Apple Should Stop Trying To Wage A Patent War

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) unsuccessfully lost its case against Motorola Mobility (NYSE:MMI). Apple believed that Motorola Mobility violated three of Apple's patents. However, the International Trade Commission ruled in favor of Motorola Mobility, stating that they did not infringe on any of Apple's patents.

This latest news is among a series of patent litigations that is taking place. The technology world has become extremely focused on patents due to the power they have in certain markets. Patents can stave off competition as well create a large royalty stream in certain cases.

Google (NASDAQ:GOOG) is in the final stages of acquiring Motorola Mobility. The biggest reason for the acquisition is that Google will officially be able to have freedom to work on applications for its Droid O/S without having to worry about patent litigations. These litigations take a long time to resolve and the legal fees alone have a material impact to profitability. The case's outcome is a positive for Google, as it shows that the Apple will be less likely to sue over patent infringement.

Just like various other companies, Apple has been building up its patent portfolio at a rapid pace. The company is now the largest in the world by market cap and therefore will make sure competitors will not infringe on its patents. This is similar to what Microsoft (NASDAQ:MSFT) did in the 90s when it came to infringement.

In 2011, Apple was awarded 676 patents. Apple has been going after any company that it believes to be violating its patents. Apple is not only in a litigation with Motorola, but also with Samsung (OTC:SSNLF) and HTC.

While Apple is in the middle of disputes with these companies, they may be better off settling with these companies instead of doing what Microsoft did back in the day. Microsoft was largely seen as an evil villain when it set out to go after anyone that possibly infringed on its patents.

Apple should not wage patent disputes for the sake of staving off competition or getting paid a large settlement. If Apple plays its cards right, they could monetize on these patents by allowing companies to use them and charge them royalties. For example, Apple filed an injunction against Samsung for the Galaxy tablet 10.1. Kevin Rivette, managing partner of 3LP Advisors said:

Apple is better off negotiating a settlement that would grant it some benefit in exchange for licensing its technology. Instead, Apple scores surface wins, but the manufacturers on the losing end need only modify their design to get around the imposed restrictions.

Eventually companies will find a way to avoid patent infringement. These issues could be solved by simply collecting royalties. For example, HTC phones that display phone numbers in a certain way were infringing on Apple's patents. The court banned the sale of any HTC device with that feature. HTC saw very little material impact from this. If Apple were smart they would allow HTC to use the feature for a price.

Royalty streams can be very good for shareholders of companies. They allow the company to earn a stable income with little to no expenses. All these companies have to do is license. Apple could really use this to the benefit of shareholders, but if the company keeps pushing for a lawsuit, these companies will find ways to get around using Apple's patents. This means the value of patents goes down and that has a negative impact on shareholders.

Apple should learn from the mistakes of companies like Eastman Kodak (EK). Kodak recently sued Apple for patent infringement. Kodak has been fighting to stave off bankruptcy. It seems that management is not fully leveraging its patents in the right way either. Instead of going after Apple, Kodak should be working with them by licensing its patents. Apple should not follow the mistakes of Kodak, but rather focus on licensing its patents.

Apple should stop trying to wage a patent war because eventually its competitors will find ways to get around it. Apple can create some strong royalty streams by allowing its competitors to license its technology.

Disclosure: I am long MSFT.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , Personal Computers
Problem with this article? Please tell us. Disagree with this article? .