Legal

In November of last year I wrote a series of posts regarding the relationship between Google and Apple in light of the antitrust trial that Google was facing. The expected verdict was issued (Google was declared a Monopolist and found to be abusing that position). Many more appeals will follow and a remedy will need to be agreed upon--a process which will take many years. The implementation of any remedies will take yet more years.

Nevertheless, commentary on this trial has continued to center of the harm the verdict will do to Apple. Since Apple receives a substantial amount of highly profitable revenue from Google for search defaults, the conventional wisdom is that, due to this verdict, Apple is at a very high risk of losing that revenue. Very little has been said about what harm the verdict will do to Google. The paradox to me is why there is no connection being made between the implied loss to Apple being necessarily a gain to Google.

Since almost all people will continue to use Google on Apple devices, regardless of default, not paying for distribution (through defaults) will lead to a huge boost for Google's bottom line. In other words, most comments currently imply that a verdict declaring Google an abusive monopolist will result in a huge benefit to Google. So I ask again: why would Google management fight against such a verdict? Surely it would have been far more beneficial to argue to lose rather than to win this case! The court will force Google to make more money.

But my conclusion last November was that "a declaration that this [default placement] deal is invalid simply means that Apple and Google would craft another deal that would work around the restrictions. And that new deal would probably turn out to be more beneficial to Apple. [and less beneficial to Google.]"

The reason would be that Apple would increase its bargaining power because Google has, necessarily, decreased its own by losing the case.

I’ll be exploring the topic further as part of a broader examination of the regulatory impact on Apple at WWIC on Sept 19th. Hope to see you there.

``It’s costly and has unpredictable consequences. That makes it a very bad business model. I suppose both companies have agendas that are not visible in court and perhaps Apple is signaling to other parties, and perhaps Samsung is using it to raise its profile. It still seems that unintended consequences may arise and the result could be very bad for everybody,’’ said Horace Dediu, founder of equity-research firm Asymco, in an e-mail interview with The Korea Times.

The above was a quote from the article  Samsung can’t afford to lose Apple fight by Yoo-chul Kim from The Korea Times. Yoo-chul contacted me via email with a series of questions. I want to share all his questions and my answers as well:

Samsung wides market gap with Apple, according to research firms. You think the gap will further be widen and please tell me why

As Samsung converts its phone portfolio to be all smartphones, it is very likely to reach much higher smartphone volumes. One year ago Samsung sold about 56 million feature phones. Last quarter it sold about 43 million. The smartphone portion increased from 20 million to 50 million. At the same time, Apple has maintained a growth in its smartphone business of about 100% on a yearly basis. I expect that to continue into 2013 as well. Therefore it's possible that Samsung could sell 290 million smartphones in the next 12 months and Apple could sell about 200 million in the same time frame.

However, it's important to understand that the companies compete on different bases. What I mean is that what generates a profit (i.e. payment by the consumer above what a product costs) is different for each company. Apple is a platform company that sells access to the iOS ecosystem across many other device types. Samsung sells consumer electronics with limited "network effects" but desirable features. In this view, the gap in device sales is "asymmetric" and not reflective of the actual competition which is between Google's Android and Apple's iOS as forms of access.

Samsung's rapid rises mainly due to the company's heady dependence
on Google Android. If Google applies better software for Motorola,
then you think Samsung will face difficulties?

Think of Google as a supplier to Samsung. No manufacturer wants to have a situation where they are dependent on only one supplier, especially when there are huge substitution costs for another supplier. And even more especially if that supplier owns one of your competitors. However, it's unlikely that Motorola will become a strong competitor to Samsung. I also don't expect Google will damage their OEM "customers" by favoring Motorola. Motorola can't become big enough quickly enough to be a threat to Samsung. What is more likely to be a problem for Samsung is ZTE and Huawei. They are on the same trajectory that Samsung was on 10 years ago. For Samsung to beat them in the future it will need to develop products that nobody can copy.

