Apple’s Patent Claws Are Out (Again)
One of the world’s largest Android phone manufacturers, HTC Corporation (Taiwan: 2498.TW), is the latest to fall victim to Apple’s (Nasdaq: AAPL) patent warfare.
Last week, an “initial determination” by the International Trade Commission (ITC) found that HTC infringes on two Apple patents.
The ITC’s decision isn’t final, though. HTC plans to appeal, and a six-person panel is scheduled to make the final verdict on December 6.
Without getting overly technical, Apple is contending that ITC’s operating system, which ingeniously recognizes and processes data to the web, is actually the property of Steve Jobs and his gang.
Another HTC feature, which relates to how a device processes multimedia data, is also being targeted by Apple.
The possibility of a win for Apple has some analysts and patent experts predicting the worst case scenario – Apple banning the sale of HTC’s products in the United States.
Their rhetoric has already spooked investors – HTC shares dipped almost 10% by Monday morning.
In a bold move by management, HTC announced plans to buy back up to 20 million of its own shares within the next two months to ease the impact on the stock. And to send a message to investors that the company is on solid footing.
As for me, I’m convinced that analysts’ “worst case scenario” is also the least likely. Here’s why.
With Licensing Deals, Everybody Wins
In a scenario where HTC loses the patent dispute to Apple, the company would still have some worthwhile options.
For starters, HTC could simply pay Apple a licensing fee to continue using the technology.
It wouldn’t be the first time for the company. Through an existing patent settlement with Microsoft (Nasdaq: MSFT), HTC pays Mister Softee a $5 cut for every Android phone it sells.
The payout hasn’t hindered HTC’s growth one bit, either. The company’s sales doubled during the second quarter this year compared to the same quarter in 2010. And with the Android platform now seeing 550,000 activations a day, striking a similar deal with Apple shouldn’t break the bank.
Such a deal could even work in Apple’s favor. You see, based on calculations from Asymco, Microsoft raked-in five-times more cash last year from the HTC deal than from its own Windows Phone platform.
True, there’s always the chance that Apple could decide to play hardball anyway. Luckily though, HTC just scooped up 235 more patents to help entice the tech giant to cooperate.
Apple’s Turn in the Hot Seat
On July 6, Via Technologies announced that it’s selling its stake in graphics processing company, S3 Graphics to HTC.
S3 owns a texture compression technology used in advanced video graphics.
According to CEO, Dr. Ken Weng, “It has been implemented in over one billion computers, game consoles and mobile devices worldwide.”
Current licensees of the technology include big names like Microsoft (Nasdaq: MSFT), Sony (NYSE: SNE) and Nintendo.
How does this help HTC now? Because Apple uses the technology, too. Only it’s not paying for it yet.
You see, HTC’s not the only one presently under ITC scrutiny. The Commission recently ruled that Apple was violating two of S3’s compression technology patents. How’s that for irony?
Needless to say, Apple’s need for the technology gives HTC some negotiating power.
Heck, HTC admits to purchasing S3 to give it leverage in these situations: “In patent negotiations, it is difficult if the other company has patents and you don’t. If you have patents too, perhaps you can arrive at a cross-licensing agreement.”
Smart move.
Hopefully Apple realizes that inking a deal is the best option here.
If not, no sweat. Expect HTC to simply find a way to work around Apple’s intellectual property.
In fact, the company’s already working on a possible solution. According to HTC, “As a leading smartphone innovator for more than a decade, we develop and acquire technology in many areas and strongly believe we have alternative solutions in place for the issues raised by Apple.”
Bottom line, a negative ruling from the ITC in December won’t sink HTC – even if Apple doesn’t play nice.
Good investing,
Justin Fritz
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