Apple (APPL) Gets Burned by Endless Litigation
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Last week, Eastman Kodak (EK: Charts, News, Offers) scored a devastating blow against tech juggernauts Apple (AAPL: Charts, News, Offers) and Research in Motion (RIMM: Charts, News, Offers) over one of two major patent violations, which could cost the two companies $1 billion in royalties. The International Trade Commission has ruled in favor of Eastman Kodak’s image preview patent, originally patented for its digital cameras and illegally copied by Apple’s iOS and Research in Motion’s Blackberry devices. While the judgment is still subject to a final review, chances of a last minute reprieve are dim. In retrospect, Apple instigated the conflict in April 2010, when it sued Kodak over its Kodak Z, M, C and Slice cameras as well as its Playsport video camera, which Apple claimed used its patented multiple image processing patent, which allows for Photoshop-like editing features, such as adjustments in balance, color, sharpness and resolution. Eastman Kodak then counter-sued with its claim that Apple violated its image preview patents. In January 2011, Apple scored an apparent victory when an ITC judge ruled in Apple and Research in Motion’s favor. However, in March the decision was overturned, pending further review.
To make matters worse, Eastman Kodak is also attacking Apple in two separate lawsuits in Rochester related to patent infringements related to digital cameras and computer processes. Kodak, however, is only the tip of Apple’s iceberg of litigation. Without Steve Jobs at the helm, and an over-reliance on its long product cycle, will Apple’s current strategy of bullying competitors through expensive litigation backfire, as it did with Eastman Kodak?
For the past two years, Apple has been the market darling, dethroning Microsoft (MSFT: Charts, News, Offers) as the world’s largest technology company and closing in on ExxonMobil (XOM: Charts, News, Offers) as the largest American company by market capitalization. Its products have been high margin, high volume hits, changing the face of smartphones and tablet computers forever. As Apple has outgrown its underdog image, however, its business practices have come under increasing scrutiny by investors, customers and the federal government. Apple, like its industry rival Google (GOOG: Charts, News, Offers), has been questioned by the federal government for its tracking practices in its iOS devices – the iPhone and the iPad. A string of suicides in China at its Foxconn processing plant, owned by Taiwan-based Hon Hai Precision, called attention to its outsourcing business practices.
Apple then engaged its popular smaller Asian rivals, HTC and Samsung, in the courtroom, claiming patent violations and the cloning of its iPhone and iPad devices. This move was regarded by most as blatant bullying, as warning shots against other competitors which wish to create iPhone or Ipad-like devices. The attack on HTC and Samsung, which both use Google’s market-leading Android operating system, has been interpreted as indirect warfare against Google, which would be too costly to engage directly in the courtrooms. As if battling throughout Asia wasn’t enough for Apple, the company is also taking on Finland-based cell phone giant Nokia (NOK: Charts, News, Offers) with half a dozen lawsuits over two dozen patents in the United States, Germany and the Netherlands. As expected, Nokia fired back with even more patent infringement lawsuits, in which Nokia has an upper hand, as it has been in the cell phone game far longer than newcomer Apple. Nokia is particularly dangerous, as its new partnership with Microsoft to produce Windows Mobile 7 phones may drag Microsoft into the battle against Apple. Windows Mobile is expected to be the second largest mobile operating system, with a 19.5% market share in 2015, in contrast with Android’s forecast 48.8% and tied with Apple iOS’ 19.5%.
Apple is clearly playing with fire, as the $1 billion fine from Eastman Kodak has demonstrated. Shareholders need to be wary of possible future conflicts with Motorola Mobility, Hewlett Packard (HPQ: Charts, News, Offers) and Research in Motion. Without Steve Jobs in command, it will only be a matter of time before the public tires of the iPhones and iPads, and begins demanding the next big “I” product from Apple, and in the meantime, legal expenses will increase and dent its operating profit as it declares a legal war on the rest of the mobile market. |
