1 Dec
2015

Few losers, many winners as the smartphone war comes to an end

It broke out in 2009 and raged across the world for five years; but unlike most wars, the battle relating to smartphone patents benefited multiple parties and had just one real loser

It is not often that a war is fought in which almost every side bearing arms wins; but the one involving mobile device patents might be a rare example of such a phenomenon. It began back in 2009, got extremely serious between 2010 and 2014 and is now in its very final stages.

Also known as the smartphone war, it involved a multitude of companies, almost all of which still exist in one form or another. At its centre was the thermonuclear dust-up between Apple and Android, most neatly encapsulated in the all-out attack launched by the Cuperinto-based company against Samsung in 2011 across multiple jurisdictions and the counter-suits that the Korean business hit back with.

Now, as the last shots are fired, Android is the world’s dominant mobile operating platform, while Apple has the biggest market capitalisation on the planet and is more profitable than ever. The temptation, therefore, is to declare that all the hostilities were a complete waste of time, money and energy. But that temptation should be resisted because the facts on the ground indicate clearly that such a claim is profoundly wrong.

In fact, if you look at the four companies at the centre of the dispute – Apple, Google, Microsoft and Samsung – each has done remarkably well out of the events of the past six years; much better, perhaps, than would otherwise have been the case

Samsung

When UK-based Brand Finance published its 2009 ranking of the world’s most valuable brands, Samsung was nowhere to be seen. Regarded primarily as just another Asian manufacturing business – albeit a very big one – the company had no reputation for building innovative products at the cutting edge of technological development.

Fast forward to this year’s rankings, however, and it is a completely different story. The Samsung brand now holds second place on the list, with a value of over $81 billion – recognition of the degree to which perceptions of the company have been markedly transformed.

Arguably one of the major factors driving this change was that in deciding to sue Samsung for patent infringement back in April 2011 and then pursuing its Korean rival in courts across the world, Apple created an equivalence between the two companies. Essentially, it signalled that Samsung was recreating the iPhone and the iPad, but at a lower price.

The publicity and marketing boost that gave Samsung is unquantifiable, but it was undoubtedly huge – and certainly worth a lot more than the lawyers’ fees, damages awards and royalties it has been required to pay out since. Although its Android sales are not what they were, Samsung has effectively been given an Apple-endorsed rebrand worth tens of billions of dollars.

Booming brands

Each year UK company Brand Finance publishes its ranking of the world’s most valuable brands. In 2009, when the smartphone war began, neither Apple nor Samsung made the top 10. By the time the conflict was winding down in 2015, they occupied the top two positions, with the remaining top four places occupied by Google and Microsoft, the other major players in the war.

Most valuable brands 2009

Position

Brand

Value ($ billion)

1

Walmart

41.365

2

Google

36.191

3

Coca-Cola

34.844

4

IBM

33.706

5

Microsoft

33.604

6

GE

31.909

7

Vodafone

28.995

8

HSBC

28.472

9

HP

27.383

10

Toyota

27.319

Most valuable brands 2015

Position

Brand

Value ($ billion)

1

Apple

128.303

2

Samsung

81.716

3

Google

76.683

4

Microsoft

67.060

5

Verizon

59.843

6

AT&T

58.820

7

Amazon.com

56.124

8

GE

48.018

9

China Mobile

47.916

10

Walmart

46.737

Google

Putting aside the relatively low direct revenues that Google has accrued from Android and the arguably much greater and more valuable data points it has harvested from the platform, the smartphone patent war provided a major boost for the company by forcing it to grow up.

Go back just a few years and the number of patents it owned was minimal (it was granted just 58 in 2008, for example); while all too often patent policy was directed from a boardroom in which suspicion and dislike of patenting were rife, despite the importance of the so-called ‘Stanford patent’ to the company’s foundation.

Although it never engaged head on in the battles until it inherited a dispute with Microsoft when it purchased Motorola in Summer 2011, the smartphone war undoubtedly impressed on Google’s corporate leadership the importance of a fully developed patent operation – one that would leave it in as secure a position as possible in terms of defence, while also allowing a high level of strategic flexibility.

The result is that today Google has one of the world’s biggest patent hoards, with an arsenal of close to 15,000 US patents. These have been generated both internally and via the acquisition of the Motorola portfolio, as well as other purchases from the likes of IBM and Foxconn.

What is more, the company also has a world-class and highly influential patent function led by Allen Lo, who was recruited in 2012. This has not only led to the negotiation of a series of major cross-licensing agreements with the likes of Cisco, Samsung, Verizon, LG and, most recently, SAP, but has also seen Google begin to roll out a series of initiatives that look like they will stand the company in good stead over the years to come.

