Enterprise society

Enterprise society

The patent wars: Apple versus Android

The recent decision by a US federal court in California to rule that Samsung had violated the patent rights of Apple has seen both Apple’s CEO Tim Cook and millions of Apple’s devoted customers cheering. Yet the headlines do not fully explain the reality of what has been taking place in the world of mobile telephony. It is also not clear what this will mean for the future of this important sector, or of the implications it may have on innovation.

Background to War – the litigious Apple

Apple has built its business and its reputation on good design, smart marketing and being the underdog. Steve Jobs, Steve Wozniak and Ron Wayne launched the Apple I back in 1976. It was sold as little more than a motherboard. With Wayne gone, Jobs and Wozniak incorporated Apple in 1977 with the financial backing of Mike Markkula and moved forward with Apple II and III products. Public listing took place in 1980 and the Macintosh was launched in 1984.

The Macintosh was a revolution with its compact size, simple and elegant design and user friendly graphic user interface (GUI). However, the original technology upon which the Mac’s GUI was based had been developed by Xerox at their Palo Alto Research Centre (Xerox PARC). It had been shown to Jobs and other members of the Apple team in 1979 as part of a deal to allow Xerox the option of buying Apple shares prior to the initial public offering (IPO).

When Microsoft launched its Windows operating system in 1985 the response from Apple was to sue for intellectual property (IP) rights infringement. The argument was that the Windows system used a GUI based on the same technology as found in Apple’s products. Although Apple had originally licenced its GUI software to Microsoft for Windows 1.0, later upgrades were deemed to have infringed as they were too similar to the features of the Macintosh.

This law suit raged on for several years and was related to copyright rather than patent infringement. The initial court decision found against Apple, but was appealed. Much of the case rested on whether the two products were identical and it emerged that much of Apple’s product had been licensed from Xerox and copyright only extended to “original expression”. Apple sought unsuccessfully to argue a case based on “complete look and feel”.

While the legal case concluded in 1994 the dispute did not fully end until 1997 when Steve Jobs contacted Bill Gates and reached an agreement. This made Microsoft’s Internet Explorer the default browser for Apple products and Microsoft agreed to develop its popular Office software for the Macintosh.

Apple’s track record is therefore one of aggressive litigation to defend its market position. However, it has focused on maintaining a largely “closed” technology strategy as compared to the “open” systems of Microsoft. This has created a suite of products that work smoothly with each other, but are not always compatible with a broader range of hardware and software found in other systems.

The rise of Samsung and Apple’s response

Korea’s Samsung was founded in 1938 but did not move into electronics until the late 1960s. Its first foray into telecommunications took place in 1980 with telephone, fax and switchboards. The company began producing personal computer products from 1982, and a major investment in R&D continued for the rest of the decade. By the early 1990s Samsung was one of the world’s largest manufacturers of computer chips, rivalling Intel. It commenced production of LCD screens in the mid-1990s and was the world’s largest LCD screen manufacturer by 2006 when it entered into a joint-venture with Japan’s Sony to produce LCD panels.

For much of its history Samsung was viewed as a components supplier. However, the emergence of Google’s Android operating system in 2008 provided an opportunity for competitors to enter the smart phone and tablet markets. These had been dominated by Apple with its iPhone (launched in 2007) and iPad (launched 2010).

Samsung was not the only company to launch Android-based smart phones and tablets, but it has proven one of the most successful. The Galaxy S smart phone appeared in 2010 and the Galaxy SII the following year. The Galaxy Tab range of Android-based tablets appeared at the same time. By 2012 Samsung had sold over 30 million Galaxy phones and more than 2 million Galaxy tablets. Samsung had become the world’s largest mobile phone manufacturer deposing Nokia from top spot.

It is not surprising that Apple has been so aggressive in trying to stop Samsung. When Steve Jobs first heard of Google’s decision to launch the Android operating system he is reported to have threatened to declare a “thermonuclear war”. However, the Samsung litigation has been a persistent and significant effort by Apple.

Fighting in the Patent Thickets

Despite the win for Apple in the recent federal court case it is unlikely that this will be the end of the matter. An analysis of the patents held by the major actors within the mobile computing and telecommunications sector is revealing. Samsung holds around 31,524 patent families compared to 8,887 owned by Microsoft and a mere 1,941 owned by Apple.

