriers will pay more attention to products that are not running on the Android platform and the biggest player in that market is now Nokia. The bet they made on Windows Phone may not look so dumb at this point but it, alone, will not guarantee success so while Samsung, the largest retailer of smartphones, is temporarily hobbled, the window of opportunity for Nokia is relatively small.
It would seem odd to put Samsung on a list of winner in this case as it has to pay over US$1 billion in damages. But perversely, this amount of money is relatively small for a company that has established itself as the biggest distributor of smartphones in the world and the second most profitable one (Apple still retains the top spot on profitability). Also, due to the length it takes for legal proceeding to take place, it seems that Samsung’s latest products (eg. the Galaxy III) may not be covered.
Furthermore, the case was decided in a court that is a mere 10-20 miles away from Apple’s headquarters. This, along with a number of procedural steps throughout the trial leaves a lot of holes that Samsung can leverage in an appeal. The size of the damages awarded, an unprecedented amount, could be seen as a form of bias, which I suspect Samsung lawyers will use in an attempt to get the case thrown out of court. When one assumes that it could have gotten as much as US$2.5 in damage claims against it, Samsung seems to have gotten away with a relatively small slap on the wrist.
It’s hardly a secret that the battle between Samsung and Apple is largely a proxy war over the Android system owned by Google. With this case, Google has been dealt a major blow and its plan to remain the most popular mobile operating system (based on the number of units sold) may be at risk. The verdict handed out points to a number of features that Google is building into Jellybean, the newest version of its operating system and, as such, could force the company to modify its operating system, lest it force its licensors to end up losing in a court of law when Apple takes them there.
More troubling for Google is the perception of Android as a copy-cat operating system. Apple has gone a long way in making its case that Android is a carbon copy of its iOS offering and, in the Samsung case, it appears the jury decided the claim was correct. However, geopolitical concern may have played into this trial. After all, Samsung not an American company.
When (and it’s a question of when, more than it is a question of if) Apple and Google end up in a US court of law against each other, it is unclear what a jury might end up deciding. This is why it behooves Apple to continue its war with Google by proxy, attacking licensors who are mostly based outside the US and thus guaranteeing that American juries will continue siding with the Cupertino giant.
HTC, Motorola, and other Android supporters
With the future of Google’s Android operating system at stake, providers of devices running it have to worry about their own position in the market. Apple could easily turn around and make claims similar to the ones they made against Samsung and sue other Android supporters. It most probably will attack some of the weaker members of the coalition, studiously avoiding Motorola as it might bring it into head-on competition with Google, Motorola’s newest owner.
Beyond the courts, the challenge Android licensees have is that the ruling creates some uncertainty as to whether products may end up being recalled or enjoined from being sold, leading some telecommunication operators to start looking for alternative to the Android system (and they will find willing partners in the likes of the Microsoft/Nokia alliance and RIM). This could represent a major issue for Android licensees, which already had to content with the overwhelming power of Samsung in the marketplace.
US$1 billion is a lot of money. Let’s not make any mistake about the fact that is a critical blow to the company, even if it isn’t as heavy a blow as it could have been. The company is now forced into a protracted war and set of appeals if it wants to continue dominating the smartphone category (as the single largest provider of Android devices worldwide, Samsung’s place in the market in terms of units shipped is only rivaled by Apple).
The company is also faced with a marketing problem as it will now forever be branded with the perception that it is a copycat that does not innovate. The trial has successfully helped in shaping that image and Apple is very focused on ensuring that it sticks as Samsung appears to be the main Android player willing to take Apple on.
With headlines screaming that this is a major blow to Samsung, some consumers may rethink the purchase of a Samsung device as they may worry that their device would not be supported in the future or that Samsung could be forced to recall them. While those possibilities are, at best, remote, they will alter the purchasing decision of some segment of the market.
While Apple’s win seems like a decisive blow against Samsung, it is only one step in a long process and Apple now will have to go all the way if it wants its case to stick. This is but one battle in a long fight that may reshape the company’s image as a bully in the technology world. Whether it is in the right or not will not do much to affect the perception by Apple’s opponents that the gigantic company (it became the corporation with the single largest market capitalization the world in the past few weeks) is flexing its muscle to beat up on smaller players.
Apple is a deeply beloved company but by wallowing in the legal world of patent laws (and software patent law is, in itself, a controversial space), that image may loose some of its luster. While such perception will have no discernible impact in the short run, it could run the risk of altering perception of the company in the long run.
With the legal arena now being a major battleground in terms of success in the software space, startups have been handed an extra set of potential difficulties to deal with. Patents are expensive to file and patent portfolios take time and money to build up. In a world where every giant is going to lay its hands on the smallest innovation in software, startups may found themselves trapped or altogether collateral damage in a war they have not asked for.
Software patents are controversial because they provided legal ammunition to people with more money. Because this cases ran largely on the validity of certain software patents, it gave increased ammunition to supporters of the idea that simple software interactions should be protected under patent law and undermined the concept that such patents were an imposition on the software industry as a whole.
Along the way, it means that larger companies, which generally have more resources than startups, can patent software interactions as a defensive method to ensure that smaller startups cannot.
When innovation moves from the technology front to the legal one, consumers end up paying for it as the cost of litigation is passed on to them through increased prices on new devices. In the cycle of innovation that includes the legal arena (for this is not an uncommon step but largely one of the final ones in an innovation era), prices either stabilize or go up, with little improvement to the underlying product.
A side effect of patent litigation is that it also makes all the players substantially more cautious when it comes to innovative product, stunting growth in order to ensure they do not infringe on this or that patent. The result is largely uninspired incremental improvements that are deemed safe enough to survive a potential lawsuit. It also means the end of a hyper-growth era for the area where the patents are deployed.
In cases like these, nobody really wins. The net results of bringing technology into the legal arena is that it ends up slowing innovation down in the long run and patent litigation ends up hitting smaller players or keeping innovators out of a market. So yes, it may be a temporary victory for Apple but, in the long run, it’s a loss for everyone including Apple itself.
Originally published on August 25, 2012 in Business . You may find related thoughts pieces under the following terms: Android, Android devices, Apple, Google, HTC, Microsoft, Mobile operating system, Motorola, Nokia, Samsung, Smartphone, Software patent, Software patents, iOS, iPhone, operating system, patent law, smartphones, software patent law