Innovation and survival: lessons from the smartphone wars
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The smartphone industry has reached a point of maturity and looks set to hold steady. In the past decade, communications technology reached a new high, with global standards charted and nearly 3,000 technology litigations filed. The smartphone era witnessed major technology players such as Microsoft, Nokia and Intel struggle to make a mark for themselves, while new and later-age entrants such as Huawei and Lenovo basked in early glory. It created a bipolar world of the Android and iOS and saw billions of dollars exchanging hands in licensing deals and litigation settlements.
As a pioneer, Nokia dominated the mobile device market in the pre-smartphone era; but the entry of Apple’s iPhone and Samsung’s Galaxy series marked Nokia’s downward spiral from 2007. Microsoft’s Windows Phone joined the fray in 2009 and had only small market segments to cater to. Apple and Samsung launched a series of patent litigations against each other in the United States, Europe and Korea. These were predominantly around wireless communication, display interface and design technologies. However, in 2014 Samsung lost to Apple and the two warring parties decided to settle most of their global disputes amicably.
Apple and Samsung survived well in the consumer market, while the likes of Nokia and BlackBerry fell back on their IP investments. Google made it into the elite with its Android operating system. Then a new cluster of low-priced yet smart-featured phone manufacturers from Asia – primarily China – entered the market. They built intellectual property surrounding niche technologies, as compared to traditional technology portfolios held by major telecoms companies. Chinese smartphone leaders such as Huawei and ZTE own portfolios comprising upwards of 15,000 telecoms patents each; while other major players such as Lenovo, Oppo and Xiaomi own more than 5,000 patents each in this space.
So who won the smartphone war anyway? In our opinion, no one.
The smartphone industry has been driven by the dynamic play of patent rights and market competition. It has reached its peak and is ready to stabilise and begin a downward curve. It has paved the way for the next generation of technologies, such as wearables, virtual reality, three-dimensional printing and the Internet of Things (IoT), with six important takeaways.
Build strong intellectual property that outlives the product
The global smartphone war roped in the industry’s giants to write its IP litigation history. The winners walked away with billions of dollars and the losers were downgraded to has-beens. Interestingly, there were survivors, such as Nokia and BlackBerry. Their timely focus on IP development paid off when they were unable to reinvent products in the fast-paced market of the time.
Until 2007, Nokia was a dominant force, with about 50% market share. Its Symbian operating system was unrivalled, despite its limited application store. Apple launched the iPhone in 2007 with a smart design and application ecosystem and drew customers in droves. It found strong competition from Google and ended the heydays of BlackBerry and Nokia. Nokia lagged behind in the product development space. However, it stayed relevant in the game, banking on its strong patent portfolio. It entered into a multitude of licences and litigation with nearly all major players, earning returns on its R&D investments.
Figure 1. Diversity of enforced smartphone patents across technology categories
The number against each tech category indicates the number of times that a patent has been enforced in that category
Source: iRunway analysis
Figure 2. Number of smartphone litigations of top five defendants
Source: iRunway analysis
High-tech products and open source can coexist
The return on investment in innovation may not have translated into successful products, but the cost of building strong intellectual property was realised. Nokia identified Apple’s Achilles’ heel in power management and wireless communication technologies and filed several lawsuits. Apple tried a counterattack by enforcing its own touchscreen-related patents, but this was no match for Nokia’s strong intellectual property in the field of telecommunications. In 2011 Nokia announced that Apple was joining its growing number of licensees. Nokia’s systematic IP monetisation strategies introduced a new wave, with companies choosing licensing and cross-licensing deals over litigation. This resulted in a drop in litigation after 2012.
Like Nokia, BlackBerry was unable to reinvent its products at the rate of Apple, HTC, Samsung, LG Electronics and Motorola. However, it owns a strong patent portfolio with more than 8,000 IP assets and nearly 100,000 claims registered with the US Patent and Trademark Office. BlackBerry’s patent portfolio has been valued at anywhere between $2 billion and $3 billion, with the potential of hitting about $5 billion in the face of an acquisition.
Alliances make way for healthy innovation
In 2009 heavy smartphone litigation began worldwide. Major players realised the need for more standard-essential patents (SEPs) in their portfolios. There was a flurry of SEP acquisition until 2012. This eased the situation of exorbitant litigation costs and encouraged licensing deals that worked in favour of all parties. Cross-licensing and patent pools took centre stage to create a healthier ecosystem and more coordinated approach. These developments allowed companies to protect their products using intellectual property, even if this was via the licensing route. While Nokia proved its value and earned returns on its IP investment, BlackBerry is still struggling to find a buyer. The answer lies in Nokia’s strategic move.
