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Technology strategy and management

The Apple-Samsung Lawsuits


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hands from Michelangelo's 'Creation' on two mobile phones

Credit: Anthony Freda

Imagine the following scenario: The Cadillac Automobile Company, founded in 1902, is granted a set of patents in the U.S. and then worldwide that define the design and basic functionality of what becomes the modern automobile: four wheels, a gasoline-powered internal combustion engine, a closed steel body, and a round steering wheel. Then Henry Ford comes out with the much less expensive Model T in 1908 and quickly gains 80% of the market. After a brief lawsuit, a jury finds that Ford has violated Cadillac's patents and must cease production as well as pay extensive damages to Cadillac, now part of the General Motors Corporation.

Two additional scenarios might have unfolded. One could be that patent protection for Cadillac stimulates further innovation. Competitors develop automobiles with batteries as well as fuel cells powering electric motors, high-tech materials for convertible bodies, and joystick controls that resemble those of modern-day video game consoles. The intense competition spurs on advances in manufacturing methods as well, leading to lower prices. Lots of companies make money, and consumers have choices of varying quality and prices. Another scenario, however, could be less cheerful. Maybe no company comes up with a better design. Cadillac dominates the market and becomes the most valuable company in history. Its investors are delighted and so are its affluent customers. As for everyone else, they make do with inferior three-wheel vehicles or continue to drive horses and buggies.


As many as 250,000 patents are filed that cover the design and functionality of the iPhone and other smartphones.


In some ways, the August 2012 California jury verdict against Samsung (the world's largest maker of smartphones) in the case brought by Apple (the world's second largest maker) could evolve to resemble this Cadillac fantasy. I say "could evolve" because we are not there yet but patent offices, judges, and jurors around the world must exercise caution and common sense. Apple is continuing to challenge Samsung on newer products and additional patents not covered in this particular litigation. It will also probably go after Google, maker of the Android operating system used in the Samsung products, as well as other phone makers that did what Samsung didintroduce products patterned after the Apple iPhone and iPad, running Google Android software. Google gives away its software and makes money from mobile ads; it will be difficult to calculate damages compared to companies actually selling products. But the iPhone has already lost a lot of market share to Android phones, and someone will place a value on these lost sales. At the time of the case, the Apple iPhone had merely 19% of the global smartphone market, compared to 64% for Android phones.10

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Case Study

The basic facts of the case seem straightforward. The jury awarded Apple $1.05 billion in damages (which the judge might triple because Samsung was found to have willingly copied Apple). The lawsuit covered some two dozen older devices mostly sold outside the U.S., not the current models Samsung is pushing.4 Apple will have to go after the newer models and other potential patent violations in separate litigation, which it is doing. In fact, as many as 250,000 patents are filed that cover the design and functionality of the iPhone and other smartphones, and there are already dozens of lawsuits and countersuits between Apple and Samsung in 10 countries.6

Samsung has already fared better overseas. A Japanese court found in favor of Samsung, saying it did not violate an Apple patent on technology that synchronizes music and videos between devices and servers. Though Apple had sought only $1.3 million in damages, this is a victory for Samsung. A South Korean court also rendered a mixed decision in another Apple versus Samsung patent case.8

In the August 2012 case, the U.S. jurors found that all seven of Apple's patents were valid and that Samsung violated six of those that help define the look and feel of the iPhone. Four were "design patents" related to the appearance of the iPhone (the use of white and black on the devices and the rounded edges on the user-interface icons, which Samsung was found to have violated, and the tablet computer's rectangular design, which Samsung did not violate). Three "utility patents" were more technical, involving both hardware and software controlling how the device enlarges documents when the user taps the screen, distinguishes single-touch versus multitouch gestures, and appears to bounce back when scrolling to the end of a page.9

In the wake of the Samsung verdict in the U.S., the largest smartphone and tablet market in the world, we are likely to have more innovation as well as competition. Microsoft and its partner Nokia may benefit, for example, because they have not copied Apple's iPhone designs and iOS software so explicitly. The Windows 8 phones from Nokia have received good technical reviews, though they seem less intuitive to use, there are few compelling applications, and customers continue to prefer Android phones that look and feel like the Apple iPhone. Not surprisingly, Windows phones as of this writing had a mere 3% of the market.1

If more court decisions come down in favor of Apple's design patents, it is likely the iPhone will remain distinctive. But it might also remain a minority platform at the higher end of the market, like the Macintosh in past years or the once-revered Cadillac. Maybe this is the best scenario for a company that wishes to maximize its profits. But is this the best scenario for consumers? Maybe not.