How about software? Samsung is good to roll out price competitive
models, however, software is always problem. Any advice for this
issue?

Software is hard and expertise can't be quickly acquired. It takes time. Only advice [I have] is that efforts must be patient and there need to be many experiments like Bada and Tizen. Google started with Android in 2005 and Apple started with iOS in 2003 or 2004.

How about the patent dispute with Apple and Samsung. The patent war
is helping Samsung see a rise in its brand awareness and that also
worked for Samsung to grab more shares in smartphones?

It's very difficult to measure the impact of litigation, both in the positive and negative. It's costly and has unpredictable consequences. That makes it a very bad "business model". I suppose both companies have agendas that are not visible in court and, perhaps, Apple is signaling to other parties and perhaps Samsung is using it to raise its profile. It still seems that unintended consequences may arise and the result could be very bad for everybody.

Samsung wants to become a market creator not just a fast follower.
For me, it's quite negative for Samsung to create a wholly-new
eco-systems because Samsung's edges are coming from manufacturing, not creative thinking. What do you think? If Samsung wants to be a
creator, what conditions should Samsung need and what things should
the company do?

Unfortunately, manufacturing excellence is not enough to remain successful long term. US companies were successful, then the Japanese, Taiwanese, Hong Kong, and now Chinese. Companies either adapt or become irrelevant. Building ecosystems is the new basis of competition but it's not the only option. Unfortunately we don't know what will be necessary to build the next basis. What matters is experimentation and the building of new businesses. I can't offer specific recommendations as there is no recipe book for how to create new markets.

For your views, who is much better so far since the trial has begun
in the US. Samsung or Apple?

I cannot comment on this. Performance in court can only be judged by those present and I'm sure everybody present disagrees.

You think Apple is enjoying its so-called a homeground advantage
for the trial and is there any possibility that the issue to go for
the highest court in the US. My Samsung contacts say that's the
possibility, though.

Again, I don't have an opinion on legal matters. Broadly speaking, IP litigation is similar to playing the lottery.

Need your perspectives about Google's support for Samsung. Google
confirms its supports for Samsung for an united front against Apple
because the fight between Samsung and Apple is a kind of version that
represents Google and Apple fight.
Any comments about that?

I believe Google does support Samsung. I question however how this relationship will develop over time. I attached below commentary from a researcher at Deutsche Bank on Android in China. I think it has some clues about how Google treats its partners.

What are pre-conditions before Samsung making an action to sign a
peace treaty with Apple?

It depends on the motives behind Apple's actions. I think they want to see a "no copying" rule. They don't mind competition and Android could be a help in the long run by moving users from feature phones to basic smartphones which could later be upgraded to Apple phones. But what I think they want is to signal to others that direct copying is unacceptable. Essentially, the work of their designers is very important to them and copying destroys [the designers'] incentives to do breakthrough products.

---

See also: Who Cares If Samsung Copied Apple? by James Allworth - Harvard Business Review

Apropos Google's excellent Android adventure.

AdMob founder and CEO Omar Hamoui today responded on the company's blog, acknowledging that the terms as written would prohibit developers from using AdMob and Google advertising products on the iPhone.

via AdMob Chief Responds to Apple's New Developer Terms for Analytics Data Collection - Mac Rumors.

Revised language for section 3.3.9 of Apple’s developer agreement, concerning the use of data collection:

The collection, use or disclosure is for the purpose of serving advertising to Your Application; is provided to an independent advertising service provider whose primary business is serving mobile ads (for example, an advertising service provider owned by or affiliated with a developer or distributor of mobile devices, mobile operating systems or development environments other than Apple would not qualify as independent

via Apple Makes Good on Steve Jobs’s Promise, Invites Other Advertisers. But What About Google’s AdMob? | Peter Kafka | MediaMemo | AllThingsD.

Apple is stating that user data must be handled by organizations that are strictly independent.  If the ad service provider is part of an organization that either competes with Apple's devices or platform, it's not independent.

AdMob would have been allowed to operate unhindered on iOS but AdMob as part of Google is not.

