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Why The Apple vs Samsung Decision Is Dangerous!

  • Written by Syndicated Publisher No Comments Comments
    August 30, 2012

    In continuing my rant on the Apple v. Samsung verdict, I wish to make clear once again that the vast majority of consumers of Google’s and Apple’s products are absolutely oblivious to the business model of Google, the business practices of Apple and the shadowy aggressive survival tactics of the behemoth that is Microsoft. If I am correct in this assertion then the potential ramifications of Apple actually defeating Samsung in the patent case decided last week is also lost on most. That is dangerous. Since it has been explained at least as good as I could have done already, let’s peruse one of my favorite legal sites, Groklaw, on why understanding Apple’s grand objectives in patent litigation matters:

    To explain why I think it matters, I need to remind you of other things that have been going on, trying to exclude FOSS from the market. Because that really is what I think this is about.

    Remember how Oracle tried to expand copyright law to cover the structure, sequence, and organization of Java APIs? It failed (subject to appeals). But it tried hard. Had it succeeded, it would have upended how any open source software could be built and used, and it would have excluded individual developers like Linus Torvalds in his student days creating Linux in his bedroom, because only those with money to pay royalties would be able to do any coding for the marketplace, if moves like that had succeeded. One of Michael A. Jacobs’ law students volunteered to help cover the trial for Groklaw, and she told me that this is what she had learned about the case in class. I take it that means it was its purpose. Do you want a world where only the present incumbents are allowed to create anything meaningful? How does that benefit you or me?

    Remember when Microsoft did its patent deal with Nokia and then they both did patent deals with MOSAID, a nonpracticing entity that presumably will be using the patents those two lovebirds provided to sue Android vendors and who knows who else? Patents exclude. That is their purpose. Android is the target. Did you notice how Microsoft crowed in public about the Apple verdict, predicting it would be beneficial to Microsoft?

    Remember back when Microsoft helped SCO afford lawyers in the very early days of the SCO saga? What was the goal there? To slap royalties on Linux and get rid of the GPL, so as to block Open Source’s free development model, and make it so expensive no one would want to use Linux on servers any more. Remember when SCO even offered to help Linux-using companies move not to SCO’s UNIX products but to Microsoft servers?

    Now, it’s Apple and Microsoft on a jihad against Android and hence Google. That’s why you see attacks on Google in an endless stream in the media and even in regulatory bodies, where Microsoft friends who take Microsoft money complain about Google. Android is eating Apple’s and Microsoft’s lunch in the marketplace, because people love it and OEMs love it, so the proprietary world has apparentely decided o use the legal system give them a win there, since they can’t win fair and square in the marketplace. Actually, they could, but they’d rather not.

    What are the weapons? IP law. They have copyright, they have patents, and now they have a new weapon of choice — trade dress and design patents — thanks to Apple. And that is why this case is so appalling, because Apple has now opened up a new area for litigation and exclusion. That’s what the L.A. Times noticed:

    Nevertheless, it’s worth remembering that Apple made its name building successful, even iconic products based on ideas that other companies pioneered. The iPhone, for example, was a significantly better version of the smartphones Nokia introduced more than a decade earlier. Innovation is by its nature an iterative process, and good patent policy creates an incentive to innovate more. Bad policy just makes it easier for patent holders to extract royalties from anyone venturing within reach of their claims.The risk is especially great in the area of patents on design, such as the ones that covered the look and feel of Apple’s iPhones. There’s a fine line between designs that are purely decorative (which, oddly enough, are the ones eligible for patents) and those that serve a function (which aren’t). For example, do rounded corners on a phone simply help set it apart, or do they make the device slip more easily in and out of a pocket? …

    If Apple’s win slows the wonderfully frenetic pace of product development in mobile devices and leads companies to battle in courts instead of the marketplace, consumers will be the ultimate losers.

