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Apple vs HTC: Battle for control of patents, wireless apps - or both?

Has Apple CEO Steve Jobs launched an attack on CEO Eric Schmidt and Google by suing its phone supplier? Is there more at stake than touch screen patent technology?
Written by Doug Hanchard, Contributor

Apple CEO Steve Jobs launched an attack on CEO Eric Schmidt and Google by suing its phone supplier HTC. It's on the defensive because of a lawsuit filed by Nokia. Is this the wave of the future? Very likely. Reports are all over the map. Questions arise: Who will win? Is this the opening gambit of consumer market space protection to halt further competitors entering the "Apple" market? Which way will this battle go? The possible answers are endless as to why this started right now and begun the way it has before the US International Trade Commission (USITC) and Federal court.

Since the 1980's, Apple has fought several PR wars and made a successful comeback from financial ruin several times. It bickered about Microsoft's domination in the PC market before and after Jobs left in 1985, which poisoned employee moral inside Apple's offices. The company began to grow when Jobs returned in 1997 and eliminated the anti-Microsoft culture inside the company. Apple still has fun with the PC competition as demonstrated with the PC  - Apple ads. Apple has moved into diversified consumer markets and succeeded where others once dominated. Since 2000 the company has had a string of successes. 2010 is no exception, it continues to be on a roll. Many considered the suit against HTC to be a lightning striking on a clear sunny day. What's going on?

2010, Year of the Patent war (again)

Larry Dignan's article on the Patent infringement Apple accuses HTC of violating lays out the battlefield. Nokia has also filed a patent suit against Apple, who in turn have counter-sued. Documents submitted by Apple at the USITC are (some of) the same entered in Federal Court. The USITC will investigate in order to make a decision 30 - 45 days from the date of submission. Update: Remedy of the case can take an unknown amount of time.  If Apple wins the USITC decision, it will support their case before the Federal Court. At the same time it will deal with Nokia's suit. Matthew Miller reports the Nokia feud has been on-going since October 2009. Similar lawsuits are likely to follow against other manufacturers. Nokia has successfully protected its patents for decades.

Apple's legal approach is a trend on the rise. Of the 30 current cases before the USITC, half involve high tech. Peg O'Laughlin, USITC public affairs officer, indicated that the Commission has not seen a dramatic rise in technology related cases which are filed as 337's (19 U.S.C. §1337). In a telephone interview with Former President of the International Trade Commission Trial Lawyers Association (ITCTLA) Tony Pezzano, he believes that there will be a rise in cases filed with the USITC. Pezzano offered two important reasons why. The first of which is that the USITC fast tracks the process completing review and decisions within 30 days from time of acceptance of a valid complaint and the other is that U.S. Patent protection has been successful in the past. In other words, using the USITC enables and seeks resolution quickly which is then used in the litigation fight in Federal court. At stake are licensing rights (money) in addition to penalties and damages (a lot more money).

Is the Apple patent battle, with the USITC complaint, simply routine business from here on in? I believe it is. The Industry will use the USITC as a control mechanism in the market. But I also think something else is brewing. Remember RIM's patent battle? RIM decided to pay out a billion dollars and move on after NTP filed patent suits. Big money is at stake in damages and early market share. The one possible obstacle that Apple may underestimate is how the USITC takes into account public interest, which could work against Apple;

Commission Rule 210.50, 19 C.F.R. § 210.50, provides for the Commission to receive submissions from the public on issues concerning the effect of any remedial order(s) on the public interest, namely, the effect of such an order on the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive products, and United States consumers. See 19 U.S.C. § 1337(d)-(g). For details on the deadlines for submitting comments on such matters, see Rule 210.50(a), 19 C.F.R. § 210.50(a), and notices issued in particular investigations.

The Google "ex" - connection

There may be another reasons why the patent suit was launched by Apple. It has been suggested that the suit is a shot across the bow of Google and the Nexus One handset. I agree. Eric Schmidt CEO of Google was on the Board of Apple, until he resigned in August of last year. Molly Wood of CNET pointed out during an SXsW panel discussion hosted by Leo Laporte on TWIT TV that Steve Jobs may think Google may have stolen some of the iPhone features, ideas and concepts and embedded them into the Google's Nexus One manufactured by HTC, which launched 5 months later. I agree with that as a plausible reason why Apple has sued HTC. The Google designed Mobile Operating system, Android, is an open source code available to various manufacturers and does NOT appear to be the focus of the lawsuits, just the touch screen technology and related components. But it may be one of the influences why Apple is suing. Google and HTC both believe that touch screen technology do not belong solely to Apple. I can think of several non Apple and HTC products that have used touch screen technology for decades. Everything from medical devices, restaurant point of sale systems to electronic toys have used touch screen technology as far back as the early 1980's. Who owned early versions the patents will be one issue and are they still enforceable. This could be the ultimate question, particularly those which are over 20 years old.