Conversely, if Google were to abandon Android, the path to riches would be open again.  As shown several times already, by pursuing a mobile device platform Google strategically abandoned some significant revenue opportunities in exchange for some extraordinarily high costs.

Readers of this blog should not be surprised.

While Apple's patent lawsuit against HTC remains ongoing, the Taiwanese handset maker has reached a licensing agreement with Microsoft to avoid another lawsuit over its Android-powered handsets.

AppleInsider | Microsoft believes Android infringes on patents, HTC strikes deal

Who says Android is "free"?

Apropos the IP lawsuit between Apple and HTC, it's perhaps instructive to look back at memorable patent suits. The following excerpt tells the story of how patent royalties were litigated for weapons that the litigants also used as belligerents against each other.

The tale shows that not even global war can affect the outcome of patent law.

From American Rifle http://www.amazon.com/American-Rifle-Biography-Alexander-Rose/dp/0553805177, Roosevelt's Rifle Chapter, Pages 271-278.

On April 5 1905 the Treasury approved royalty payments of 75 cents per rifle plus 50 cents per thousand clips, up to a ceiling of $200,000. Seven months later, on Novemeber 6, Mauser's accountants were pleased to receive the first (for $11,367.53) in a four-year-long series of checks adding up to the $200,000 maximum.

[General William Crozier who became Chief of Ordance of the Army in 1901 overseeing production for the nation's weapons] made an energetic start on the new .30-06 bullet, introduced on October 15, 1906. Early the following year he received an ominous visit from a very polite but insistent representative of Deutsche Waffen Munitionsfabriken (DWM), maker of the Spitzer bullets for the Mauser rifle.  The .30-06, he said, was a near-copy of DWM's "projectile for hand-firearms", which had been submitted to the Patent Office on February 20, 1905--about the same time, suspiciously, that Crozier had been finalizing the financial details of the settlement with Mauser--and approved on January 22, 1907.

The good news was that DWM had a far weaker case than Mauser's--it was difficult to demonstrate that the shape and dimensions of such a common item as a bullet were unique--and Crozier's  patent attorneys advised him to fight the case. Crozier, again fearful that the newspapers would find out about this charge (even if it was trumped up by an opportunistic DWM), decided to fend off the accusers by stalling. He appointed his deputy, Lieutenant Colonel John Thompson (inventor-to-be of the famous tommy gun), to take care of the negotiations in the hope that they would go on for years.
...
In the summer of 1914 [8 years after the accusation] his deputy Thompson had finally run out the clock regarding Ordnance's alleged infringement of DWM bullet patents. DWM had made repeated offers to Thompson asking him to settle quickly, and each time they had been rebuffed. On July 18, 1914, less than a month before the outbreak of the cataclysmic Great War, in which millions of men would be killed by pointed bullets, DWM finally lost its patience and sued the government in the U.S. Court of Claims for royalties on 250 million Spitzer bullets totaling $250,000. Ten days later, when Austria-Hungary declared war on Serbia, the suit was deferred.

Crozier's position was saved by the sinking of the Lusitania in 1915 and the U.S. declaration of war on Germany in April 1917. Upon entry to the war, under authority of the Trading with the Enemy Act, the government created the Office of Alien Property Custodian to oversee the seizure of enemy-owned or enemy-controlled assets. To Crozier's immense relief, the DWM patent was ruled to be U.S. property, and the attorney general dismissed the company's suit out of hand.

Crozier retired in 1919 and escaped the censure for the fallout from a reinvigorated lawsuit launched by DWM in 1920 [two years after the WWI ended]. Having given up on obtaining a favorable patent-infringement judgement, DWM's lawyers focused on whether the alien property custodian's seizure of the patent had been lawful. Impressed by DWM's argument that its bullet was protected by previous treaty, a tribunal ruled the U.S. government in violation and awarded DWM damages of $300,000.