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Intellectual Property Protection

The broader issue, of course, involves the pluses and minuses of intellectual property protectiona hotly debated topic for decades. On one side are those who have arguedsuccessfullythat companies will not have sufficient incentives to invest in research and product development if they are not allowed to capture the value generated by their investments for some significant period of time. On the other side are those who argue that intellectual property protection actually hurts innovation at a broader social level. Patents, because they grant temporary monopolies, might restrain the ability of other companies or individuals from making improvements or disseminating the technology to a broader user base.a Other research has found that patents issued in a particular area (for example, around a specific protein molecule in biotech research) can have a "chilling" effect on further research in this area. Patents in this scenario can actually create disincentives for further research and development.7 In general, though, most governments have agreed with the former argument and that is why they have created patent systems, dating back at least to the 15th century in Europe. The U.S. patent system predates even the Constitution and currently provides protection for 20 years from the date of filing.

It is also true that platform dynamics with skillful marketing can lead some companies to dominate markets without relying on patents (see my column "The Evolution of Platform Thinking," Communications, Jan. 2010). Microsoft achieved a 90%-plus market share with DOS and then Windows mainly through good fortune and timing (the deal in 19801981 to provide the operating system for IBM's new PC) as well as deliberate efforts to cultivate hardware and software partners, and long-term contracts with PC manufacturers. It also used specific pricing tactics and volume discounts (some of which were found to be illegal in the 1990s U.S. antitrust action).3 Most software companies have not viewed patents as useful to protect their products since there are often many ways to implement a particular function and work around a patented algorithm. But times have changed, and now many hardware and software companies are acquiring stocks of patents and suing each other with increasing frequency.6

Particularly worrisome are design patents, which appear broader and fuzzier than technical utility patents and might create undesirable consequences for users and competitors. The courts need to be careful as well as consistent when issuing such patents to make sure they do not overly inhibit innovations that are important to disseminate as broadly as possible. Recall that Apple once sued Microsoft in 1988 for copying the "look and feel" of the Lisa and Macintosh graphical user interface (GUI). Apple had engaged Microsoft in the early 1980s to create versions of Word and Excel for the Macintosh, which came out in 1984. From this experience, Microsoft learned how to design graphical softwaresimilar to how Samsung learned about the details of the iPhone and iPad by being the largest supplier of the microprocessors to Apple.5 Microsoft had licensed some GUI design elements for Windows 1.0, a layer it built to sit on top of DOS. But Microsoft continued to use Apple's design elements in later releases of Windows, which Apple challenged. Apple lost this case at least in part because it had licensed and copied aspects of the GUI from Xerox, which had done the pioneering work at its research lab, Xerox PARC. In its defense, Microsoft also argued that a company should not be able to protect something as vague as a "look and feel."b


If more court decisions come down in favor of Apple's design patents, it is likely the iPhone will remain distinctive.


So while Apple was the first to commercialize the graphical user interface, the court did not grant Apple a monopoly on the general design (though it made Microsoft change its trash can icon because this copied the Macintosh garbage can too explicitly). Microsoft eventually made the GUI ubiquitous by broadly licensing Windows to many PC manufacturers, which brought down prices. The Macintosh remained expensive (the "Cadillac" of PCs?) and became a niche product, where it remains despite a recent revival in sales. The iPhone and the iPad have turned Apple into the world's most valuable company, but Microsoft still generates remarkable profit levels (see "Reflecting on the Facebook IPO," Communications, Oct. 2012). More importantly, thanks mainly to Microsoft and Windows PC manufacturers, the Macintosh-style graphical user interface became the dominant way to use a personal computer, elevating billions of people beyond character-based DOS computing (which reminds me of the horse and buggy).

How valuable Apple remains in the future has a lot to do with how effectively it can prevent other firms from copying its innovations. At the same time, whether billions of consumers will be able to buy iPhone-like smartphones and iPad-like tablets that are rectangular and have touch screens and other functions that work in similar ways has a lot to do with how patent offices, juries, and judges act in the future.


Many hardware and software companies are acquiring stocks of patents and suing each other with increasing frequency.


