Samsung Is Building An Army To Fight Apple

| About: Apple Inc. (AAPL)

I think Apple (NASDAQ:AAPL) executives are getting restless. Samsung (OTC:SSNLF), Apple's bitter rival, is making a series of strategic moves that I suspect many underestimate. Samsung vs. Apple is the war between East and West. Recently Samsung signed two intellectual property (IP) licensing agreements that in my view set the company up in a real fight against Apple.


Patents are the way a society encourages innovation. We as consumers agree to give firms monopolistic powers for a certain period (which results in a loss of welfare) in exchange for the firm's resources and efforts necessary to developing new products/services, as well as better manufacturing processes that, to a certain degree, benefit the greater part of society. When a company patent is issued, no one can use it (legally) without the company's consent and, usually, "fat" royalties. When firms combine IP portfolios, then the R&D divisions of either firm gets free access to use the patents of both firms. One firm has a patent for using a fingerprint sensor in its phones? Great-the other firm is free to use it. One firm has cracked a method for improving data connectivity? Awesome-the other firm can take it and increase its value proposition. The value of combining IP portfolios is tremendous. First, it makes the lengthy and exhausting process of litigations, which have been all too common the last few years, obsolete. Second, it forms a cooperation between firms, a cooperation that can enable further innovation and makes the huge resources that are spent on "reverse-engineering" efforts a thing of the past, thus accelerating innovation within the circle of IP alliance members

Samsung's Strategy

In the past three weeks, three extraordinary agreements have been signed:

Samsung-Google (NASDAQ:GOOG) Deal

This deal is a 10-year-long cross-licensing patent agreement. Both companies will have access to the entire IP portfolio of the other company.

Samsung-Ericsson Deal

Samsung signed a deal with Ericsson to end all ongoing litigations between the firms. Samsung will pay Ericsson (NASDAQ:ERIC) $650M + royalties to end the dispute.

Samsung-Cisco Deal

The last deal is a Samsung-Cisco (NASDAQ:CSCO) deal that was announced on February 6th. The details of the deal are the same as the Samsung-Google deal.

So, what has Samsung been doing over the past two weeks? It looks like the Korean giant is taking a new approach to the endless court battles against Apple. Samsung is trying to build an "Innovation Alliance" that will enable its members to use each other's patents as they wish. Perhaps even more significantly, two of the first members to join are American-based companies. Although these deals have real value in them (IP cooperation), I suspect there is a hidden agenda in play. Samsung is building an army to fight the "Rockstar Alliance."

Meet the Rockstar Alliance

The Rockstar Alliance is an entity created by Apple, BlackBerry, Ericsson, Microsoft (NASDAQ:MSFT), and Sony (NYSE:SNE). Rockstar was formed to create a heavyweight "patent troll." In March 2012, Rockstar acquired the IP portfolio of the now-liquidated company Nortel. In October 2013, Rockstar filed suit against eight companies [Google, Huawei, Samsung, ASUSTeK (OTC:ASUUY), HTC (OTC:HTCCY), LG Electronics (LG), Pantech, and ZTE (OTCPK:ZTCOF)]. In December 2013, Google filed a countersuit against Rockstar.

This Is Madness

It started as a battle of East vs. West, with Apple on one side of the ring and Samsung on the other. Now most of the tech industry is being drawn into the ring. The Rockstar-Nortel affair stepped up the game, and now Samsung is forming its own alliance. Potential members of the Samsung alliance might be all of the other companies that Rockstar filed suit against: Huawei, Asustek, LG, ZTE. At the end of the day, it seems that Samsung can recruit a stronger army than Apple and beat it at its own game.

How Will It All End

I think that there is one last chance for peace as Samsung-Apple has agreed to a mediation session on February 19th. If both giants agree to a truce (and some sort of settlement), this thing might become a nice piece of history. If not, it looks like every relevant tech company is gearing up and taking their battle positions. If the Rockstar-Samsung Alliance war will start, all hell will break loose and endless lawsuits over tens of billions of dollars will take place for years/decades.

The World Needs a New Innovation Solution

All of these IP wars are gobbling up huge resources and requiring immense efforts from the mentioned companies. Instead of concentrating on how to create value and new products, they are putting all their energies into how to win in court. I believe we are witnessing the end of an era. There are only two possible outcomes to this: peace and cooperation between the IP holdings of worldwide tech companies, or a full-blown war. We, as a society, might need to start thinking of a different system to encourage innovation, one that doesn't involve decades of courtroom fights and billions of dollar spent for nothing-other than the enrichment of law firms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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