Apple’s Patent Win Could Start A Fundamental Shift In Industry Innovation

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In a historic ruling on August 24th, a U.S. District Court jury awarded Apple (NASDAQ:AAPL) over $1.05 billion in damages after finding Samsung (PINK:SSNLF) guilty of infringing on six of Apple’s ‘design’ patents. [1] We say ‘historic’ not because of the high dollar amount, which in itself is not particularly significant to either company considering their huge sizes individually, but because of the ramifications that the ruling has on future innovations in the mobile industry. Apart from the possible impact that the judgement has on the mobile industry’s future R&D spending decisions, it also increases Apple’s clout in a market it commands at least 70% of profits of each quarter.

Apple could use this as a precedent to press further charges against Samsung as well as other Google’s Android partners such as Motorola and HTC. Apple has already filed an injunction to temporarily ban the sale of some of the patent-infringing Samsung devices in the U.S. If Apple succeeds in doing so, Samsung may see only a limited near-term impact considering that these devices are fairly old now and are nearing their end-of-product-cycle. But it could set a dangerous precedent for a similar case that is scheduled for next year that concerns some of Samsung’s newer models such as the highly successful Galaxy S III.

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A successful ban on Samsung’s products on U.S. soil could lead to Apple pushing for similar rulings in other geographies as well. With Samsung gaining a lot of smartphone market share and gradually growing its presence in the higher end of the market as well, this ruling couldn’t have come at a better time for Apple. (see Apple Falls Behind Samsung In Smartphone Sales But iPhone 5 Is Near)

Growing importance of ‘design’ patents

From a broader industry perspective, with smartphones proliferating and mobile devices seeing a huge growth in demand, we could be seeing the start of a fundamental change in how competitors try to outdo each other in these hotly contested markets. So far, the biggest differentiating factor for mobile phones has been their underlying technology and hardware specifications that have governed phone prices and stature in the industry. Players such as Nokia’s and Motorola’s treasure trove of utility patents have therefore historically been deemed very important. However, with the rapid advancement in technology and falling hardware costs, the distinction between mobile devices is fast blurring, especially in the consumer space.

Handset makers’ focus has therefore been shifting, albeit slowly, to designing their devices’ look and feel and improving their software’s interactive design in order to woo more customers (Nokia’s Lumia line of smartphones is a great example of this gradual shift). The nature of this verdict, where such a huge emphasis was put on both the design of the hardware (the iPhone as well as the iPad’s rectangular shape with rounded edges) as well as the software (iOS’s features such as double-tap to zoom and centering, scrolling bounce back, pinch to zoom and one-finger scrolling), could hasten the trend and have a lasting impact on how future smartphones and tablets are designed. This will increase the value of ‘design’ patents as opposed to ‘utility patents’ in the future.

Apple stamps smartphone dominance

Apple, being at the forefront of the mobile device revolution, stands to benefit immensely from such a shift as the ruling has given its near-exclusive control over some of the features that are now considered essential for a smartphone experience. Other competitors will now have to design effective workarounds to avoid patent litigations and may be relegated to playing catch-up with Apple in the near-term. This would make Apple’s job at defending its market position a lot easier, giving it sustained negotiating power with suppliers and helping it maintain its high profit margins.

Eventually, this should lead to more design innovations, leading the industry forward in terms of both hardware as well as design improvements. As smartphones gradually start dominating the mobile phone landscape, Apple may have to start licensing its patents in much the same way as Nokia and Motorola have to license out their essential utility patents under FRAND policies. The Samsung ruling increases the value of ‘design’ patents in general and if Apple is successful in its future quests to impose bans on some Android devices, it could demand higher royalties for its patents in the future.

As we have seen in the past, the highly competitive nature of the mobile industry has led to quite a few shifts in market positions with Samsung displacing Nokia as the top handset maker recently and RIM being left behind in the post-Apple era. It will therefore be a healthy diversification for Apple if it can diversify its revenue streams with royalties in the future, given the high-margin nature of the business and recurring nature of revenues. It will also be a proxy on the sustained growth of the overall mobile phone market, irrespective of Apple’s market position.

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  1. Apple Wins Big in Patent Case, WSJ, August 25th, 2012 []