Thursday, April 3, 2014

Apple does not 'own' multitouch smartphones and tablets any more than Samsung 'owns' phablets

My blog posts yesterday about the limitations of Apple's ability to lay exclusive claim to modern-day computing technologies -- "10 European judges found Apple had not invented slide-to-unlock (star patent at Samsung trial)" and "In 49 months of holy war, Apple has not proved that it owns any feature other than rubber-banding" -- have already been read widely and they have sparked some debate.

All in all, I'm very happy about the reactions I received (and 10% of moronic emails don't matter). I sense that a growing number of Android fans understand that I am one of them (and an Android app developer as well), but that I separate my platform preferences from my intellectual property and antitrust analysis. And I can see that those who would like Apple to "destroy" (as Steve Jobs put it) Android in court (for which Apple's own customers would also pay the price) increasingly realize that Apple does not appear to be, if the results of more than four years of litigation are any indication, a nuclear world power.

I did want to add a few general thoughts. For more detail, I recommend the two posts I linked to further above, which these reflections here are just meant to complement.

There's a sense of entitlement in the Apple camp and it is centered around the notion that Apple, because it reinvented the smartphone (I agree) and built the first popular tablet in history (I agree, too), has exclusionary rights that give it serious leverage over Google and its hardware partners (on this one I disagree for non-philosophical reasons after watching Apple's lawsuits for several years). A secondary consideration is that Google's then-CEO Eric Schmidt stayed on Apple's board of directors for way too long. I would agree on this one philosophically, but Apple never claimed any violations of trade secrets.

This sense of entitlement is interdependent with many people's fear that history might repeat itself and just like "Wintel" (Windows PCs with Intel CPUs) once marginalized the Mac to the extent that Microsoft had to give Apple a $150 million "shot in the arm" (though Apple had an advanced graphical user interface before Microsoft did), Android devices might marginalize the iPhone and the iPad. In other words, what happened with mouse-based user interfaces could now happen in the arena of multitouch user interfaces. Obviously, Apple is now starting from a much higher level, and its cash reserves won't be exhausted too soon unless activist shareholders get their way.

In the debate following yesterday's posts I've seen some Apple fans and investors discount that possibility. They argue that Android devices, especially, tablets are mostly low-priced, and that the market share of iOS in major markets is still amazing given that this relates to only one vendor (true, but that did not help Apple against Wintel) and that Apple just needs to focus on the most affluent customers to do well. A few days ago I walked by a newspaper vending machine here in Munich and I saw a headline: "Best tablets under €200 ($275)" -- and those were obviously all Android- or Chrome-based. But Samsung is clearly competing with Apple at the high end as well. Samsung's counsel, in a transparent attempt to reduce the impact of Apple marketing chief Phil Schiller's testimony but nevertheless on a factual basis, drew the jury's attention to Apple's concern about a Wall Street Journal article entitled "Has Apple Lost Its Cool to Samsung?".

I am, by the way, not among those who blame Apple's management. While I don't disagree with Oracle CEO Larry Ellison's conclusion, I think even Steve Jobs would not be able to overcome the incredible force called "network effects".

I've been a strong believer in the importance of network effects for decades, even before the term became popular. Network effects have certain limits, of course. For example, Facebook was not the first social network, but it's now the leading one. Microsoft was considered unstoppable because of network effects and it's now giving Windows Phone away for free on small-screen devices. It's not like there's no room, or no opportunity for a successful market entrance, left for anyone if an incumbent benefits from massive network effects. But depending on the dynamics and mechanics of a given market, that room can be very limited. Take online auctions, for example: eBay is not the only game in town, but it's where the largest number of sellers meets the largest number of buyers, and the only other way to make money in that business is at the extremely high end, not the top 10% of the market but a fraction of the top 1%.

I don't believe that Apple's high-price business model is sustainable at the same time as a high market share. It will work for several more years. But Apple has to make a choice, like any other business, between short-term profitability and long-term viability. It won't be able to pursue both conflicting goals equally well -- nobody can. If it gave away iOS for free to third-party device makers the way Microsoft gives Windows Phone away now, it would maximize market share and network effects. But it would no longer be very profitable, in the short term. The stock market looks at this mostly on a quarter-by-quarter basis, and that's Apple's dilemma. From a consumer point of view, prices have to come down further. And it isn't desirable to artificially inflate them by using patent rights, especially if the true and valid scope of those patent rights doesn't justify it anyway.

Apple deserved, and continues to deserve, a substantial reward for the impact it had on the market. But unless it lowers its prices and accepts lower profits (which its shareholders won't allow management to do until it's too late), Android will become so extremely popular that third-party innovation will concentrate on Android the way it did on Windows. No single company can match the power of a massive ecosystem, and the Android ecosystem is now by far the most powerful one, with the gap widening further every day.