Others may not be enamoured of the Patent Purchase Promotion, the LOT Network or the Open Patent Non-assert Pledge, but they and other similar programmes will pay dividends for Google for a long time. Would this have happened without the smartphone war? It seems highly unlikely.

Microsoft

Of all the entities affected by the smartphone war, the benefits that Microsoft has accrued from the events of the past six years are probably the easiest to identify. Quite simply, the company has made a fortune from Android-related royalties. It now has more than 30 licensing agreements in place, the majority of which involve the licensee paying it cash.

The single biggest of these agreements – that we know of – is with Samsung. According to court documents that emerged earlier this year as a result of a dispute between the pair, in 2013 the Korean company paid more than $1 billion to Microsoft. Based on that figure, in an article published on the Forbes website on November 1, telecoms market commentator Ewan Spence estimated that the overall amount being generated annually from Android by Microsoft could be over $6 billion.

If Spence is right, that sum is equal to approximately one-third of the company’s net income in its last financial year – a meaningful measure given that most licensing revenue usually heads straight to the bottom line – or well over 50% of its $10.4 billion R&D spend in 2014.

Of course, money is not the only thing that Microsoft will get from these licensing agreements; they can also help the company to build relationships, obtain access to third-party intellectual property and place its products on new platforms. All are significant and important benefits.

At a time when the overall Microsoft business has been going through choppy waters, Android-related patents, the revenue they have generated and the other items they have delivered have been an outstanding success story. They have given the company’s leadership valuable breathing space as it develops and renews Microsoft’s offering.

Apple

The late Steve Jobs launched thermonuclear war against Android, enraged by what he saw as blatant patent infringement and personal perfidy, and vowed to do whatever it took to destroy the platform. However, his successors failed to achieve his aim. On that basis, is Apple the big loser from the events of the past five years? No – in fact, it may be the biggest winner of all.

Since the smartphone war began, according to the Brand Finance rankings, Apple has become the most valuable brand in the world, while the company’s overall worth has grown hugely. Earlier this year it became the first US company ever to hit market capitalisation of $700 billion, as sales have soared and its cash mountain has continued to increase in size.

When Apple first began launching suits against Samsung, some expressed concern that the company might harm its reputation; that using the courts rather than the market to fight an opponent would send out a negative message. But these commentators have turned out to be wrong.

While many saw the smartphone war as confirmation of Samsung and Android’s ability to compete with Apple, the fact that Apple was prepared to stand up for its products and that juries and judges sided with it on many occasions showed to another section of the consumer market – the company’s huge fan base – how much it cared about offering the buying public something unique and very special.

The litigation reinforced the Apple brand promise and demonstrated that the company will always be prepared to fight tooth and nail to protect the integrity of its iPhones, iPads and other products. This has allowed Apple to build its pitch as a purveyor of high-quality, premium products that others can try to match, but never quite succeed. It has done this not only in traditional markets, but also in new ones such as China.

The smartphone battles and the acres of coverage they have received over the course of the hostilities have proved to be the most powerful marketing message that Apple has ever had.

More winners besides

But while Samsung, Google, Microsoft and Apple have been the stand-out winners from the confrontations that began in 2009, they are not the only ones.

The smartphone war has also given a new lease of life to companies such as Nokia and Ericsson. Both have developed significant licensing operations as a result of the patents created by their investments in mobile telecommunications R&D. The signs are that, having taken a while to understand the potential inherent in its own portfolio, BlackBerry is beginning to do the same. On top of this, a host of non-practising entities have made a great deal of money.

Also, thanks to big-dollar events such as the Nortel auction, Google’s purchase of Motorola Mobility, the Alcatel-Lucent financing and the Kodak bankruptcy process – all of which can be linked to the smartphone war in one way or another – patents as an asset have become much more visible and understood. This has benefited companies across the world, as well as those advising them on IP matters.

The market for patents may not be what it was at the height of the war, but it is far more advanced and international than it was before conflict broke out. That is good news not just for rights holders, but also for their employees and their investors – not to mention entire national economies.

One loser

Over and above all these entities, though, the real winner from the past six years has been the buying public. Since 2009 smartphones, tablets and similar devices have come in leaps and bounds technologically, while also becoming much cheaper and available to many more people.

Indeed, perhaps the only real losers since 2009 are those who claim that patents stifle innovation and reduce the public’s choice. The consequences of the smartphone war have shown that they are completely wrong.