The term “patent families” refers to a bundle of patents that are owned across a range of software and hardware applications. They are typically registered in the three major patent offices in the United States, Japan and the European Union. This is known as the “triadic patent families”. Large concentrations of patents are known a “patent thickets” and create a potential crowding-out of other companies’ ability to create new products if the owners of these patents remain unwilling to licence their technology.

The diagram below is an image of a “patent thicket” sourced to a paper published by Mark Summerfield in the Journal of Asset Management earlier this year. At the bottom left hand side of this “patent thicket” are patents relating to mobile and wireless networks access and transmissions. At the top right hand side are software applications relating to the internet. Lower right are cellular mobile network management and operations, while the top left hand side has handset designs, antennas and touch screen displays. In essence the cluster map shows the range of hardware and software patents that can be found in almost all the smartphones and tablets we use today.

Patent portfolios of key technology firms as cluster map. Summerfield (2012)

When the patents owned by Samsung and Microsoft are overlayed onto this diagram as shown in the following diagram, the crowding-out effect can be seen. Samsung’s patents (shown in red) and Microsoft’s patents (shown in yellow) are very dominant across the full range of technology applications.

Microsoft and Samsung patent portfolios. Summerfield (2012)

By comparison Apple’s modest patent portfolio, as shown in the figure below, is much more thinly spread. It is primarily concentrated around the key devices associated with the user interface. This was the area of technology where the US court found Samsung had breached Apple’s IP rights.

Apple patent portfolio. Summerfield (2012)

However, the victory of Apple over Samsung has many potentially significant implications. According to Summerfield Apple’s relatively small portfolio of patents forces them to rely on the licencing of technology from other companies. Apple also licenses its technology to other companies and reportedly offered to licence its patents to Samsung back in 2010. Yet Samsung has been active over a number of years in seeking to develop industry standards for mobile communications systems. This has involved looking for ways to avoid conflicts within the patent thickets that can block out competition and result in non-standard or incompatible systems.

Apparently Samsung has had its own issues with Apple using its patents. Apple has allegedly ignored Samsung’s approaches and sourced technologies from Qualcomm and Infineon that follow standards set down by Samsung and others who support industry standards. Apple has had similar patent battles with Taiwan’s HTC and Motorola in which both parties counter sued for breaches if IP rights.

3GPP, FRAND and Google

In past years Samsung has been one of Apple’s most important suppliers. This has included the supply of semiconductors and LCD screens. If Samsung’s appeal is not successful there is the prospect of a “tit-for-tat” response. Samsung has been a leader in the setting of standards for mobile telephony. This has taken the form of the 3rd Generation Partnership Project (3GPP). This aims to maintain and develop industry wide standards for mobile communications devices.

Companies that contribute to 3GPP are allowed to protect their own patent portfolios, but they need to agree to make licences available to other firms on fair, reasonable and non-discriminatory (FRAND) terms. What this agreement implies is that patents cannot be used to exclude competitors from the market or seek to price them out of the market. According to Summerfield’s analysis Apple is not playing by the rules of 3GPP. As he explains in his paper:

Apple is not playing by the rules. Its products build on the mobile communications standards in which others – including Samsung – have invested huge amounts of money and effort. Indeed, without the broadband wireless systems which make so many applications possible and compelling, there would be no market for devices such as the iPhone and iPad. Yet Apple has not itself contributed to the standards.

What this suggests is that the issue is potentially much greater than a dispute over whether Samsung copied Apple’s patents. In fact it is somewhat unfair to portray – as some commentators have – Samsung as the Asian copycat too lacking in ideas to compete fairly with the innovative Americans at Apple.

What is actually at stake is the ability to deliver products to consumers that have the ability to function in a consistent manner and with connectivity and compatibility. Rather than maintaining a degree of harmony within the system in the interests of consumers, this legal case may trigger an unseemly brawl that few are likely to benefit from.

Finally, there should be some attention given to Google. This giant of the internet search engines is the source of the Android operating system and one that they have been happy to supply as an open source system to the likes of Samsung. Yet in 2011 Google acquired Motorola’s mobile communications business “Motorola Mobility” for $12.5 billion. This gave it ownership over 9,582 patent families spread across a wide spectrum of the patent landscape. This is illustrated in the figure below.

Motorola/Google patent portfolios. Summerfield (2012)

If the patent wars turn nasty we can expect the fighting to include not only Apple and Samsung, but Microsoft, Nokia and Google. This will make for interesting times for lawyers. Whether it will be of much benefit to the consumers is still unclear.

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