Justin Paulsen
Jun 25, 2012

Patent Wars Worth the Pricetag?

Models hold new Galaxy S III devices -- direct iPhone competitors -- during a launch event in Seoul June 25, 2012.It’s beginning to feel like a TV series, a weekly patent war drama. Apple and Samsung have consistently been going back and forth with claims of IP infringement, to the point where who is accusing who of what is exhausting to follow. The question I would like to ask and try to answer is what the opportunity costs are of pursuing litigation versus just toughing it out? Would it be more economic for both companies to live and let live, or is there value to be captured in legal finger pointing? My best guess would be that this isn’t about stopping sales this quarter or next, nor is it about defending the small-scale tech features that merely mildly differentiate. It’s instead about momentum and branding. Winning these cases is PR that says, ‘we are the leaders in smartphone technology, we are the innovators.’

What’s the Fuss?

Numbers in the millions are thrown around in many of the verdicts of these lawsuits, but we should lay the groundwork for what exactly is being bought. On the surface, it’s all about technology and inclusive features. It’s a confrontation based on getting what is deserved for founding a certain element of the smartphone technological processes. Of course, this imprecise science of projecting what value, for example, the slide-to-open feature is worth is far from clear. It lies in the realm of ascertaining what specific features and functions mean to the consumer, and the value of the differentiations. This is a complicated concern. Fortunately, for the ease of writing, this is not what I perceive the value being pursued is anyway.

When you dig deeper, it’s about who truly owns the cumulative idea of a smartphone in the consumers eye. Apple is, in many ways, considered the company that started the smartphone transition. A more notable achievement in the mobile industry could hardly be conceived, and this has led to a branding advantage that has proven difficult for competitors to breach. Some evidence for the mathematically minded folk might be that Apple’s opening stock prices in 2007, the year the original iPhone was released, hovered comfortably around $125 per share. Now? Ballpark $600 per share. Yes, that is pushing 500% in 5 years. Granted Apple’s recent success is not something we can blame solely upon their smartphones, but it certainly provides some scope as to how the iPhone may have affected the company’s potential. Samsung’s argument? Much of the smartphone design, including many of the crucial features for it to function, are as much Samsung’s as they are Apple’s. It appears people may be listening.

Apple and Samsung Historically

The chart in this blog is a fairly effective illustration of the maturing relationship between these two A man looks at his iPad while sitting in a cafe in central Beijing June 6, 2012. Apple maintains vast market dominance int he tablet space.tech giants since the dawn of the smartphone: customer (Apple) and supplier (Samsung) competitors. Samsung is perhaps the largest technology giant in the world, as they span the vast value chain involved in the production of many of the latest gadgets. Apple is more focused on the final product, outsourcing the manufacturing of much of their design. Who do they outsource to, you ask? Well, Samsung. Samsung has evolved their technologies alongside Apple in order to continue their collaboration in the production of the iPhone. So when the Samsung Galaxy, with its Google Android operating system, was announced in 2009 to compete for market share with the iPhone it was doomed to be an IP issue.

This difference in vertical integration is where the value lies in these lawsuits, more so than in the profits lost to another company leveraging similar technology. Both companies are heavily invested in being viewed as the leader in innovation, in the marketing element of the value chain. With this in mind, it’s easy to speculate why Apple perceives these litigations as so crucial despite the growing legal costs. This is what they do. Apple doesn’t make their products, Apple designs their products. It is their innovative product lines that dictate their capacity to charge prices that reflect profitability margins. This is where they add value. On the other hand, Samsung benefits from the manufacturing of either smartphone as well as the marketing of the Galaxy. They cover a larger spectrum of the process, and therefore suffer significantly less risk from pursuing these lawsuits. If Apple sells an iPhone, Samsung presumably makes money. If Samsung sells a Galaxy, Apple only loses a customer.

Bottom Line

When one combines the focus on being the innovation leader with each company’s respective position on the value chain, it’s a bit clearer why Apple feels threatened and why Samsung perceives an opportunity. Apple derives value directly from design and marketing, while Samsung procures revenue regardless. Samsung takes on little risk, aside from legal fees, in working to dominate the sales end of the operations. Apple, on the other hand, takes considerable risk if they do not defend their reputation as the innovators in the smartphone industry. So despite the high costs and seemingly roundabout episodes of patent warring, both companies must view these disputes as not only strategically relevant, but strategically necessary.