Not only in the patent damages context but also in the strategy debate I often notice that Apple's fans grossly overestimate the amounts of money Apple spent on research and development when it created the iPhone and the iPad. It spent that money very wisely, and I like the fact that it has increased its R&D budgets in recent years, but in terms of R&D budgets, companies like Microsoft and Samsung still invest a lot more money in innovation. See this CNET article, "Apple's R&D up 32 percent in 2013, still dwarfed by rivals". Apple and some of its fans have unreasonable and unrealistic ROI (return on investment) expectations, such as that Samsung should pay, for its alleged infringement of five allegedly-valid patents, more than 40% of Apple's annual R&D budget.

Apple has been and continues to be rewarded generously, but this level of profitability is in my opinion not sustainable at the same high volumes unless Apple comes up with "the next big thing" that really convinces customers to pay a hefty premium. (I guess that's what Larry Ellison meant.)

Let's again talk about what the focus of this blog is for the most part, intellectual property. Against "Wintel", Apple tried to enforce copyright all the way up to the Supreme Court but failed "except for the ruling that the trash can icon and folder icons from Hewlett-Packard's NewWave windows application were infringing". Copyright is, by definition, narrow. You can't use it to enforce broad monopolies. Patents can be far broader. By comparison, the 7,000 lines of Java API declaring code that Google copied from Oracle would correspond to a patent claim with more than 7,000 claim limitations (at least one limitation per line, but some lines and some structural aspects would result in additional limitations), while the kinds of patents Apple is asserting against Samsung now have, depending on the level of granularity, roughly a dozen limitations each. A key difference beween patents and copyright is that each and every limitation of such a monster claim would have to be practiced, while copyright applies to subsets that are deserving of protection. Still, you get the idea: copyright helps you against outright copying. Apple accuses Samsung of "copying" all the time, but it's not even asserting copyrights because Google and Samsung wrote all of their program code (except for those Java APIs) themselves. Imitation and inspiration don't constitute infringement, however.

For the reasons I explained in my previous posts, Apple's patents have not proved powerful enough in those more than four years of litigation. The HTC settlement doesn't mean too much because Apple had prevailed on only one patent (!) at the time of the settlement and wasn't close to prevailing on any additional ones anytime soon. Also, it would be wrong to blame Apple's management, including its legal department, or its outside counsel. The problem is more fundamental:

Patent rights are not designed to protect form factors, much less those who are not the first ones to come up with a form factor but merely the first ones to make those form factors popular.

I said in one of my previous posts that the revolution Apple brought about with the iPhone and the iPad is not just a result of first-rate marketing: it took some serious R&D work to make it work. But patents protect only an inventive contribution to the state of the art. The delta (the difference). If you add a better graphical representation on top of previously-existing slide-to-unlock mechanisms, you own that particular visualization, but not the underlying concepts of slider bars or of unlocking a device.

Four of my six multitouch smartphones, and all of the ones I bought over the last couple of years, are phablets. No small part of the market share that Apple claims Samsung took away by copying is attributable to the fact that Samsung made phablets popular. This, too, wasn't easy to do. Otherwise it would have been done by others.

Even if Apple could have done it, it simply didn't. The argument that you can't use a phablet with one hand never convinced me (nor the tens of millions of other customers who bought phablets in recent years). Assuming that Apple could have done it (maybe with screens supplied by Samsung), it would have been a mistake. Of course (we discussed short-term vs. long-term before), it's much more profitable to have fewer form factors and fewer shelf-keeping units and to avoid any cannibalization within your product portfolio. You make more money that way in the short term. But it also means that you don't meet consumer needs. The greed of shareholders (of any company) is the enemy of consumer choice. That created an opportunity for Samsung. But it doesn't mean that Samsung now "owns" phablets in an intellectual property sense.

It would have been a better and more consumer-friendly choice for Apple to make a phablet than to sue, as it is doing in the current California case, someone else over phablets.

Even if Apple prevailed on all five of the patents it's asserting, it couldn't claim ownership of the categories of multitouch smartphones and tablets. With the greatest respect, an incremental improvement of slide-to-unlock, a particular variant of autocomplete, "data tapping", a synchronization method and unified search are just a small subset of all of the functionalities found in those kinds of devices.

Just like copyright law didn't solve Apple's problem in the 1990s, patent law won't solve it in the 2010s. Apple would need a whole new sui generis kind of intellectual property right that is detached in its scope from creative expression (copyright) and inventive contribution (patents) and simply says that if you did something creative (Apple did) and you make some inventive contribution (even if the only exclusive feature you can currently claim under patent law is rubber-banding) and you succeed in the marketplace, no one else has the right to take market share away from you. But that kind of intellectual property right does not exist and never will. Even Apple's fans would not want to live in such a static world because innovation would slow down while prices would go up.

