Apple vs. HTC – Someone blinked.

 

 

 

 

 

  • One of the skirmishes is over. Apple and HTC have signed a 10 year license deal dismissing all outstanding patent litigation.
  • As usual no details whatsoever have been released leaving everyone in the realm of speculation and conjecture.
  • The first conclusion that one can draw is that someone blinked.
  • Typically what happens in these cases is that one side has a sudden strengthening of its hand and the other side decides that it is time to settle.
  • This is exactly what I believe happened with Nokia and Qualcomm 6 years ago and the same is very likely to have happened here.
  • To date, Apple has had the upper hand in this case with wins at the ITC and HTC’s disastrous acquisition of S3 Graphics.
  • Apple has also historically taken the position of refusing to licence its patents.
  • Instead it has insisted that competitors design around them.
  • Because none of its patents are standard essential, governed by FRAND, this is a perfectly reasonable position to take.
  • For Apple and HTC to suddenly announce a deal, something must have changed which leads me to believe that it could have been something to do with HTC’s LTE patents.
  • HTC acquired these patents in April 2012 and they are deemed to be standard essential for LTE meaning that (if true) the iPhone 5 and iPad will infringe them.
  • Early September saw HTC starting to get more aggressive with these patents.
  • Apple’s riposte against this case is that the patents are invalid.
  • Not because they have no worth but because HTC doesn’t own them properly (as in the Google case) and that HTC simply bought them to assert them against Apple.
  • Interestingly, Apple does not seem to have disputed the validity of the LTE patents themselves.
  • Both of these complaints look very weak to me and my guess is that after some searching and analysis, Apple concluded that HTC finally had something that might stick.
  • This is what could have led Apple and HTC to sit around the table and make a deal.
  • For the first time, HTC would have had something to bargain with and it could have been this that led to the deal.
  • The result is that I suspect that HTC will be paying Apple some royalties.
  • This is because standard essential patents are unable to command royalties on a par with implementation patents and because Apple has had the upper hand most of the time.
  • However, the LTE patents are likely to have ensured that they are not punitive, putting HTC in a better financial and legal position that it has been for some time.
  • This deal is doubly useful for HTC as it sends a signal that it has something of value which should deter other aggressive lawsuits from other predators.
  • The downside of course, is that HTC’s costs will now rise and margins will fall further, something that it can ill afford.
  • I estimate that HTC will be paying Apple around 1% of the wholesale price of every infringing handset that it ships.
  • The legal problem may now be fixed but HTC still has a huge mountain to climb in order to regain any of its former glory.
  • At least now management is now free to concentrate on the assent of Everest rather than fighting legal claims.
  • Every patent infringement dispute is different and I do not for one moment think that it signals a change in Apple’s IPR strategy.
  • In my opinion, It also has no read across for the fight going on between Samsung and Apple and Motorola (Google) and Apple.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.