Monday, July 18, 2011

Battlemap: Apple's heavy patent artillery against HTC's guerrilla warfare

On Friday (July 15, 2011) an Administrative Law Judge at the US International Trade Commission (ITC) issued an initial determination that HTC's Android-based products infringe two Apple patents. If affirmed, this can result in a U.S. import ban against HTC's infringing products. The following day I published detailed infringement claim charts with which Apple argued that HTC infringes those two patents. Those tables leave no doubt that these patents affect Android itself, not just HTC's own extensions (such as HTC Sense).

In the meantime I have produced a "battlemap": a visualization of the dispute between Apple on one side and HTC and its subsidiary-to-be S3 Graphics on the other side. Let me show it to you, and then let's talk about the tactical situation between Apple and HTC:


That visualization is not just one static picture. You can click through it to see a slideshow of the dispute escalated. After the slideshow, there are detailed reference lists. This is best viewed in full-screen mode. I have created more visualizations of this kind, and they are all available on Scribd.

Some financial analysts vastly underestimate the potential impact on HTC

Since Apple's second ITC complaint against HTC, which became known about a week ago, HTC's shares have been sliding downward on the stock market, and the Financial Times reports that they "fell by as much as 6.5 per cent on Monday".

There are various financial analysts out there with whose assessment of the situation I disagree. Some have been misled by HTC's and Google's spin doctoring, and financial analysts often make draw mistaken inferences from past statistics instead of fully understanding the particular issue at stake.

In its statement on Friday's decision, HTC vowed to fight on. Of course, the ITC decision isn't final yet. But HTC was found to infringe multiple claims of each of two distinct patents, and it won't be easy for HTC to reverse all of the judge's infringement findings. Even one infringed patent claim is enough.

Google was quoted with the following reaction:

"We're pleased that the ITC ruled against all of Apple’s operating system patent claims"

That's not really accurate. Look at the claim charts I published: those are operating system functionalities. It's pretty certain that those patents read on all Android devices (in fact, Apple is also suing Motorola over them). Google wants to downplay the serious patent problem that the entire Android ecosystem faces. Denial, however, doesn't solve problems.

Now some analysts think that things could have been worse for HTC if some of Apple's touch screen patents had been found to be infringed. While things would certainly have been even worse in that case, Apple still has 16 other patents in action against HTC besides the ITC investigation to which the decision announced on Friday relates. Also, Apple has more patents that it can and perhaps will assert against HTC in the foreseeable future.

But the most fundamental mistake is to assume that Apple is going to settle for a royalty-bearing license deal just because it would be a quicker solution than defeating HTC or because that's supposedly the normal course of business. Let me make the following very clear:

A settlement that allows HTC to license Apple's key patents is absolutely positively NOT a foregone conclusion in this case

There certainly can be a settlement in this case like in any other. But I can't imagine that a settlement would result in HTC getting access to Apple's entire relevant patent portfolio. For Apple this is not just about money. They're not going to let HTC build fully functional smartphones and tablets in exchange for $10 or $20 per device unless HTC owns patents that Apple absolutely needs to license.

It's a fallacy to assume that Apple v. HTC is just the usual patent dispute between two large players, and therefore going to have the same kind of happy end. This one is different. From a shareholder value point of view, what Apple needs to achieve -- even if it costs a lot of time and money -- is as much of a technological gap as possible between its own products and the Android-based products offered by HTC and other vendors.

Statistically speaking, most patent cases don't even go to trial. And between "large" companies, the rule of thumb is that there's always some kind of cross-license agreement, with one party typically ending up the net payer. But that rule of thumb doesn't really apply here because the circumstances are different:

HTC is big in terms of revenues and even at the current level, it has a very high market capitalization. But it can't really negotiate a patent deal with Apple on an equal footing. In terms of patents, what it brings to the table is light guerrilla warfare.

Between Apple and Samsung, it's hard to imagine that Apple can just defeat Samsung all the way because Samsung owns about 28,700 patents in the U.S. alone and huge numbers of patents around the globe. But HTC is no Samsung.

HTC's own patent assertions against Apple seem very weak. I can't imagine that those impress Apple in any way. What's more difficult to say is how much leverage the acquisition of S3 Graphics (to be closed before the end of this year) might give HTC. An ITC found Apple to infringe two S3 patents on graphics chips, but Apple may be able to solve this problem either by using different types of chips or by buying chips from someone who already has a license from S3.

Timing of S3's lawsuit: just a coincidence?

If you click through the slideshow further above, you may notice that S3 filed its ITC complaint against Apple little more than two weeks after HTC's complaint against Apple, which was an attempt to counter Apple's original complaint. HTC's chairwoman is a major S3 shareholder. I can't say with certainty that Apple's attack on HTC was the only reason for which S3 sued Apple. S3 seems to do patent licensing deals with others in the industry, and maybe they were negotiating with Apple. But it's quite possible that S3 acted from the beginning as a company that views itself part of the HTC family.

The other shareholders obviously wouldn't want the company to embark on litigation that doesn't benefit S3 regardless of any HTC-related considerations, but if S3 believed (as an ITC judge also determined) that Apple infringes a couple of its patents, it made sense to sue. Maybe the situation between Apple and HTC just accelerated the process.

Whether the timing of S3's complaint against Apple was a coincidence in whole or in part, at this stage S3's patents are more likely than HTC's original patents to create a situation in which Apple may be open to a cross-licensing arrangement. But again, it's not certain that Apple can't deal with the S3 situation without having to grant licenses to its patents.

I could imagine a situation in which Apple might agree on a partial cross-license that would grant Apple access to all of HTC's and S3's patents while HTC would get access to only some of Apple's patents: maybe just enough so that HTC can at least continue to sell Android-based products of some kind, but those products could be limited and there might be substantial degradations of the user experience.

Even if Apple determined that HTC's current portfolio (with S3 already factored in) isn't strong enough to suggest a settlement, it's possible that Apple's decision-makers take a longer-term perspective: maybe HTC will over time amass or acquire more patents and could do serious damage to Apple at that stage. But again, that doesn't mean that Apple will just license everything to HTC. They might just allow HTC to survive, but nevertheless the competitiveness of HTC's products (at least in the U.S. market, or even in other jurisdictions if Apple enforces its international patents) could suffer.

HTC struck a license deal with Microsoft well over a year ago at a rumored rate of $5 per device. Whatever the amount is, that arrangement and Microsoft's other license deals with Android device makers cannot serve as an indication for the terms on which Apple might settle with HTC. Apple isn't Microsoft. Apple doesn't have a history of being a particularly cooperative patent holder. That's why HTC's situation is much more precarious than most financial analysts may think -- with or without S3.

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