These cases are complex because there are valid arguments on the different sides. From the innovators' point of view, strong intellectual property protection is desirable to stimulate and protect their investments. Apple may not have developed the Macintosh in 1984 or the iPod, iPhone, or iPad products in the 2000s if Steve Jobs did not believe he could prevent others from copying the designs, at least to some extent. From the competitors' point of view, strong patent protection is not desirable when they want to "borrow" or "build on" good ideas or follow the "dominant design" established in the marketplace.c From the point of view of consumers and society at large, we all lose if companies do not have sufficient incentives to invest in research and development. We also lose when patents prevent advances in a particular technology or make it difficult or expensive for the majority of consumers to adopt the most useful, usable, and elegant designs.

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Conclusion

Apple needs to be fully rewarded for its innovations. But if the company's patents and lawsuits prevent other firms from creating elegant, simple-to-use products patterned after the iPhone and the iPad but perhaps better, faster, and cheaper, then it will be a sorry ending to the current battle between Apple and Samsung. Perhaps there could be a middle-ground solution where, for example, Samsung, as well as Google and other companies, reach agreements with Apple to make royalty payments and then cross-license some of their own patents. In fact, a recent court did this with a lawsuit filed between Apple and Motorola, and Apple and Google are already engaged in patent discussions.2,9 With a negotiated outcome, companies would be able to take better advantage of the innovations they and their competitors produce, while giving proper credit to the innovators and allowing them a fair return on investment. The definition of "fair" will be another matter of negotiation and litigation. Nonetheless, even small royalties on every Android device sold could quickly produce a financial windfall for Apple that exceeds current iPhone and iPad sales.

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References

1. Ante, S. and Troianovski, A. Microsoft's mobile moment: Will consumers buy in? The Wall Street Journal (Aug. 29, 2012), B1.

2. Bloomberg News. apple, Google discuss patent issues. The Boston Globe (Aug. 31, 2012), B6.

3. Cusumano, M. and Selby, R. Microsoft Secrets. Free Press, New York, 1995, 164166, 436437.

4. Elias, P. Apple asks judge to ban U.S. sales of 8 Samsung phones. The Boston Globe (Aug. 28, 2012), B6.

5. Koetsier, J. Apple stuck in bed with Samsung as exclusive CPU deal with Taiwan semi fails. Venturebeat.com, (Aug. 29, 2012); http://venturebeat.com/2012/08/29/apple-samsung-taiwan-semi-cpu-iphone-ipad/.

6. Lohr, S. A patent war in your pocket. The New York Times (Aug. 26, 2012), A4.

7. Murray, F. and Stern, S. Do formal intellectual property rights hinder the free flow of scientific knowledge? An empirical test of the anti-commons hypothesis. Journal of Economic Behavior & Organization 63, 4 (2007).

8. Tabuchi, H. and Wingfield, N. Tokyo court hands win to Samsung over Apple. The New York Times (Sept. 1, 2012).

9. Vascellaro, J. Apple wins big in patent case. The Wall Street Journal Online (Aug. 25, 2012).

10. Wingfield, N. In Apple's patent case, tech shifts may follow. The Wall Street Journal (Aug. 20, 2012), B1.

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Author

Michael A. Cusumano (cusumano@mit.edu) is a professor at the MIT Sloan School of Management and School of Engineering and author of Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Unpredictable World (Oxford University Press, 2010).

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Footnotes

a. For arguments in favor of intellectual property protection, see the classic articles by K. Arrow, "Economic Welfare and the Allocation of Resources for Invention," in National Bureau of Economic Research, The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton University Press, 1962), 609626; and R. Nelson, "The Simple Economics of Basic Scientific Research." Journal of Political Economy 67, 3 (1959), 297306. For a recent popular argument on the other side, see E. Von Hippel, Democratizing Innovation (MIT Press, 2005).

b. Apple Computer, Inc. v. Microsoft Corporation, 35 F.3d 1435 (9th Cir. 1994); http://bulk.resource.org/courts.gov/c/F3/35/35.F3d.1435.93-16883.93-16869.93-16867.html. Also see S. Manes and P. Andrews, Gates (Doubleday, 1993), especially pp. 357364 and 437438.

c. For a discussion of the "dominant design" concept, see J. Utterback, Mastering the Dynamics of Innovation (Harvard Business School, 1994).


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