Patents Wars 2: The Asian Empire Strikes Back - Are The Tables About To Turn On Apple?

Tyler Durden's picture

Much has been said about Apple's recent victory over its key component supplier, Samsung, in a recent US court decision the direct result of which has been the halt of sales of several Samsung products which are already obsolete in cell phone year terms. The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company. Alternatively the Chinese politburo can one day decide to pull FoxConn's operational license, in the process bankrupting AAPL overnight. But these are of course M.A.D. scenarios which in rational, non-centrally planned market would never take place, and so we have no reason to worry about them. That said, it is increasingly becoming clear that patent warfare fought in partial domestic judicial systems, will be the next form of protectionism as pertains to that most faddy of technology: the ubiqutous smartphone. And while Apple may have won the first battle, the outcome of the war is still very much unclear: in fact, the return salvo after Samsung's big defeat on US soil may come quite soon, this time courtesy of another Chinese Apple "clone", HTC Corp, which if it goes against the Cupertino company, could have a large impact on revenues.

From Bloomberg:

Apple Inc. (AAPL) may face a difficult task invalidating two HTC Corp. (2498) patents for data transmission in wireless devices, a U.S. trade judge said at a trial that could lead to import bans on the newest iPad and next version of the iPhone.


“Clear and convincing means something to me,” U.S. International Trade Commission Judge Thomas Pender said yesterday in Washington, referring to the legal standard in determining that a patent shouldn’t have been issued. “I have to be pretty darn certain a U.S. patent is invalid.”


HTC accuses Apple of infringing two patents it owns for ways to reliably transmit a larger amount of data. Taoyuan, Taiwan-based HTC said the patented methods are critical to the 4G technology known as LTE, or long-term evolution, that allow faster downloads.


A victory could let HTC seek an import ban of the latest iPad and even the newest iPhone, if it uses LTE when it’s unveiled as early as next week. That could give the Taiwanese handset maker leverage to force a settlement with Apple, which has made its own patent-infringement claims against HTC.

Could Apple lose? Who knows, although it is increasingly likely that as the partial distinction of court systems (Samsung won in Korea, lost in the US) becomes clear, we may well see a new form of trade protectionism: one that is won and lost in the courts for makers of the most demanded products. It also means that should China decide to increase it outright aggression with US-based Apple, it could certainly impair the iBlank maker, especially since it is the US consumer who is increasingly tapped out, and the bulk of future growth hopes lie with the rising Chinese middle class and domestic consumer.

Could China get involved to demand its "pound of externalities" in this conflict? Who knows, but China is certainly aware what the market potential of smartphones is, and that it would like to dominate the market as much as possible.

The global smartphone market grew 62 percent last year to $219.1 billion, according to Bloomberg Industries, and consumers are demanding ever-faster downloads of movies, music and websites on what has become more a handheld computer than a simple phone. Carriers such as AT&T Inc. are converting to faster LTE technology, and network-equipment maker Cisco Systems Inc. (CSCO) projects that worldwide mobile-data traffic will soar 18- fold by 2016.

While the prehistory between Apple and Samsung is well-known, this is the story, in a nutshell, behind the looming conflict between Apple and HTC:

Apple and HTC have been embroiled in patent battles over features in smartphones since March 2010, when Cupertino, California-based Apple filed its first infringement claim at the trade agency. The case at trial yesterday, and an earlier case HTC lost at the commission, “were filed in retaliation against Apple,” McKeon said.


Apple contends phones by HTC and other competitors that run on Google Inc. (GOOG)’s Android operating system copy features that make the iPhone unique. The March 2010 complaint against HTC has spread to a global war involving Apple and Android-handset manufacturers that is being contested in courts on four continents.


HTC lawyer Tom Jarvis of Finnegan Henderson said the company was the first to sell Android and 4G devices and one of the first with touch screens.


“HTC is an innovator,” Jarvis told the judge. “It’s no Johnny-come-lately.”


