Apple, Samsung both losers in patent war

While the smartphone giants squabble their rivals edge closer to cracking their cushy duopoly.

As Apple Inc. and Samsung Electronics Co. squabble in court over who copied whose phone features, the companies' grip over the smartphone industry is slipping.

The two companies account for nearly all smartphone hardware profits. But they are losing market share to Chinese rivals with lower-priced phones, particularly in developing nations.

Two years ago, Apple and Samsung accounted for more than 55 per cent of world-wide smartphones shipments, according to research firm Strategy Analytics. In the first quarter, that fell to 47 per cent. Samsung said this week  that quarterly operating profit at its mobile division fell from a year earlier for the first time since 2010. Apple's annual profit fell last year for the first time in more than a decade.

Compared with those shifts, the stakes in their high-profile courtroom dispute are surprisingly small. Apple's $US930 million verdict in a prior case amounts to little more than one week of its profits; Apple has yet to collect a dime. Neither company has had to pull a meaningful product off the shelf.

For that, the companies have suffered through embarrassing revelations. Emails showed Apple bickering with its advertising agency after the firm suggested its brand was slipping. An Apple employee created a slide titled "Consumers Want What We Don't Have." Internal Samsung emails revealed executives saying that it was suffering a "crisis of design" and that the difference between its early smartphones and the iPhone was "heaven and earth."

The case is "a distraction," said Sundeep Bajikar, an analyst for Jefferies. "There are potentially more important structural changes happening in the industry," he added. "The implications are not that meaningful."

Attorneys for the two companies delivered closing arguments in the latest case yesterday in U.S. District Court in San Jose, California. Apple is seeking $US2.2 billion from Samsung for infringing five of its software patents. Samsung has counter-sued Apple for infringing two of its patents and is seeking a mere $US7 million.

"Bringing this lawsuit was Apple's last choice," said Apple's lawyer Harold McElhinny, adding that it first asked Samsung to stop infringing its patents in 2010. "Apple simply cannot walk away from its inventions."

Samsung's lawyers said Apple should recharge its growth through new products instead of stifling competition through the legal system. "What Apple needs to understand is that the answer to the innovator's dilemma is not here in the courtroom suing people," said Samsung's lawyer John Quinn.

Apple-Samsung duopoly under fire

As the lawyers argue for yesterday's profits, rivals are moving to crack the Apple-Samsung duopoly over the smartphone industry. The current field is pretty fragmented, with nobody else controlling more than five per cent of the smartphone market.

Microsoft Corp last week finished swallowing Nokia Corp., replicating Apple by uniting hardware and software. Lenovo Group Ltd, one of China's biggest smartphone manufacturers, is in the process of acquiring Google Inc. Motorola unit to expand its global reach. Xiaomi Inc., the smartphone startup that has rocked China with low-priced phones and wildly loyal customers, plans to move into 10 emerging markets this year, including India, Indonesia, Russia and Turkey.

As the field grows more competitive, market growth is slowing. World-wide smartphone sales increased 38 per cent last year to more than one billion units, according to market researcher IDC. This year's growth is expected to be half that rate. The bulk of the expansion is coming in developing nations, which tend to favour lower-price handsets over the high-end models that drive Apple's and Samsung's bottom lines.

That's hurting both sales and profit margins at Apple and Samsung. Strategy Analytics says Samsung's share of smartphones fell to 31.2 per cent in the first quarter, from 32.4 per cent a year earlier, marking the first year-to-year decline in a quarter since 2009. While holding strong in the high-end of the market, Apple's share fell to 15.3 per cent from 17.5 per cent in the year-ago period. Strategy Analytics said Apple's lack of a new entry-level smartphone—the company tends to discount its older models instead of offering new lower-end products—is hurting it in fast-growing regions like Latin America.

Smartphone prices are tumbling, further pressuring profitability for both companies. IDC says the average selling prices of smartphones fell 18 per cent globally to $US335 in 2013; it forecasts another eight per cent decline in 2014.

Litigation lament

Litigation is a particularly fraught strategy in technology, where the pace of innovation is so quick that a once-key feature can become obsolete in a few years.

Consider the "swipe to unlock" feature at issue in the current trial. When it was introduced with the first iPhone in 2007, it was a simple, novel way to prevent people from accidently unlocking touchscreen handsets. However, Apple's latest iPhone 5S and Samsung Galaxy S5 use fingerprint sensors to offer a more secure way to start the device.

On the hardware side, the processor that powers the latest iPhone is 56-times as powerful as that of the original iPhone introduced six years earlier.

By comparison, the companies' patent disputes move at a snail's pace. Apple first filed suit against Samsung in April 2011. The trial began in August 2012. A retrial to determine the damages owed by Samsung was completed in November 2013. The suit in the latest trial was filed two years ago.

This means that even if one party is found to have copied, the most meaningful penalty that the court can assess—an injunction blocking sales of an infringing product—is largely neutered because those products now sell in small quantities, or not at all. U.S. District Judge Lucy Koh, who has presided over both Apple-Samsung trials, has rebuffed nearly all of Apple's efforts for an injunction.

"Generally, these cases only make economic sense if you can get an injunction," said Brian Love, a patent law expert and an assistant professor of law at Santa Clara University. "It continues to amaze me that this case hasn't settled."

The way Apple runs its business makes a settlement more difficult. Other companies license their technology, and go to court in part to fight over the terms. But Apple aims to differentiate its products by keeping its technology for itself, leaving it at the mercy of the courts.

"It's a waste of time," said Gene Munster, an analyst at Piper Jaffray. "It's been proven over time that litigation doesn't get you anywhere with technology."

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