    There’s no if about it. It certainly will have that effect. My point is, it’s all about the same thing — to make it impossible for Android to survive as it is, and now we will see litigation after litigation — Apple has already filed another lawsuit against Samsung — and the end result is to make Android cost more because of encrusting it with high royalty obligations, so it cuts into the vendors’ profits sufficiently that it will end up making it undesirable to use. That’s why, I believe, Apple offered licenses to Samsung on its first visit to discuss matters at such a high price. It would have cut Samsung’s profits so radically, it would no longer make much sense to use Android. I think they had to know Samsung couldn’t agree to that price. Apple itself is complaining about a much, much lower price for FRAND patents, after all, saying it can’t afford to build its products with that price added. Did Microsoft pay that high price?

    But, I hear you say, that’s anticompetive behavior. Isn’t that patent misuse? Misuse of the courts? I think it is. But I’m not a lawyer. And antitrust law is complicated, and thanks to folks who think business should be unregulated, it’s a little bit toothless at the moment.

    Time will tell how others view it, but I despise the strategy. The purpose of both copyright and patents is to encourage innovation and progress. The purpose of trade dress protection is to make sure consumers are not confused as to origin of goods and products. Design patents are supposed to protect only ornamental features, not functionality. None of it is supposed to be for the purpose of killing off newcomers to the market. Is it even Constitutional to use them that way? You tell me.

    Remember too that Apple itself reaps benefits from Open Source software. It switched from its own software to OSX, which is BSD code. Why? Because it was better than what it had done itself. So it surely knows what FOSS can do. Now, it wants to make sure no one else can offer what it offers, even in such basic elements as rectangles with rounded corners and rows of brightly colored icons or ways to touch a tablet that are simply intuitive. Intuitive is just another word for obvious.

    The reason Apple has gone scorched earth on the litigation front is because it is sorely losing the battle on the technology front and rapidly losing market share in an industry that’s currently growing like a weed. Why should Apple even care if the industry is growing like a weed? Well, for starters, once that growth slows, Apple’s growth slowdown will be amplified and levered several times. Think of growth using margin or gearing. If the market growth stagnates to near 0% growth, then Apple’s growth could drastically reverse and go negative!!! Apple had better knock the upcoming iPhone 5 out of the ballpark, because if they don’t Android will have captured nearly the entire smartphone market within a year. There will be no extra-normal profits stemming from network effects for iOS if there is no network! Just think about that. They are already at 64% global market share and growing faster than all of their competitors combined.

    Back the Gartner data…

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    Here’s one of the reasons why…

    Many people are still totally oblivious to exactly what it is that Google does. Here’s a tutorial.

    Industry Leading, Subscription Based Google Research

    All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade.

    Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

    Subscription research:

    file iconGoogle Q1-2012 Valuation Summmary 04/20/2012

    file iconGoogle Q1 2011 results 04/18/2011

    file iconGoogle Q3 2010 reveiw 11/08/2010

    file iconGoogle Final Report 10/08/2010

    file iconAn Analysis and Valuation of Google’s Android and AdMob 09/27/2010

    file iconGoogle Valuation Model 09/21/2010

    file iconGoogle’s VOIP and Telephony Services 09/16/2010

    file iconGoogle Cloud Based Services

    file iconGoogle TV Analysis

    A couple of bits from our archives…


    There are currently 7 Google reports available. Select the “Google Final Report” and click the “Download” button. You will receive a 63 page analysis that looks like this on the cover…

    The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

    Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

    Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

    Unique, Indpendent and Accurate Apple Research

    file iconApple 2Q2012 results analysisTooltip04/26/2012

    file iconApple Margin & Valuation NoteTooltip03/15/2012

    file iconApple Margin Strategem WIPTooltip02/13/2012

    file iconApple – Competition and Cost StructureTooltip05/16/2011

    file iconApple Earnings Guidance AnalysisTooltip08/12/2010

    file iconApple iPhone Profit Margin Scenario Analysis ModelTooltip08/03/2010

    file iconApple business model noteTooltip

    File Icon Apple Margin & Valuation Note

    As excerpted:

    It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

    Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

    What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, “But wait, the company reported an INCREASE in margins while you said there will be a decrease!“. Yes, that’s true and both can exist simultaneously.

    Apple_2Q2012_results_analysis_Final_Page_2

    Apple_2Q2012_results_analysis_Final_Page_3

    Apple_2Q2012_results_analysis_Final_Page_4

    Comments are always welcome.

    Images: via Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record

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