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I have devoted a chunk of this roundup to patent wars in consideration of President Obama’s landmark veto of the ITC decision against Apple last week.
Patents and Patent Infringements
Waging patent wars has become commonplace in the consumer device market, but wins or losses are becoming less significant by the day. The International Trade Commission (ITC) has been the go-to body for device makers because it was vested with the power to ban the import of infringing devices.
For a consumer device manufacturer, getting the product into consumers' hands is of utmost importance because, by their very nature, the devices are not all that different. For instance, a smartphone allows you to take calls, listen to music, watch videos, take pictures, check your Facebook (FB - Analyst Report) account, etc. Irrespective of the make or model, every smartphone allows you to do these things.
If you cannot stop a device from entering the market, anything else you do will have a limited impact because there will always be some demand for any device of at least a moderate standard. And by the time the legal system deals with the issue, the ruling could be of little consequence because all the parties have moved on to the next generation product. So the patent goes essentially unenforced.
A patent infringement is not the same as stealing because no one can say with certainty that he/she was the only one that had a given idea at the time. It’s more about being the first to stake a claim. But not all technology is the same. Some technology is built up on existing basic technology and it makes sense for all concerned if additional resources are not wasted on re-inventing the wheel. This is what gave rise to the standard-essential technologies that were developed by Samsung, Motorola, Qualcomm (QCOM - Analyst Report) and several others. If any company’s technology becomes part of the standard, it has a great advantage because it can collect licensing fees every time any device is sold, which is why it is allowed to charge only reasonable and non-discriminatory rates for these patents.
This boils down all competition to the look, feel and user experience of the devices, or in other words, the “cool” factor. Manufacturers continue to increase the cool factor and they will convince you that it’s not “what” you’re doing that’s important, but “how”. So naturally, the patent office is working overtime ensuring that companies get rewarded for the shape of a phone, the shape of ear phones, the ability to zoom pictures, the ability to cut, paste and draw parts of a picture on your phone, the ability to take a photograph a miniscule of a second faster than the competition, and so forth. Consumers no doubt gain a lot from this innovation, but let’s see what it means to the creators-
The most famous tussle is between Apple (AAPL - Analyst Report) and Samsung, the world’s leading smartphone makers. Apple’s iPhone used to be the most-used smartphone for a long time, and for a long time it was Apple versus Everyone Else. Samsung, which still uses the Android OS developed by Google (GOOG - Analyst Report), has been growing faster than everyone else and just recently moved past Apple in both units and profits (market share data is hard to analyze since only Apple breaks out exact numbers).
Apple has scored more wins than losses versus Samsung, but has failed to stop this growth. In fact, indirectly, Apple has spurred innovation at Samsung by taking each case to court/the ITC. Every time Apple did this, Samsung came back with something different that it claimed did not infringe on Apple’s patents. The sheer volume and variety of Samsung phones is mesmerizing users, which is the reason for Apple’s shrinking market share. So it’s not surprising that Apple shares lost more than they gained last week as President Obama’s landmark veto of the ITC decision was overridden by fresh reports of Apple continuing to lose market share.
Google acquired Motorola because of its patent-load. But it is not winning in court much because Motorola’s patents are largely standard-essential, so they can’t be infringed and have to be licensed to competitors. A federal judge in Chicago ruled that Apple devices couldn’t be blocked for infringing standard-essential patents and a federal judge in Seattle ruled similarly in its case against Microsoft (MSFT - Analyst Report).
On the other hand, non-essential patents can be enforced. Microsoft secured a ban on Motorola phones for its patent allowing synchronization of calendars between a phone and a computer that Google says is based on its own synchronization technology. Microsoft has even sued customs authorities for allowing entry to Motorola phones that Google says do not infringe Microsoft patents. Separately, an appeals court overturned an ITC ruling dismissing Apple’s case against Motorola over multi-touch technology, saying that some of Apple’s arguments had merit.
So Where Does the MotoX Fit In?
Google created a lot of hype and publicity all over the world for its MotoX phone, but when the phone launched, it was surprisingly non-exceptional. It was a good first-attempt phone that some critics ranked just slightly below the iPhone and HTC One. But the promos were clearly saying “made in the U.S.A” in a cool, unobtrusive way. Google also didn’t launch the phone anywhere in the world except the U.S., although it ran promos all over the world.
If we link this to its patent trouble with Microsoft, it appears that the ITC ban on imported Motorola phones can’t be extended to the MotoX, since it is not being imported. The Federal Circuit, which rules on patent cases, heard Microsoft and Google on the ITC case this week, but no one really knows when they will have a decision. Microsoft has leverage against Google on this one, but if the companies settle soon, which looks likely now, the MotoX could be rolled out much faster and could reach international customers as well.
Making the Case for Microsoft
Sentiment on Microsoft shares appears to have bottomed, since a 1% gain in the Windows Phone market share (IDC report) sent Microsoft shares up 1.6%. And this was despite the fact that Surface Pro prices were slashed. On the following day, an Evercore analyst raised his rating on Microsoft shares to Overweight based on its stable enterprise business and the chances of a dividend increase, which sent the shares up another 2.5%.
The analyst also expects Microsoft’s analyst day (to be held next month) to serve as a catalyst driving up share prices (Microsoft did not have an analyst day last year). The company has recently seen some pressure from activist investors that could play a role in expense control. Activist investors can be good for a company – Yahoo’s (YHOO - Analyst Report) Daniel Loeb really stirred things up at Yahoo and Dell’s Icahn continues to do so at Dell.
Company Last Week Last Months
AAPL -2.11% -5.31%
FB -0.36% +36.23%
YHOO +0.07% +32.44%
GOOG -1.38% +13.80%
MSFT +2.64% +17.37%
INTC -2.05% +7.04%
CSCO -0.71% +22.47%
Cisco (CSCO - Analyst Report), Applied Materials (AMAT - Analyst Report) and Agilent (A - Analyst Report) report this week. Cisco’s enterprise business has been picking up and its unified computing system appears to be working magic. But trouble in China (related to Snowden’s exposure), stiff competition from Huawei in China and the looming threat of software defined networking are reasons for caution on the shares. Learn more about these companies going into their earnings announcements in our “Earnings Preview” section.