Verdict by U.S. court leaves Samsung down, not out; increasing patent wars bewilder consumers

Apple’s victory against arch rival Samsung in the smartphone segment could not have been better timed, coming as it does on the eve of its widely expected launch of its new iteration of the iPhone, the iPhone 5 on September 12. Its first victory in courtroom battles across the world, not only against Samsung, the clear leader in the global mobile phone industry, but a clutch of others (most notably Google), however, leaves consumers bewildered.

That is not surprising because while Apple had established itself as the clear market leader in terms of setting the trends in the mobile phone business, Samsung had clearly emerged as a challenger. The latest figures on mobile phone sales in the second quarter clearly demonstrate this. Figures released recently by Gartner, Inc., widely regarded as the leading information technology research and advisory company, show that the overall mobile phone market slackened during the quarter, actually declining by 2.3 per cent sequentially. This was obviously due to the “challenging economic environment”, according to a Gartner analyst. It is estimated that 419 million mobile phones were sold globally during the second quarter of 2012, down from almost 429 million a quarter earlier.

Segmented market

However, the slackening pace was offset by the increasingly higher proportion of smartphones sold globally, reflecting a schism in the market for mobile phones, pointing to the segmented nature of demand. Significantly, the sale of smartphones accounted for more than one-third of all mobile phones sold during the April-June quarter even as this segment itself grew 42.7 per cent during this period.

Samsung, which has hitched its star to the Android wagon, was the clear leader in the mobile phone business worldwide (see chart). During the last quarter, almost one in three phones sold anywhere in the world was a Samsung phone. Nokia was not far behind, but the old horse, which set standards for mobile phones a decade ago, especially in the emerging markets, is clearly boxed in a corner. What the data show is that Nokia may have sold a lot of phones (mostly “feature” phones, the marketing spin for plain vanilla devices), but they were not the pricey ones (read smartphone) that Samsung has been selling.

A flood of lawsuits

Any serious analysis of what is at stake for the large companies needs to reckon with the nuances of not just the market, but as has been demonstrated by the recent courtroom battles, the nature and content of the patent lawsuits that threaten to assume a source of extra-market power in the hands of these behemoths such as Google, Samsung and Apple. Meanwhile, the smaller ones in the fray, such as HTC, LG and several others, which have also been embroiled in the growing list of lawsuits across continents, are seriously in danger of being singed in these costly and prolonged battles.

Samsung’s ride on the Android platform has been truly spectacular. Since Apple’s iPhone pricing strategy has kept the device away from the mass market, it aggressively targeted the “middle ground” in the smartphone business. This move was also dictated by its understanding that the “feature” phone business offered lesser margins. And, the Android platform let loose by Google was its chosen vehicle as the Operating System for a range of phones that it has launched. In fact, no other company, barring Nokia perhaps at an earlier phase of the mobile phone revolution, has offered products at a bewildering range of price points as Samsung has in the last couple of years or so.

Down, but not out

Meanwhile, the gap between Apple and Samsung has narrowed, not merely in terms of the revenues earned by these two companies from the sale of mobile phones, but also technically. To write off Samsung would be a serious error of judgment for several reasons. For one, the Samsung Group is a conglomerate that makes products ranging from chips to refrigerators to shipbuilding (revenues in excess of $250 billion). Moreover, the patent “infringement” that it has been hauled up for committing refers to a “look and feel” issue, which leaves room for the company to work around the problem it faces in its lawsuits with Apple. One hint was provided at the recent event in Berlin where Samsung announced its version of a Windows 8 phone, stealing a march over Nokia, in the process.

Meanwhile, there are strong indications that the stranglehold of the patent system, at least in its present form, is facing popular (and expert) criticism. Richard Posner, a judge who heard the Apple-Motorola lawsuit (before the latest verdict was pronounced) told Reuters that advances in software, unlike in industries such as pharmaceuticals, require much less investment. He also said that the first-mover advantage in gadgets is quite significant. Judge Posner said there is a “proliferation of patents”. “It’s a problem,” he remarked.

It is significant that the International Telecommunications Union (ITU) has called for a Patent Roundtable in October, which standards organisations, industry players and government officials have been asked to attend. This is what Hamadoun Toure, the ITU Secretary General had to say: “We are seeing an unwelcome trend in today’s marketplace to use standards-essential patents to block markets.” He urged for an “urgent review of this situation”, observing the purpose of patents is “to encourage innovation, not stifle it”.

Meanwhile, the Apple vs Google lawsuit will be in full media glare soon. Behind the legalese employed by the two would be an irony, which Apple is likely to exploit to the hilt. Apple, according to the bloggers tracking the numerous ongoing patent wars, is likely to argue that Google has been less than willing to share its search PageRank logarithm, whose patent is actually held by Stanford University. Where this will leave the bewildered consumer is anybody’s guess.