During times of war, the most profitable position is that of an arms dealer. It doesn't pay to get shot at. It doesn't even pay well to do the shooting. Why risk death and dismemberment when you can stay safe while selling weapons?
There is a clear analogy for investors in Apple's (AAPL) intellectual property world war, as well as that of other players in the space, such as Nokia (NOK) and Research In Motion (RIMM). Mobile device makers, in aggregate, only lose by paying legal fees. Worse yet, attorneys are not good predictors of legal outcomes. Without any insight to bet on, the best way to play this litigious environment is to sell intellectual property weapons.Tides Turning On Apple's Patent Battle Win
Apple (AAPL) has dropped from its all-time highs partly because legal counterattacks are chipping away at its recent courtroom victory over Samsung (SSNLF.PK). Apple's victory will be under assault for years as the intellectual property war rages on.
A jury found that Samsung infringed on six out of seven Apple patents, and awarded Apple over $1 billion in damages. Samsung even lost an initial bid requesting a lift on the preliminary ban on U.S. sales of its new Galaxy Tab 10.1 tablet, which was imposed after losing a patent trial to Apple. A hearing is scheduled for December 6 to consider Apple's request for a permanent sales ban in the U.S. on eight of Samsung's smartphone models and the Galaxy tablet. But Apple may not stop there. In fact, it may include more Samsung products in its requested ban.
More recently, Samsung has been able to gain ground in this fight. Samsung won a court order lifting the ban on the Galaxy Tab 10.1 tablet computer in the United States. The company was also able to overturn a pretrial ban on its Galaxy Nexus smartphone.
Samsung is also going on the offensive by claiming that Apple's iPhone 5 infringed on eight of its patents. This trial is scheduled for 2014.
Unfortunately, Apple's legal battles continue on different fronts. Patent infringement complaints by Google (GOOG) against Apple devices are scheduled for government investigation. The initial complaint was filed by Google's Motorola Mobility unit, and a notice of the investigation was posted on the U.S. International Trade Commission's website. Motorola Mobility and Apple had been fighting for at least the past two years, after licensing negotiations failed. Motorola Mobility may be pressing this issue to push Apple into negotiating a cross-licensing deal.
This case is seeking a ban on U.S. imports of devices, including Mac computers, the iPhone, and the iPad. While the complaint however name the iPhone 5, the International Trade Commission could allow Motorola to add it to the list of devices that infringe on the patents at a later date. Apple has stated that Motorola Mobility's demands for royalties of a little over 2% of the retail price of every device are unreasonable, and is appealing a previous case that it lost, claiming that Motorola's Android phones infringe on Apple's patents.
Apple's Third Legal Front
Apple is also involved in yet another legal war, this time with HTC. HTC claims Apple is infringing on two of its patents. These patents relate to the reliable transmission of large amounts of data. HTC has stated that the patented methods are imperative for the 4G LTE technology. If HTC wins the trial, it could seek an import ban of the latest iPad that uses LTE, and the newest iPhone, if it also uses LTE technology. This could give leverage to the Taiwanese handset maker to force Apple to agree to a settlement. Apple has countered with its own patent infringement suit against HTC.
HTC and Apple have been battling patents over different smartphone features since March 2010, when Apple filed its first claim against HTC. The latest case brought by HTC, and an earlier case, which was lost, are conceptualized as a legal retaliation against Apple's first case. Apple states that phones made by HTC and other companies that run Google's Android OS infringe on patented features that make the Apple iPhone unique. The original complaint against HTC has now spread to a global litigation war that spans four continents.
In Litigation, Legal Arms Dealers Win
This may sound speculative, but legal arms dealing is commonplace in the tech sector. For example, HTC's current conflict with Apple relies on patents that it purchased from ADC Telecommunications in April 2011. More recently, Google purchased Motorola Mobility in May 2012 for almost $13 billion in order to gain access to its many patents. Strategically, these patents may serve as a safeguard against Apple's claims that all devices running on the Android OS are copying unique iPhone features. This purchase has allowed Google to claim that Apple has infringed on seven of its patents, including interactive voice commands, email notifications, location reminders, and video/phone players.
Stocking Up On Patent Weapons
Given present and future legal disputes in the mobile device space, investors should consider buying Nokia and Research In Motion for the value of their intellectual property.
This is an arms dealer strategy that seeks to sell intellectual property for courtroom battles between mobile device players. Other companies will buy intellectual property from these firms or take them over outright. Owners of Nokia and Research In Motion shares will benefit from these transactions if and when they are announced.
Investors can buy shares of Nokia and Research In Motion at discounts to their book values. This is a steal in war time, since their internally-developed patents and other intellectual property is not capitalized on the balance sheet, and is essentially free after net assets.
Not only is this intellectual property effectively free, prior analysis has substantiated the values of their patent portfolios. Research In Motion's intellectual property is estimated to be worth near $1.3 billion, which is substantial relative to its $4.0 billion market capitalization. Nokia's patents are estimated to be worth $7.5 billion, which is the majority of its $9.6 billion market capitalization.
These purchases would anticipate that Google, Samsung, Apple, or other firms seeking some armaments for this war could acquire either firm, or pay them for their patents. In doing so, they would acquire patents rights and have credible threats to take legal action. Such power could be used in negotiation and settlement, or in a worst case scenario, to build a court case. Buying Nokia and Research In Motion shares in anticipation of a takeover is a cheap way to benefit from the rivalry of dominant mobile device firms.
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Disclosure: I am long AAPL, RIMM.