In this case, though, HTC acquired the patents at issue in April 2011, around the same time it began selling its first LTE phone, the Thunderbolt. The patents are part of a portfolio HTC bought for $75 million from ADC Telecommunications Inc.


“I don’t care if they bought these patents to sue you or not,” Pender told McKeon. “They are a property right.”


In a court filing, HTC said it bought the patents, which ADC said were being infringed by Apple, “to protect itself and its customers from these aggressive tactics and to preserve its ability to compete in the United States.”


Yesterday’s testimony, much of which wasn’t open to the public, focused on whether HTC is using the technology, a requirement to win the case under trade law.


“LTE products were particularly important to our strategy in 2011,” when the complaint was filed, said Martin Fichter, HTC America’s vice president of product and operations. “We’re a pioneer in that field.”

How will this play out? It is still too early to know. But in a world in which currency warfare has been going on for three years, and in which conventional trade wars are becoming more prevalent, it would be no surprise if the next round of warfare for limited consumer dollars is not fought in the FX trading room, nor in the antitrust commission, but in various patent law court rooms. Lawyers: take note.

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SeverinSlade's picture

Karma is a bitch, isn't it Apple?

On a side note, if China were to ever shut down Foxconn, that would be the most entertaining trading day in history.  The term "drop like a brick" would be an understatement with regard to what would happen to AAPL.

Blasé Faire's picture

All you'd need was to get a rumor going.  Then let the carousel begin.  Then again, Sharp's announcement that it may not be able to produce displays in time for the next iPhone didn't do anything.  I'm waiting for something to finally be baked into AAPL's price.  On every rumor it pops, then on the verification of the rumor it rips.  But the downside hasn't really shown up - maybe it's because AAPL doesn't seem to be able to disappoint.  Benefits of brilliant marketing.

bank guy in Brussels's picture

So Apple had a fraudulent 'win' in the courts of bribed US judges, robbing and defrauding Korea's Samsung of a billion plus, US judges instructing the jury to protect Apple stock holdings in US pension funds and hedge funds -

Great post from Karl Denninger on how Apple, claiming copying of design by Samsung, tho Apple was really copying a design made by Korea's LG company back in 2001:

machineh's picture

In a case of sweet revenge, Samsung is selling 200,000 Galaxy S III phones PER DAY while Apple works the rumor mill:

Sickened by Apple's grabby greed, Americans are buying better and cheaper Android gear before the Rotten Apple Evil Empire can close the borders.

Apple = FAIL.

monoloco's picture

Why can't we all get along? Why the fuck do people get so jacked up over what kind of phone someone uses? It's just a phone for Christ's sake, it doesn't define your character, we don't berate each other over what brand of car we drive or sneakers we wear. To each his own, for fuck's sake, get a life!

Centauri's picture

Hmm. The most valuable company in the history of ever, and more cash than God Himself. Fail is probably not *exactly* the best word to use to describe what AAPL is equal to.

Ar-Pharazôn's picture

they made this money on 16 hours 7/7 chinese worker. Great job mr. Job

Lucius Cornelius Sulla's picture

Benefits of brilliant marketing.

Although Apple does have a brilliant marketing strategy, I think a lot of it has to do with the consumer fad factor.  Consumer tastes are fickel.  Just ask the other consumer products companies that were at the top of the world; Sony (Walkman), Motorola (flip phone), Nokia.

Azannoth's picture

AAPL has 0 leverage in this fight as they are 100% depend on cheap parts and labour from Asia to make any profit, iShit produced in the US/Europe would be 4x as expensive and totally uncompetitive

AAPL is playing with fire and it will get burned, all they have are 'designs' and a brand everything else is running on commodity hardware all that is differentiating their products from the competition are the stickers on the packaging

Zero Govt's picture

Apple is a software company missed that in your idiotic assesment of what Apples strengths are

ParkAveFlasher's picture

Really?  Because my SanDisk $15 refurb """MP3""" player lets me play all my bought, ripped, or pirated Prince Purple Rain tracks without buying totally upcharged propriety hardware and pricey, cumbersome subscription services.