Nokia realised its vulnerability in the face of fast-paced technology growth from competitors. In a bid to stay in the race, Nokia sold its product development division to Microsoft for $7.5 billion. However, it only offered a licence to its portfolio, which comprises over 1,400 SEPs. It identified gaps in the intellectual property of other major players and resorted to licensing and litigation practices. The world sat up and noticed Nokia’s IP strength.
Figure 3. Number of SEPs of key players
Source: iRunway analysis
Figure 4. Global market share of key players in the smartphone industry shows the rise of new smartphone manufacturers from 2012
Source: iRunway analysis
Nokia’s aggressive early move helped it to reap returns on its R&D investments. However, BlackBerry realised this too late. BlackBerry decided to put itself up for sale at a time when smartphone players realised the benefits of cross-licensing and preferred joining patent pools over litigation and acquisition. Hence, while its intellectual property is highly valued, BlackBerry did not monetise it at the right time, thus losing on its investments dramatically.
Nokia’s enforcement of its intellectual property showed the industry the power of patent monopoly. Hence, when Nortel Networks announced the sale of its 6,000-patent-strong portfolio, Microsoft, Apple, Ericsson, Research In Motion, Sony and EMC came together to form the Rockstar Consortium patent pool. On one hand, this was an effort to thwart Google’s bid for Nortel and its intent to create a monopoly for itself in this space. On the other, it was an effort to drive the trend of cross-licensing.
Figure 5. Android’s open-source operating system made it more adaptable for developers
Source: App Annie
Figure 6. Google Play Store v Apple iStore revenue
Revenue from mobile apps on the Android-powered Google Play Store has nearly doubled from 2013 to 2016. In comparison, Apple’s iStore witnessed slowdown from 2014 to 2015
Practise prudence in unexplored markets
At a time when the bigger players were engaged in patent wars, Asian manufacturers were observing from the fringes and building their patent portfolios, with a focus on aligning their intellectual property to telecoms standards. Asian countries, particularly China and South Korea, are taking fair trade rules in intellectual property very seriously. South Korea brought its rules into effect in December 2015 and China is following suit. The European and US markets are observing the Asian efforts to strike that tricky balance between preserving competition and encouraging innovation. However, these smartphone manufacturers are repeating the mistakes made by the likes of Apple, Google and Samsung in the early years. The new entrants from Asia have developed intellectual property to support them in their home ground. However, they have fallen back in strengthening their global IP strategies. Huawei has emerged as a dreaded patent owner in China and has been playing a strategic game even within the US market. Even as a new entrant in the US landscape, Huawei asserted infringement of its 4G-LTE patents against Samsung and T-Mobile. However, other Asian players may not have understood the need to strengthen their intellectual property on a global scale before stepping into untested regions. This was a lesson that companies such as Xiaomi, Gionee and Lava learned the hard way in India.
India is the second-largest mobile consumer in the world, offering a lucrative market for smartphone manufacturers. Despite the lack of ample IP protection in India, Asian manufacturers – particularly Chinese companies – tried to grab a fair share of the Indian consumer market. The risk found them facing the wrath of telecoms giant Ericsson. Ericsson asserted eight patents, including SEPs, against major small and medium-sized enterprises in India. Ericsson won big, encouraging other major SEP holders such as Samsung, LG and Sony to look at patent enforcement and licensing revenues in India.
Microsoft entered the PC race early on and established a powerful user interface with its proprietary Windows offering. Microsoft protected key aspects of Windows with strong intellectual property and reigned without any significant threat, even from the Mac. Apple tried to follow the same path when it launched its iPhone in 2007. It backed it with an aesthetic user interface and brilliant app ecosystem, but in a proprietary environment.
Google followed closely with a head-on strategy to capture a global market. It made Android open source, which enhanced its ease of adaptability and was an easy pull for those who disliked Apple’s closed systems. Android became an instant success and proved that strong IP protection allows high-tech products to be created even in open source.
The stories of Microsoft, Apple and Google show that working in an open source or proprietary environment does not matter, as long as the product hits the right note. Technology companies foraying into the future hybrid technology of IoT and the like need to assess and enter the market in the early stages, even if they must follow other players. An early entry offers them the advantage of building products tailored to the evolving market. Equally important is the need for these players to simultaneously build strong, aggressive intellectual property around key technologies. For instance, companies looking to foray into IoT should develop intellectual property around core domains of communication protocols, sensor technologies and embedded processors.
