Patent wars put pressure on Apple despite robust quarter

Apple’s most recent results demonstrated the firm’s continuing ability to turn its iPhones into gold, despite mounting fears, for the medium term at least, about its over-reliance on a single product family which lives in a market with rising competition and slowing growth. Apple may not be the innovator it once was, but the anniversary iPhone 8 promises to postpone its real smartphone woes for another holiday season at least, especially if it can start to claw back position in China from the ascendant Huawei – although the Chinese company plans to unleash its high end Mate 10 in the same timeframe as the new iPhone.

In its third fiscal quarter, Apple achieved revenues of $45.4bn, up 7% year-on-year, with net income at $8.7bn. iPhone shipments were 41m in the quarter compared to 40.4m a year ago, though down from the seasonally stronger Q2. Even the iPad, which has seen falling sales, in a shrinking tablet market, for several quarters now, sold 1.4m more devices, for an additional $100m in revenue, than in the year-ago quarter. CEO Tim Cook also highlighted record services revenue of $7.27bn, led by iTunes and the App Store.

IDC says that all the top five smartphone manufacturers grew their shipments in the second quarter, even though the global market was down by 1% in unit terms, with market leaders Samsung and Apple taking 23.3% and 12% of the total respectively. Chinese vendors made up the rest of the top six – Xiaomi edged out Vivo to take the number five position, while Huawei was in third place and Oppo fourth. By contrast, Apple’s Chinese revenues were down to $8bn in the quarter from $8.8bn a year earlier.

However, while the promise of the iPhone 8 – not to mention the ripple effects of Samsung’s Galaxy Note disaster last year – is keeping Apple’s demons at bay for now, the company has challenges on the legal front. It is locked in patent litigation with Qualcomm (see separate item), which could, if Apple succeeds, improve its iDevice cost base with lower licensing fees, and help to upturn the whole Qualcomm business model – something which would have knock-on effects throughout the value chain.

However, it by no means certain that Apple will succeed, with Qualcomm, veteran of so many patent wars, responding vigorously to its customer’s attacks. The chip giant has succeeded in its quest to get the US International Trade Commission (ITC) to investigate Apple, over allegations that the iPhone maker is violating six Qualcomm patents. The ITC is unlikely to complete its process until late 2018, but could, if it finds Apple guilty, block imports of offending iDevices.

Qualcomm lodged a request on July 7 that the ITC should stop imports of iPhone 7s and other products, infringing patents related to “envelope tracking, voltage shifter circuitry, flashless boot, power management circuitry, enhanced carrier aggregation, and graphics processing”. None of these is a standards-essential patent (SEP), which means licensing terms are purely down to negotiation and market prices, not governed by Frand (fair reasonable and non-discriminatory) rules. On the news that the ITC would investigate, Don Rosenberg, Qualcomm’s general counsel, said the firm “looks forward to the ITC’s expeditious investigation of Apple’s ongoing infringement of our intellectual property and the accelerated relief that the Commission can provide”.

Qualcomm has also filed suit against Apple over the same patents in the US District Court for the Southern District of California, and in Germany. All that action followed Apple’s initial suit, filed in January and subsequently extended, with several of Apple’s manufacturers, such as Foxconn, also joining the action (see Wireless Watch July 24 2017). These suits make various allegations related to Qualcomm’s licensing model, including claims of ‘double-dipping’ (collecting revenues from two partners in the supply chain for the same patent), excessive charges and even patent invalidity.

Until the matters are resolved, Apple and its manufacturers (which actually pay most of the patent licences on its behalf) have suspended royalty payments, hitting Qualcomm’s most recent quarterly revenues, which saw a 40% year-on-year drop to $800m. Meanwhile, the US Federal Trade Commission (FTC) has also filed a complaint against Qualcomm, alleging unfair licensing practices for cellular modem SEP.

Apple has been at the center of smartphone patent battles for the past decade, despite having virtually no position in SEP – many of its claims have revolved around so-called design patents related to items like screen shape. But its lack of fundamental cellular IPR assets does put it at a disadvantage when it comes up against companies like Qualcomm and Nokia. Earlier this year, it settled its latest patent ligitation with Nokia, and the Finnish firm’s quarterly financial report revealed that, as in the past, it has scored a win over Apple/

The figures showed that Apple paid Nokia €1.7bn in May as a patent settlement. The statement said: “We got a substantial upfront cash payment of €1.7bn from Apple, strengthening further our cash position.” Nokia had sued Apple last year, accusing it of infringing a series of patents, but the settlement was announced in May, along with new cooperations in areas like digital health and IP routing.

Qualcomm and Nokia are not the only organizations putting pressure on Apple in the courts. A group of 28 Chinese developers has filed suit with the country’s regulator, claiming that Apple treats them unfairly by removing their products from the App Store without good reason and saying that the vendor’s 30% cut of revenues from in-app purchases is excessive. The plaintiffs also argue that Apple treats developers differently, depending on other factors including a preference for US software houses.

“When companies that are important to Apple allege that certain apps infringe their rights and should be taken down, Apple will do so with very little evidence or even no evidence,” said the complaint.