Who's the monopolist in this equation?


Zero Govt's picture

so does my iMac and MacBook, 2,200 tracks and there's not a single paid-for song on either device

...ditto my GF's iPhone

iTunes absolutely rocks as a free music download platform, every DJ i know (stars and bar-club DJ's) use Apple 

not sure if it'll play something as tired and old hat as Prince but it's great for the latest House music

ParkAveFlasher's picture

Well, color me iPaisley, JOKEnfold, but you are proving my point.

frenzic's picture

Yeah.... right. I bet you were joking or you're some kind of paid shill. If I am wrong I'd happily send you an invite to the real thing. Sharing is caring and nothing's free.

Blasé Faire's picture

It's an important distinction.  But I would say there's a lot more hype for their new hardware iterations than their software upgrades.  While this is a terribly weak survey, among those polled, present iPhone owners (who would receive iOS6 free) are the most likely to buy the new iPhone.

If that's to be believed at all, the hardware is pretty significant and it is undeniable that supply chain disruptions could severely damage Apple.

Zero Govt's picture

"...the hardware is pretty significant.."

i'd agree it adds (value) to Apples offer in that like a BMW much is bought in from suppliers.

Apples strength is cutting edge, fault free, software. On that skill base, which is absolutely world leading and has been for decades, Apple builds (buys in) other top line products, as does like BMW

the high end pricing Apple can target because its software is so good also gives it another luxury, the best or newest hardware such as the rumoured curved glass screen for iPhone 5 or something basic like aliminium casing rather than competitors low rent plastics

but everything stems from Apples cutting edge software skills 

Azannoth's picture

No they are not, MS is a Software company AAPL is a Hardware company with the exception they buy all their hardware from suppliers

they don't even license their software they glue it to 'their' hardware and make it impossible to use any of their services without it(the hardware)

Zero Govt's picture

"AAPL is a Hardware company with the exception they buy all their hardware from suppliers."

not another moron!



swmnguy's picture

Is Apple really a software company?  I might almost say they're a Design company, or maybe just a Marketing company.  Over a decade ago I heard a presentation in which a smart feller said Wal-Mart was a software company, because he claimed their competitive advantage was derived from software managing their delivery and logistics structure.  Everybody else in retail, he said, did everything else Wal-mart did; in some cases better.  But nobody else had their logistics and supply chain figured out as efficiently.  Which leads me to question what it is that Apple really does so differently that makes their stuff so much more desirable.

Zero Govt's picture

"Is Apple really a software company?"

Er no, it makes snowmobiles you moron

of course Apple are software, it's what makes Apple an Apple.. they can't build hardware, their marketing is based on their software skills as is the iPhone and platforms like iTunes etc

Azannoth's picture

You are missing the point, their software is no better or worse than anybody else's it's their designs and brand that differentiate them, besides iOS is a Unix/Linux under the hood with a proprietary GUI ditto the rest of their software

swmnguy's picture

What Azannoth said. 

Really.  Stop being so literal, or stop calling people morons.  If you read my comment to the end, you saw the part about Wal-mart being a software company?  Well, duh, they're a retailer.  The point, applied both to Apple and Wal-mart, was a little larger.

Besides, I've done work for a snowmobile company that actually seems to think they're in the apparel business.

If you're going to hang around a website concerning itself with business, it helps to have some familiarity with the way businesses think about themselves.  It ain't the way an outsider might expect.

Freddie's picture

Wal Mart is a software/logistics company.  Up to a few years ago, KMart had the worse Point of sale and inventory system.  They came out with all sorts of stores (shoes, home improvement and some others) which largely failed.  If they had invested earliers in a decent MIS system they would have been able to compete a bit better.

