The verdict is in – literally – but the final outcome of the patent dispute between Apple and Samsung probably will be fought in the consumer electronics market itself, and take months or even years to resolve.
A U.S. jury in California ruled that Samsung infringed on six patents of the seven that Apple said its Korean rival had violated in devising smartphones to compete with the iPhone. Samsung has seen its devices become a runaway success among smartphone users – less costly and more flexible than Apple’s iconic iPhones – and the Android system on which the Samsung devices are based has seized half of the market for smartphone and tablet devices, leaving Apple with about 30 percent.
The $1.05 billion in damages awarded by the jury made headlines as one of the largest on record in such a patent dispute, and underscores the value of patents to companies that possess them. There has been a steady surge in the number of these transactions, such as Microsoft’s acquisition some 800 patents from AOL in a deal valued at about $1.1 billion, or Google’s $12.5 billion purchase of Motorola Mobility (largely to capture the value of the latter’s patents).
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Looking for a great investment idea? You could do far worse than screen the stock market looking for companies whose market value and book value doesn’t fully reflect the potential value of the patents in their portfolio. Or keep an eye on those companies who are accumulating a strategic mass of patents in their portfolios. These don’t just include obvious candidates like Google, Samsung, Apple and Microsoft, but offbeat players like RPX Corp., a San Francisco company that some would call a “patent troll.” RPX looks to snap up patents as a defensive move, to protect companies that are its clients from just such lawsuits as the Apple/Samsung battle.
As for that battle, the overarching question is what happens next. However large the $1.05 billion fine may appear, and while writing that kind of check is never a pleasant experience, it’s not the fine itself that matters. Samsung is currently sitting on about $21 billion in cash, so even if the judge in the case triples the award, Samsung can afford it. Apple can request that tripling, given that the jury concluded Samsung’s patent infringement was a willful and conscious act.
With or without that tripling, Apple stock is likely to shoot higher, what matters most for Samsung is whether its sales will take a hit – whether the judge grants an injunction preventing its phones from being sold in the U.S. – or how big a hit it takes if it has to roll out products that look different from the phones that have succeeded recently.
Samsung and other smartphone makers will have to exercise caution going forward to avoid looking like they are copying Apple. Their success or failure could have implications for the popularity of Google’s Android operating system. While Android has rapidly risen to take a dominant share of the smartphone market, it is challenged not only by Apple (which has described it as a copycat version of its own system) but also by Microsoft’s only modestly successful effort to make headway in the world of smartphone and tablet technology. The jury verdict may be a blow to the broader world of Android devices, and not just to Samsung.
In the short run, Samsung has pledged to appeal the verdict. In a statement released after the verdict, the company called the outcome “a loss for the American consumer” and said it would continue the legal battle. “It is unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners,” Samsung said, adding, “This is not the final word in this case or in battles being waged in courts and tribunals around the world, some of which have already rejected many of Apple’s claims.”
Pending the results of Samsung’s appeal, it would be prudent for it to start hedging its bets by finding ways to redesign its next wave of products so that they can’t be viewed as violating these or any other Apple patents. That may be a tall order, but given that Samsung products based on the contested patents could be barred from the U.S. market altogether, it’s probably going to be necessary. Samsung can use some of its own cash mountain to fund the R&D. To the extent that it can’t – or until it does – Samsung products will become more costly either to consumers or to Samsung, depending on who pays the licensing fees to Apple.
Needless to say, the decision gives Apple an edge in what is likely to be a prolonged war with its rivals. But to exploit it fully, Apple will have to keep its own innovation engine firing on all cylinders, continually rolling out new iterations of the iPhone and iPad, and devising new gizmos based on the same kinds of technology. It also needs to pray that consumers continue to feel affluent enough to replace their iPhone 4 with an iPhone 5, 6, 7 and so on into the future. The latter is more at question than the former, given that Apple is expected to announce a new iPhone, and possibly other new products, early next month.
As the legal battles continue, Microsoft may still emerge as an intriguing company to watch. As mentioned, it is trying to stake out some ground in the mobile computing universe and has become an aggressive acquirer of patents. The Samsung verdict may make device manufacturers pay a bit more attention to Microsoft and its robust patent portfolio.
Android isn't going away any time soon, but Apple’s focus on that front opens up an opportunity for Microsoft to exploit, if it is able to do so. It hasn’t been so far. Microsoft still has to make its product as appealing to consumers as the Apple and Android systems currently are. But it hasn’t given up the fight for mobile market share. In the meantime, it also offers risk-averse investors exposure to the vast panoply of Microsoft products, plus a healthy dividend yield of 2.6 percent. If you want to play the patent story on its own, sure, you can look at RPX. But Microsoft trades at about 15.3 trailing earnings (compared to more than a valuation of more than 17 times for RPX). If you want to hedge your bets on Apple, Microsoft may be worth a look.