Washington immediately appealed the decision, and the case lurched on interminably, for another seven and a half years, until it was finally settled on the last day of 1928, a generation after its beginning. The judgement stood. With interest added on the original $300,000, the United States owed a German company $412,520.55 [for the rights to the bullet they used against Germany in two World Wars].

Read more:

http://en.wikipedia.org/wiki/Mauser
http://en.wikipedia.org/wiki/Springfield_1903 "Still, the 1903's used so many design features from the German Mauser that the U.S. government paid royalties to Mauserwerke"
http://en.wikipedia.org/wiki/Spitzer_(bullet)

In the suit against HTC, Apple's listed infringing phones include HD2, Touch Pro2, Tilt2, Imagio, Pure and Touch Diamond. These all run Windows Mobile and not Android. HTC shipped 80% of the Windows Mobile units in the field, a far larger volume than Android so it stands to reason that the law suit is as much targeting Windows Mobile as Android.

In 2006 Microsoft announced that their partners/OEMs/Operators will get indemnification on IP suits regarding their OS. It's not a sure thing that Apple's patents cover any part of the Windows Mobile stack--vs. whatever parts HTC layered on top. However, there is a high probability that Microsoft will join Google in HTC's defense.

I should also point out that the media's emphasis on Google as the exclusive target of the suit is sensationalistic. Focusing on Google possibly misses a hidden agenda.

Namely that Apple is attacking the hub of the modular approach to mobile computing while largely leaving the integrated vendors like Palm and RIM alone (the dispute with Nokia is over license terms for GSM patents and not yet about UI patents).

Therefore it's entirely likely that HTC was singled out to disrupt the business logic of modular mobile software. HTC is the pioneer and the hub as the largest licensee for both WinMo/WinP and Android and the inspiration for hundreds of OEM/ODMs to make modular products.

HTC's defense will be complicated and difficult due to these dependencies. Legal risk weighs heavily on large corporations, especially when the payoff is marginal at best. Other vendors looking at this licensing model might think harder about participating, and that may be the whole point.

Well, I don't want to talk about any specific company. I'm just making a general statement that we think competition is good. It makes us all better. And we are ready to suit up and go against anyone. However, we will not stand for having our IP ripped off, and we'll use whatever weapons that we have at our disposal. I don't know that I could be more clear than that.

Tim Cook, my favorite Apple exec, in January 2009.

One thing should be obvious: the accusations against HTC are aimed at Google and Microsoft or more broadly still, they are aimed at any mobile software competitor that intends to use touch and gesture inputs.

When Jobs said in 2007

We've been pushing the state of the art in every facet of this design. We've got the multi-touch screen, miniaturization, OS X in a mobile device, precision enclosures, three advanced sensors, desktop class applications, and the widescreen video iPod. We filed for over 200 patents for all the inventions in iPhone and we intend to protect them.

he implied that Apple had approached this new input method with much more care than when they introduced the mouse and windowing interfaces in 1984.

Unlike the fight over Windows, which was a copyright debate, this will be all about patents. Apple ultimately lost the GUI fight over the MasOS windowing interface, which is why I think they are much more prepared this time.

Given this strategic intent, the only questions were how the war would be engaged and on what terms. A few skirmishes caused some head fakes.

First, came apparent threats against Palm. Apple was certainly debating going after Palm, but I think they realized it would not be a good strategy. Mostly because the signal would be weak. There would be few consequences to Palm being punished. Palm's integrated model is not employed by many of the larger device vendors. Except for Nokia, all other vendors license their OS, Samsung, LG, Sony Ericsson and Motorola would not be infused with anxiety over Plam taking a hit.

Second, came the pre-emptive attack from Nokia. Apple was not ready to go after Nokia last year because Nokia did not yet have a UI "worthy of being infringing".  In other words, there was no target to shoot at.  Nokia's suit was pre-emptive in that it centered on their desperate wish to have a cross-license agreement--trading GSM patents for touch patents.

That skirmish should not detract from what's the real goal here:  securing monopoly rights to mobile computing interfaces.