About ten years ago I attended a conference on software patents in the European Parliament and there was a banner, put up by free software activists, that said: "In the heaven of Gates, you pay the Bill." Competitive dynamics have changed the landscape to the extent that device makers no longer have to pay Microsoft anything for Windows Phone on smaller devices. But the concern that some people had with respect to Microsoft is one that many people would have now, if not for Android's success, with respect to Apple's business model.

Update: You can't please everyone...

It's interesting how one can be attacked by two opposing camps at the same time for taking centrist positions. After this post went live, someone wrote on an Apple investor board (pointing to this post and the two previous ones and vaguely referring to other posts "over the past few weeks"):

"Is Florian Mueller being blackmailed? His child kidnapped? Or merely sold out?

Any sane person would ask such questions after noting the sudden swerve toward concentrated anti-Apple posts on FOSS blog over the past few weeks, a bizarre trend that has recently accelerated."

What's bizarre is that someone would even raise any of those questions in light of the facts. In November 2012 -- a few months after Apple's first Samsung trial in California and shortly after the settlement with HTC -- I took the same positions on Apple's business model in even more detail. At the time I argued that Apple needed to ensure product differentiation through IP enforcement. I still find Apple's enforcement legitimate, and I even wrote on Twitter on Monday that Apple deserves to emerge victorious from the trial, within reason. But between that November 2012 post and today's post, a number of things have happened that dictated an adjustment of my opinion on what Apple could achieve. Most notably, Apple was twice denied permanent injunctive relief in the U.S. (before and after an appeal) because it couldn't convince the court that Samsung's competing products are substantially unlawful; a host of Apple patents came to judgment at the Federal Patent Court of Germany (and one at the European Patent Office), with each and every one getting invalidated in its entirety -- all granted claims and even all (narrowing) amendments proposed by Apple's lawyers; and it now turns out that the U.S. import ban Apple won at the ITC over two patents including the "Steve Jobs patent" has no commercial impact whatsoever on Samsung (workarounds are perfectly lawful). There simply comes a point where I can't ignore those facts and have to draw the appropriate, inevitable conclusions.

There are people who do understand the need to adjust positions to reality. Yesterday I received two emails from someone who had emailed me several times over the last three years. The first one had this subject line:

"OMG, what just happened"

And this was at the end of that message:

"Sir, what happened? I hear Samsung pays well, but I thought you were above that!"

I actually stated clearly on Monday that I never did any work for Apple or Samsung, that I am not doing any now, and won't do any anytime soon. Judge Koh is independent. So are the judges of the Federal Patent Court of Germany. The ITC is a U.S. government agency but nevertheless cleared Samsung's workaround for the "Steve Jobs patent", and as a result, Samsung is still selling tons of products there. Conspiracy theories are of no use here.

I didn't reply, and not much later I got another email from this user -- and now it gets really interesting:

"taking a big breath"

"I re-read your latest post a third time, after several cups of coffee. And I can say that I actually agree with much of what you say.

I can actually also say that it then appears as though Patent law in the world is so far behind the times as to be mostly useless except to patent trolls, who are making much money on this."

Without any response from me, this reader understood things by re-reading what I actually wrote.

To be fair and balanced, similar things -- negative commentary as well as adjustments of positions -- are not unique to the Apple fan community but also found in Android circles, despite the fact that I was invited by HTC's lead counsel in Germany to give a surprise keynote at an HTC-Nokia settlement party. Take this Monday morning tweet, for example:

I did some work for Microsoft and announced it a long time ago; that does not make me a "mouth piece". I also announced a working relationship with Oracle a long time ago; same thing -- and when the appellate decision in Oracle v. Google comes down, a lot of people will suddenly see that I was right. As for Apple, I addressed that one further above, and if I had had in an alternative universe an opportunity to work for Apple at this stage, I would have been unable to comment on this trial publicly because of my fundamental disagreement with Apple's damages claims and its disproportionate infringement allegations. My opinions are not for sale. And I'm still on Apple's side on a number of issues.

Let me also show you a couple of comments from (presumably) Android users below a Google+ post:

The closest thing to a conflict of interest that I currently have is that I made the decision to focus on Android for my app (by the way, Windows will probably be my second priority, which is now even more likely to be the case in light of this announcement Microsoft made yesterday about universal Windows phone and desktop apps, but also because I'm writing my level editor and the cloud part under Windows anyway). This platform choice is not really a conflict of interest because it's consistent with what I say. I'm putting my time and money where my mouth is: Android first. I would have set a different priority if I expected Apple's patent enforcement to have major impact on Google and Samsung or if I saw, at this point, any other reason for which Apple could bring about the trend reversal that its marketing chief Phil Schiller admitted (in an internal email shown at the trial) would be a difficult turnaround. I'm not suddenly in favor of IP infringement. I just believe that there are reasonable, low-impact licensing solutions to the problem.

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