Feature Article

November 12, 2012

Android Isn't Free! HTC's New Patent Deal with Apple Points to Why

Having pursued – fairly successfully, though at a significant financial burden – a long time delaying strategy with Apple on the patent suit that Apple had filed against it, and after having spent $300 million several years ago on the purchase of S3 Graphics in the hope of being able to use that company’s patents in potential legal battles, HTC finally hit the wall. The company knew it would not win the battle (and resources may have been a key piece of it) and knew that it would need to bring the suit to a close.

The International Trade Commission certainly had something to do with the decision, having ruled for Apple – finding that HTC infringed its patents, and against HTC – finding that Apple did not infringe any HTC patents. Talk about finding one’s self between a rock and a hard place.

Image via Shutterstock

This all means of course that Apple and HTC have come to terms, with HTC signing a broad 10 year licensing deal with Apple. Terms of the deal were undisclosed (though Sterne Agee analyst Shaw Wu suggests the cost will likely be between $6 and $8 for every phone HTC sells)– and the dollars involved may not be all that onerous to HTC, but the fact that HTC came around to signing a license suggests that there is now additional merit to Apple’s patent claims. Winning in the courtroom isn’t the only way patents are affirmed – more often than not when a licensing deal is struck – especially when a lawsuit is in progress - it suggests that the hand of the patent holder has been strengthened, and most assuredly, Apple’s patent hand has indeed been strengthened.

It is interesting to note that HTC went from smartphone high flyer to essentially also-ran status in just a few short years. All of about 24 months ago, HTC was the lead dog in the pack of vendors selling Android-based smartphones in the United States. But Samsung has since obliterated essentially all Android competition globally since then, and HTC’s share of the Android smartphone market has dived from more than 10 percent to roughly four percent today. In truth, the fall from grace had nothing to do with Apple – HTC simply wasn’t able to deliver a product that was more desirable than what Samsung has put on the table.

HTC is now looking for renewed glory with its new Windows Phone 8 phones – just as Nokia is with its new lineup. HTC CEO Peter Chou notes, of course, that by ending the litigation HTC can return to product innovation: “HTC is pleased to have resolved its dispute with Apple, so HTC can focus on innovation instead of litigation.” We doubt, however, that HTC is going to recover any time soon – if at all – from its current predicament. That has been out own advice to Apple ever since it came out ahead of Samsung in its latest patent wars episode – innovate, don’t litigate.

One issue in particular that has the financial analysts abuzz and concerned – though this is always an automatic reaction from them whenever they hear it – is that HTC will book hugely reduced margins in its next quarter, dropping like a lead balloon from about 12 percent to one percent. A company (especially one that is tight on cash) cannot sustain its business on one percent margins. This is what has happened to Research in Motion as well – and negative analyst reaction to it is the key reason its stock initially plummeted and likely won’t recover.

The Interesting Legal Fact about Android – and Why it Isn’t Free

We would be willing to bet that most people do not know, with HTC now signing and adding its licensing deal with Apple, that there are now 15 licensing deals that have been struck between users of the “open source” Android - for the most part with Microsoft. We sometimes point to the irony of Microsoft owning licensing for Android use – but however much it is ironic it also simply means Android isn’t free. Any vendor that uses Android ultimately ends up paying for a non-trivial number of licensing fees. Now we can add Apple to Microsoft in the list of Android patent ironies.

The ultimate irony of course will be the scenario where Google – in spite of its $12 billion acquisition of Motorola (and its patent portfolio) – will have to pay both Microsoft and Apple as well. That day of reckoning isn’t nearly at hand yet, but we are in the camp that believes the reckoning will ultimately fall in favor of Apple and Microsoft. And he and she who laugh last…

Interested to read through a detailed list of the 15 licensing deals? Hop on over to our favorite patent site, Florian Mueller’s FOSS Patents blog.

Edited by Brooke Neuman

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