Apple, Samsung Verdict's Real Loser Is You

The Apple iPhone 4s, left, is displayed next to the Samsung Galaxy S III at a store in San Francisco, Monday, Aug. 27, 2012.
The Apple iPhone 4s, left, is displayed next to the Samsung Galaxy S III at a store in San Francisco, Monday, Aug. 27, 2012. Apple Inc. on Monday submitted a list of eight Samsung Electronics Co. products it wants pulled from shelves and banned from the U.S. market. Apple submitted the list after a jury found Samsung copied the iPhone and iPad in creating and marketing the products. (AP Photo/Marcio Jose Sanchez)


Apple’s $1.05 billion jury verdict, which held that Samsung, the world’s No. 1 manufacturer of mobile phones, had violated several patents owned by Apple, the world’s most valuable company, will cause huge aftershocks in the cellphone, software, and Internet industries.

Samsung was found to have violated Apple’s “trade dress” by in essence making smartphones that look too similar to the iPhone. More consequently, Samsung was found to be in violation of several Apple software patents covering elements of the smartphone user interface. Apple, for example, was the first company to market a touch-screen interface featuring the ability to zoom in and out by pinching your fingers. Apple also owns patents on certain aspects of screen scrolling behavior, including the particular way a scrolling screen bounces if you push it too far.

Who wins and who loses from the decision? To start with the obvious, Apple won and Samsung lost. As a product, the Android operating system has been a stunning success that’s captured an enormous and growing share of the global mobile phone market. As a business proposition, it hasn’t been nearly as successful. Google’s Android revenue is very meager, and of all the companies out there making Android phones, only Samsung is earning profits. Dealing a billion-dollar hit to its only real rival in the smartphone profit game is a big win for Apple, and the fact that the trade-dress infringements will disrupt Samsung’s manufacturing and supply chain makes it a particularly solid blow.

Secondary losers include the other manufacturers of Android devices. Many of them are likely immune to the trade-dress charges but can be hit with parallel suits over the user-interface issues. Since the non-Samsung smartphone makers are already having trouble making money, anything that causes hiccups in their process or adds licensing fees to the cost of making Android phones will sting.

Google too has obviously been dealt a blow. It’s not entirely clear that Google’s strategic decision to write and release a free mobile operating system was a wise one, but having made that decision, Google needs to make the strategy work. The patent litigation means that Android is no longer free to Google’s customers, since they too could get sued. Google’s financial risks are smaller: Since Android hasn’t been a major profit center for Google, its downside risks are limited and its core search, email, and advertising businesses are still as strong as ever.

The bigger losers may be the telecommunications companies that sell mobile phone plans. These operators have had a love-hate relationship with the iPhone for years.

They love the way the iPhone created a mass consumer market for expensive mobile broadband plans. They hate the fact that the iPhone is so popular that Apple has enormous leverage in its negotiations with operators. Apple’s phones are sold without carrier customization, and the iPhone is such an enormously profitable product because the carriers pay Apple enormous subsidies for the right to sell the phones. These subsidies badly hurt operator profit margins, but inability to deliver the world’s most popular smartphone is a crippling disadvantage for telecoms that don’t accede to Apple’s demands. The rise of Android has been a godsend for AT&T, Verizon, and the rest, because it has created feature-rich, touch-screen smartphones that can be sold to customers who don’t have their hearts set on an iPhone. Since high-quality Android phones are made by more than one company, telecoms have their leverage back and can get away with lower subsidies and more customization. The carrier dream would be superstar Android phones that are credible challengers to the iPhone. Anything that’s bad for Android is bad for telecom operators, and a blow to Samsung is particularly damaging since Samsung has come closer than anyone to creating a profitable and recognizable alternative to the iPhone.

All of this makes Apple’s old rival Microsoft one of the biggest winners here. Its Windows Phone operating system hasn’t gained traction in the marketplace despite being a generally well-regarded product. The problem is pretty simple: There are too few Windows Phone users to make it an attractive platform for developers, and without developer interest, users shy away from a platform that’s lacking in quality apps. To reach critical mass, Microsoft desperately needs some group of stakeholders to turn away from Android as their go-to alternative to the iPhone. Legal trouble for Android might be just the thing.

Nokia, Microsoft’s key partner on Windows Phone, is a double winner. Nokia benefits from the boost to the Windows ecosystem and also from the fact that as a mobile phone pioneer, it owns a lot of potentially relevant patents. Blackberry maker Research in Motion is also a winner on these same grounds, which is why both companies’ shares started Monday sharply up. The verdict was essentially confirmation that under contemporary conditions, if you want to get in the technology game, a product people want to buy isn’t good enough. You’ll also need an arsenal of patents that you can use in countersuits to force a cross-licensing agreement with the incumbents you’re trying to challenge. Consequently, Samsung’s loss is a huge gain for a product-poor, patent-rich firm like RIM. The patent system operates as a kind of tax on today’s innovators, and the jury’s verdict confirms that the tax is not a small one. Optimists will say this kind of strong protection for first movers creates big financial incentives to innovate. But a more realistic view is that technology companies are generally trying their best to innovate and it’s simply difficult. In that view, jury rulings in favor of incumbents will simply reduce competition and raise prices for consumers.

Of course the clearest winners are lawyers, since the verdict is bound to be appealed. A growing chorus of voices—now including prominent judges such as Richard Posner—have reached the conclusion that America’s patent system has veered far off track. They’re right, and Samsung’s best hope may now be that this broader critique of the patent system will lead some judge or other to bail them out.