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ITC ruling gives Apple key weapon in smartphone battles over Android

July 19th, 2011 |  Published in The Smartphone Wars






18 July 2011 —  Apple has netted a victory in its legal dispute with HTC as a U.S. International Trade Commission judge ruled the Taiwanese cellphone maker infringed two patents that Apple had cited in a March 2010 complaint to the agency.

The patents relate to multimedia processing technology and data detection technology that lets users dial a phone number that appears in their email. Apple originally alleged that ten of its patents were used in smartphones from HTC, which uses Google’s Android mobile operating system. The ITC ruling Friday only applied to four patents.

As we all know, Apple has reshaped the mobile phone market with its iPhone but has been been grappling with the rise of competing smartphones that run Android.

For HTC, a major blow with implications for other Android phones that offer similar functionality.  And Apple has squared off in other patent cases against smartphone makers such as Motorola and Samsung.

But this ruling was closely watched because it was the first between Apple and smartphone makers that use theAndroid operating system. 

Companies on the losing side of these legal battles face the prospect of having to pay the winner hundreds of millions of dollars a year in royalties, eroding profit margins that are expected to shrink as competition in the sector intensifies. 

HTC’s shares have seen a major melt-down (HTC just announced a share buyback to try and stem the collapse) but most analysts we spoke with said the market had gone from over-bullish to over-bearish.   HTC’s recent acquisition of S3 Graphics, the chipmaker which on July 1 won an ITC court ruling against Apple for patent infringement, gave the group better bargaining power in royalties negotiation with Apple. 

Given it isn’t over yet (HTC will appeal) some analysts say the if the final decision were to go against HTC the direct financial impact might not be huge.  Morgan Stanley has estimated that even if HTC were to pay Apple $4-$5 per handset sold, that would shave only 1-1.4 per cent off estimated earnings per share of T$91.70 in 2012. 

But when it comes to that silly old bear, the market, we all know the market doesn’t like uncertainties.  HTC’s share price may continue to take a big hit. 

Because Google developed the Android platform – not the phone makers – most handset manufacturers did not bolster patent portfolios in areas such as software and multimedia and are thus vulnerable to legal attack by Apple and Microsoft.  Apple’s settlement with Nokia last month could provide some reference. No financial terms were disclosed, but analysts have estimated that Apple agreed to an initial payment of $300m-$600m plus royalty payments that could reach hundreds of millions a year.  

HTC last April moved to head off a possible second legal battle by signing a licensing agreement with Microsoft. Under the deal, Citigroup analysts estimate, HTC pays Microsoft $5 for each Google Android phone it sells. 

Having to pay royalties means the Android platform is no longer “free” for phone makers. 

Google initially distinguished Android by opening it to phone makers with no royalties for its use. Of even greater concern than royalties for smartphone makers like HTC, Samsung and Motorola is the shadow the legal battles are increasingly casting over the future for Android.

Android-based smartphones dominate global sales, but Apple is expected to launch a new version of the iPhone later this year, and Nokia is poised to re-enter the fray with its first smartphone based on Microsoft’s Windows platform. 

While smartphone penetration is still relatively low even in the more mature European and US markets, industry sales growth is expected to slow from 74 per cent last year to 49 per cent this year, according to IDC.

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