Foresee next tech waves and adapt
Intel was a powerhouse of technology and intellectual property in the PC and server processors segment. However, it made no headway in smartphone technology. This may be attributed to Intel not foreseeing the signs correctly and not adapting to the new age. Intel considered the mobile market to be a low-margin area. Hence, it sold its ARM technology wing in 2006 and also declined an offer from Steve Jobs to create mobile processors for the iPhone.
Intel’s in-house x86 architecture is as good as ARM’s. The company leveraged this power to weaken its competitors (eg, AMD) in the PC and server space and capture 99% of this market. However, it was not ready for the next big wave of smartphones. Its delay in releasing a system on a chip (SoC) integrating the communication modem with its high-performance processors resulted in misread margins. Qualcomm in particular enjoyed success in Intel’s absence. It showcased its strong graphics processing unit, wireless technology and application processor prowess. It leveraged its integration capabilities and introduced power-packed SoCs for the power-hungry smartphone industry. Qualcomm played a pivotal role in developing Code Division Multiple Access technology. However, it also understood the importance of diversifying into 4G-LTE, which has grown to become the most relevant communications technology today. This foresight of Qualcomm and its subsequent R&D in this space earned it heavy returns from its intellectual property. Qualcomm’s mammoth efforts to stay put in the Chinese market that it recently entered proves its determination to thrive in new markets and showcase its technology capabilities.
InterDigital and Tessera are further cases in point. These patent licensing entities moved with the times and pooled strong intellectual property around niche telecoms technologies. Tessera’s focus on microelectronics, imaging and optics was its major revenue earner. Its intellectual property provides a strong base for smartphone manufacturers in the mobile camera space and helped it to develop its licensing roadmaps.
Look for complementary opportunities
Three decades ago, Steve Jobs predicted the age of a software distribution centre. This has now become an integral part of smartphones and is known as the mobile app. It has been a decade since the iPhone was launched with an app store. Google followed with its Google Play and many other players followed suit. Since then, smartphones and apps have been married. The smartphone era paved the way for several businesses. Mobile devices turned into an easy-to-use platform for brand enhancement and a revenue boost for businesses.
Apps evolve at a much faster speed than smartphones. Besides, they must cater to a gamut of operating systems and be easily upgradable. The smartphone wars opened wide avenues for app developers in terms of user interface, operating system and even handset capabilities. Considering the comparatively low costs involved in developing mobile apps, there is an interesting combination of patenting activities and filing of copyrights, trademarks and the like in their IP practice. Whatever combination of shield is used, it has proven beneficial for an app-based company in the long term. Take WhatsApp, where the entire business operates in the mobile app space. When Facebook realised that its consumers were losing interest in posting personal details, it found WhatsApp’s private digital communication method a perfect platform to regain its foothold in social media communication and acquired WhatsApp for $19 billion.
WhatsApp, Facebook, YouTube, Google Search, Google Maps, Instagram – these are only a few of the hundreds of globally used mobile apps. None of these businesses built smartphones; instead, they leveraged the smartphone device to build their consumer base. In complement, the convenience of using mobile apps found a growing consumer market for smartphones.
In the end, it is all about keeping the fundamentals strong. It has taken more than 10 years, billions of dollars and scores of hours of legal advice for smartphone industry players to take the rational route with licensing deals and mutually beneficial settlements. When patent litigation becomes an outcome of being on the field, rather than a business strategy, it becomes easier to resolve using IP protection. This is the point where next-generation technologies – wearables and IoT – need to begin their chapters.
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Animesh Kumar is the chief solutioning officer of iRunway. He oversees all revenue and client operations for the firm and is responsible for driving the organisation’s strategic customer relationships. He is responsible for the strategy, design and growth of iRunway’s solution landscape across multiple technology domains. He works in close collaboration with chief IP counsel of leading corporations and partners in law firms to design customised IP monetisation programmes and help organisations to achieve better outcomes. His interactions with leadership teams across organisations and service orientation have helped iRunway to achieve ‘strategic IP partner’ status with customers.
Bineet Bhasin leads the telecoms practice at iRunway. In this role, he manages several client relationships and drives execution of their consulting services. He is an expert in designing IP monetisation programmes for patent owners and provides key technical insights that help attorneys to profoundly improve licensing and litigation outcomes. He specialises in finding evidence of use through product testing, analysis of source code and reverse engineering. He has successfully assisted leading technology companies in complex patent litigations and helped them to monetise their intellectual property.