Apple is a lot of things.  Design, lifestyle/gadget and software company.  Yeah it is just UNIX/LINUX whatever but they put it on a lot of platforms to create devices for music, phones, pads.   At the product lifecycle time aka when they came out - it was a bit ahead of others. They soak up all the demand for the new niche wit high prices and when competitors come in - they cut prices.  Why buy a Zune and when an iPod was about the same price.

swmnguy's picture

Yes, that's the kind of thinking I was pointing toward.

Arnold Ziffel's picture

<<AAPL has 0 leverage in this fight as they are 100% depend on cheap parts and labour from Asia>>


Actually, about 99% of the stuff we use in the USA is made in Asia so if we "sufficiently piss them off" we are sunk...we'd be "shooting ourselves in the foot."  That's why there will never be a war with China....all of our factories are there...we'd be bombing our own factories---GE, AAPL's FoxConn, and on and on. The courtroom is a much better place to fight as long as the judges are impartial.

[BTW, I think even Barry's Nobel Peace Prize says "Hecho in China" on the bottom.]

old naughty's picture

Ok. I am thinking...

Yes, needs lots of money-printing, and body-bags I get that.

Yes, it will come to that when the dog-eat-dog cycle (of you copy i copy you price down i price down further) fast approaching end,

But is war hardware-, software-, marketing- intensive?

I am thinking...Can Foxconn turn itself into maker for war? Hummmmmm.

Joe Davola's picture

I'll bet the waitress is with the Russians too.

AlaricBalth's picture

Send Lawyers, Guns and Money!!

SeverinSlade's picture

HTC and Samsung should consider a merger with S&W.  At least then they have something a little bit more intimidating than just their legal team.

machineh's picture

When the first .40 cal. semi-auto with wireless and 4G comes out, I'm buyin' it!

LongSoupLine's picture

I guarantee China is doing the over/under on dropping Foxconn as to keeping it.  I wouldn't be surprised if the Chinese "decision makers" have been padded very nicely by one Sunnyvale/Palo Alto located company.

adr's picture

There are plenty of other sources to build shitty phones. There aren't many other sources for the parts to build the phone in the first place. The iPhone can't exist without Samsung, Sharp, and a host of other corporations. Apple doesn't make a thing themselves and the majority of their patents are absolute bullshit that any designer or developer would never have been able to get granted.

Troll Magnet's picture

China needs Apple probably moreso than Apple needs China.  Cheap labor everywhere!  In fact, shit from China's getting expensive because of their rising labor costs and many companies are looking elsewhere - Vietnam, Pakistan, etc - to set up shop.

malikai's picture

Someone please remind me again why you slaughter your cash cow?

ParkAveFlasher's picture

Because your geopolitical rival's NASDAQ suckles exclusively at its teet, and at its teet alone.

DeadFred's picture

And because your rival's qualitatively superior military forces (which impede any of your expansionistic fantasies) are fed by the high-octane fuel of an increasingly fragile financial system which you may (or may not) be able to destroy with acts that fall short of open warfare.

You can be certain the Chinese are wargaming many scenarios.

Don't make the mistake of believing they think like you do.

buzzsaw99's picture

If I was samsung I would embargo the shit out of apple. NO PARTS FOR YOU!

disclaimer: I love samsung products.

Yen Cross's picture

 The new S-3 rips Buzz. We don't need no stinking !pads...   The S-3 has a great screen, super light! Isn't insanely expensive"cultish APPL" expensive. I like Android, and it's only getting better! :-)

css1971's picture

How's the battery life? You up to 2 recharges per day yet?

Centauri's picture

I guess most companies would love to kick their best customer tot he curb. 

El Viejo's picture

Is that Latin for "What goes around comes around." ?

Dr. Engali's picture

The whole "market " swings on the word of the fed and a single stock. It's never felt so precarious in my life.

El Viejo's picture

It's an upside down pyramid scheme. Just give it a nudge and...Timberrrr!

e-man's picture

I sometimes wonder if German people in coffee houses and beer halls were not having these identical conversations about economics and trade wars, back in 1921/1922.