Exhibit A

HTC issued this press release on its website;

“HTC disagrees with Apple’s actions and will fully defend itself. HTC strongly advocates intellectual property protection and will continue to respect other innovators and their technologies as we have always done, but we will continue to embrace competition through our own innovation as a healthy way for consumers to get the best mobile experience possible,” said Peter Chou, chief executive officer, HTC Corporation. “From day one, HTC has focused on creating cutting-edge innovations that deliver unique value for people looking for a smartphone. In 1999 we started designing the XDA and T-Mobile Pocket PC Phone Edition, our first touch-screen smartphones, and they both shipped in 2002 with more than 50 additional HTC smartphone models shipping since then.”

The App store

Open source for many programmers offers an easier method to develop applications. It offers the same initial revenue / costs model compared to Apple, which takes a 30% cut of the apps selling price. Like Apple, Google's Android App store has two methods a developer can distribute apps. One is no charge and therefore no transaction fees apply. This allows developers to test application demand. Then if successful, develop a new application and begin distribution through the Android store. Some developers will do both, others will specialize and pick one. Obviously, market share will influence direction. During the release of the FCC National Broadband Plan on March 16th, Commissioner Robert McDowell stated that 837 million times, users downloaded applications onto their wireless devices.

As I have previously mentioned, Steve Jobs has plenty of experience in a PR war, having learned more than a few lessons along the way. The battle with Microsoft was bruising and Jobs quickly upon his return recognized it can be a significant long term distraction for the company. Jobs wants to avoid a long and protracted fight in the court of public opinion and simultaneously protect what he believes is Apple's intellectual property. This is one fight that has significant impacts to the profitability of the iPad and iPhone which are mass production and high margin devices with limited shelf life between models.

A search of the U.S. Patent and Trademark office using a string "Electronic Touch Screen" brings back 374 results. Among the companies listed: RIM, Apple, LG, Nokia, Samsung.

Here's an interesting tidbit. One of the documents (I downloaded over 150 files from the USITC) submitted by Apple is a patent related to Apple's USITC filing against HTC, Patent 5,293,385. A search of the U.S. Patent and Trademark website of this patent brings back a search result a "Notice of Expiration of Patent Due to Failure to Pay Maintenance Fee" as of March 11th, 1998.

Conclusion

If Apple wins its Patent fight against HTC, it creates three powerful future revenue streams;

1) Hardware : iPhone, future models of iPad has optional iPod applications and iPhone built in.

2) Software - iPad / iPhone / iPod - complete control of multi-platform app store driven and of course, touch screen technology 'patented'.

3) Licensing - Software and Hardware interface Patents that, maybe, for a fee you can sell a non-Apple version.

If Apple loses;

1) Competitive Consumer space drives down prices and thus margin, especially in the consumer electronics space. Even Jobs knows that low volume sales would hurt future development and profits. Google / HTC / Android gain significant market share, perhaps defeat Apple by a wide margin.

2) Software demand will go where the market demand is. Google is the 800 lb gorilla in the Open Source software space and revenue opportunities for developers is likely to be more open to immediate access.

3) No threat of change in product or software licensing in Google's Android or Nexus One platforms, offering confidence to the developer community that the product in whatever form it takes will be supported. Apple app development would never go away completely... but it might shrink to a level that only Apple winds up developing new ones.

Hypothetical Epilogue

During the 1990's battle for the computer market, Jobs fiercely protected the Mac and operating system from being cloned. Jobs killed the program to license its products when he returned in '95. This time around, something tells me that Steve Jobs wants to do both: dominate the app eco-system for iPhone/Pod/Pad (and patent licensed versions) and control the hardware Patents for displays for smart phone and readers. If Apple wins, Jobs can make the Nokia suit go away pretty fast by offering a license swap. If Job's strategy fails, it is possible the company could face an uncertain future. I would argue that the company already focuses too many internal resources on iPhone and iPad and has ignored its Computer products for too long and that it could hurt them over the long run. When was the last major upgrade to the Mac Operating system OS-X or laptops with the exception of the i-MAC? To be sure, Apple fans love its computer products. It managed to survive with no price cuts during the recession. The only thing that will definitely repeat itself FOR SURE - the lawyers are going to make a killing while taxpayers around the world pay the judicial system to sort it out the patent issues.

Steve Jobs is one of the most brilliant geeks on the planet. He gets it. He knows his consumers. Apple's long term growth plan is to continue its significant market share in the entertainment and communications space and expand it. The decision to go on the offensive now is the right move, given the diversified product and services Apple sells. There is one minor problem.

I think Apple will lose the patent war.

You be the judge

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Additional Resources;

Commerce Secretary: Patent delays are a scandal

Patent wars: Kodak sues Apple, RIM for patent infringement

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