Re-thinking Apple's "Thermonuclear War" Against Android
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Incensed by what he deemed to be blatant theft of Apple's (NASDAQ: AAPL) innovations, Steve Jobs told his biographer, Walter Isaacson, "I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this." Far from destroying Android, the years since this declaration have seen Google's (NASDAQ: GOOG) Android become the top mobile operating system for smartphones and tablets.
IDC's most recent data on smartphone and tablet market share makes it clear that Apple's contentious approach has not in any way arrested Android's growth. In Q2, 187.4 million Android OS smartphones were shipped, versus 31.2 million for iOS. Android's smartphone OS market share increased from 69% a year ago to 79%, while Apple's share decreased from 16.6% to 13.2%.
In tablets, Apple's market share decline has been even more dramatic, going from a 60.3% share last year to 32.5% this year, while Android went from 38% to 62.6%. Even as the overall tablet market grew year over year by 59.6%, Apple's unit shipments declined 14% to 14.6 million units.
No effective bans
If Apple's legal maneuvers were intended to curtail or at least slow down the growth of Android, then they have been an abject failure so far. Even when recent court decisions have gone in Apple's favor, they have not resulted in any effective ban of Android products.
Apple's most important legal victory came last year when it won a $1 billion patent infringement suit against Samsung (NASDAQOTH: SSNLF) in Federal court. However, the judge later reduced the judgement to $550 million and refused to ban the import of Samsung products. Both Apple and Samsung are appealing the case.
The latest turn of events may or may not result in a ban. Last Friday, Apple won a favorable ruling by the U.S. International Trade Commission that Samsung had infringed two of the six patents Apple claimed were infringed. The ITC's ruling banned Samsung from importing products that infringe the Apple patents, but Samsung has potential workarounds, such as software changes to get around the patents in question, and only older devices may be impacted.
And things haven't always gone Apple's way. Apple suffered a setback when the ITC ruled that Apple had violated Samsung patents and banned import of older model iPhones and iPads. The ban was vetoed at the last minute by President Obama. In March 2012, the ITC dismissed an Apple complaint against Google's Motorola unit charging infringement of three patents. This was overturned by the U.S. Court of Appeals recently, but the case now bounces back to the ITC for further consideration.
Never much of a chance
With so many cases and decisions being handed down, it's easy to miss the larger trend. Apple's legal war against Android never really had much of a chance of success, and here's why:
1) Android, at the level of its fundamental operating system architecture, is in no way a rip-off of iOS. Android was developed by Android Inc., founded by Andy Rubin and others in 2003. By the time Google bought Android in 2005, it was known that Android was working on a smartphone OS, well before the iPhone debut in 2007. Android is based on Linux, and uses a homegrown Java Virtual Machine (Dalvik) to run apps written in Java.
I've written about the Android app architecture in the past, explaining that my dislike for it was what drove me to become an iOS developer. But even as an iOS developer, I can acknowledge that Android is a unique product, distinct from iOS.
Apple's software design and physical design patents couldn't really get at the heart of Android, because it's so different from iOS. The lack of fundamental overlap between the two operating systems means that Apple's patent attacks could only nibble at the edges of Android rather than deliver a mortal blow.
2) Even when Apple proves infringement of a patent by a competitor's device or group of devices, the Federal Government will be reluctant to grant an import ban. This was demonstrated in Apple's patent victory last August when Apple's requested ban on some Samsung products was refused.
This goes back to the ambivalence towards monopoly currently built into the legal system that I have referred to in past articles on Apple's anti-trust woes. The patent system was mandated by the Constitution and intended to promote and reward innovation by granting monopoly status to the inventor for a limited period of time.
Since that time, legal and social attitudes towards monopoly have evolved, so that it's frowned upon even when not illegal. In the role of encouraging competition, the U.S. government will prefer to use royalty payments and penalties rather than an outright ban on those who do infringe a patent.
3) Any success Apple might have in the U.S. or elsewhere will still leave huge emerging markets unaffected. Currently, I'm unaware of any Apple patent litigation in India, and only one case in China in which a Chinese company is suing Apple for infringement.
4) Apple is not the only company capable of innovation and willing to enforce its patents in court. The "thermonuclear war" commenced with Apple suing HTC in March 2010. HTC countered and the dispute was eventually settled in November 2012 with a cross licensing agreement between the two companies and an undisclosed payment by HTC to Apple.
Staying ahead of the competition
I don't advocate that Apple drop its patent litigation. Apple should defend its intellectual property vigorously, but investors should not expect this to solve Apple's Android competition problem. It probably won't.
The best way for Apple to mitigate the effect of "copycat" products is by accelerating its pace of innovation. With $130 billion in cash, Apple can easily afford to do this. Then copycat products can only feature outdated tech that just makes them less desirable, even at a discount.
Apple's management has realized that the pace with which Apple innovated in the past is not the pace that will keep it competitive in the future. Apple has begun to increase its R&D spending as a percentage of revenue, as seen in its second quarter-earnings. Ramping up an R&D effort of the magnitude (roughly double the 2012 level) that Apple needs takes time. Researchers have to be hired, new facilities found or built, and a mound of research proposals have to be sifted through for the ones most likely to yield successful new products.
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Mark Hibben owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!