Apple's Patent Payout
A little less than three years ago, the smartphone marketplace exploded into a storm of litigation and licensing demands. At the heart of this storm was Google (NASDAQ:GOOG). When Google released Android, they stepped on a multitude of patents from Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). Rather than negotiate licensing deals with patent holders in advance, they released their OS into the wild, leaving their partners to duke it out with Apple and Microsoft for their respective patent rights. The legal team in Redmond knew Linux (the operating system kernel Android runs atop) used many of their patents and have been waiting in the wings for an opportunity to cash in. Apple for their part seemed to have a less clear goal in mind with regards to litigation. Apple's early approach to patent enforcement was characterized by a series of lawsuits designed to force Android to differentiate from the iPhone and iOS. Now, after their big legal victory with Samsung (OTC:SSNLF), Apple seems to be shifting gears and turning towards monetizing their patents. This is a huge shift in policy on Apple's part and should end much of the chaos in the industry and help Apple unlock the real value and power of their patent portfolio.
A Bit of History
The inventors, deserve to be compensated through reasonable patent royalties. Their claims have stirred controversy, but that was true as well of Qualcomm's (NASDAQ:QCOM) initial efforts to charge licensing fees for its radio technology. - Brad Smith, MS General Counsel
When Microsoft approached the various Android makers, they resisted and several went to court. Microsoft's portfolio was filled with patents for smartphone patents features, file system naming, and flash RAM. Google and many technology bloggers claimed Microsoft was anti-competitive or their patents were invalid. Eventually, one by one the Android makers caved, some through litigation, some just settled. The exact fees are private and vary, but analysts pin it at around $5-10 per device, adding nearly half a billion dollars per year into Microsoft's coffers. Over half the Android phone makers pay licensing fees to Microsoft. Motorola and Google are still in court with Microsoft, trying to escape paying licensing.
Apple spent most of the first two years using the courts to preserve the unique look and feel of the iPhone. As such, many of the early lawsuits required injunctions blocking shipments of manufacturers' phones. By seeking to interrupt supply, Apple left Android makers no choice but to defend themselves in court because there was no option to license. This tactic was partially successful, and Apple was able to force Google to change Android to design around critical iPhone patents.
The legal victories have piled up in Apple's favor. Android has been found in various courtrooms to infringe on 12 Apple patents, including two which have stood up in courtrooms in multiple countries. On top of their pile of injunctions, Apple now has a billion dollar victory against Samsung. Even as the courtroom victories pile up, it's become more and more clear that the legal battles are not going to be a long-term solution. Even as they were winning in the courtroom, the perpetual legal morass and occasional humiliation clearly weren't doing the Apple brand any favors.
An Olive Branch
Google should finally recognize that Android devices need patent licenses, that Android is not free no matter how often Google says so, and that one Android device maker after the other will seek licensing arrangements with Apple, Microsoft, Nokia and other significant patent holders. - Florian Mueller
The recent agreement with HTC signals a change in Apple's tactics. Apple's deal with HTC suggests they are changing their song and are pursuing licensing agreements instead of filing for injunctions to halt sales. The fees from licensing patents are significant, but equally important for Apple, the licenses are almost certain to contain anti-cloning provisions and protection for Apple's "unique user experience." Apple has already established a similar arrangement with Microsoft and while the terms of the HTC agreement are private, it's difficult to believe Apple would neglect to include a similar clause in that agreement as HTC doesn't have the bargaining power Microsoft did.
While the philosophers among us debate the ethics of patents in a free marketplace, they are part of our current system and Apple's portfolio is a powerful asset. Even as Android vendors caved under Microsoft's patent assault, they are beginning to buckle and acknowledge Apple's patents. Apple stands to make $180 million - $280 million per year from HTC alone and as additional Android makers come to grips with the inevitable, that number is going to swell. Over the next six months, it's likely Apple is going to extend cross patent licensing deals with more and more Android makers until they are collecting fees for all the Android phones sold, much as Microsoft does.
By licensing, Apple's patent portfolio can bring in $500 million to $3 billion per year and grant them the brand/cloning protection their design patents have been unable to deliver to date. The revenue itself isn't huge for Apple, but it goes straight to the bottom line and grows with the success of Android. Additionally, as the patent licensing fees from Apple, Microsoft, and eventually Nokia (NYSE:NOK) pile on top of the Android OS, that cuts into their competitors' bottom lines and helps Apple's competitive position.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.