How innovative, competitive and well adopted was 4G LTE in mobile communications— implications for outlook in 5G?

LTE's introduction a decade ago and its development as the definitive 4G mobile communications standard which predominates in smartphones is an outstanding accomplishment. Competition has served technology innovators, manufacturers, mobile network operators (MNOs), over-the-top service providers and end-users extremely well.  Markets have functioned and advanced superbly with a vibrant supply ecosystem and providing 4.1 billion LTE connections out of 9.4 billion in total worldwide. In the U.S., 63 percent of the nation’s 479 million mobile connections use LTE.

Despite overwhelming evidence of this extraordinary and widespread success, some allege that illegal and anticompetitive practices have caused significant harms including suppressed innovation, market exclusion and excessive pricing. While legal arguments and economic theories are extensively articulated by the parties and their amici in the U.S. Federal Trade Commission’s antitrust action against Qualcomm—with this case still on appeal following the Northern California District Court’s ruling against the latter—my analysis here focuses on market and economic facts and figures in innovation, competition and consumer welfare over the last decade with LTE. While there is no evidence of those negative effects, there is proof of commercial failure by the alleged principal injured party, Intel, due to its poor strategic judgment and inability to keep up with the exacting technical pace of a most fiercely competitive marketplace in smartphone chips.

Antitrust law is to ensure competitive processes are preserved, not that competitors are protected. High prices are not per se illegal because they provide incentive for increased competition, such as from new market entrants and lower-cost innovations. Suppliers that are inefficient in terms of costs, quality or speed-to-market versus competitors should not be protected from their failings.

Every new decade, a new G

A new generation of mobile technology is introduced approximately every 10 years. As the new decade turns, it is most opportune to assess how well LTE has exceeded all expectations, and what has made this possible, since its first introduction around the turn of the previous decade.  Were concerns about introduction of yet another new G—including the need to invest in a network overlay, more spectrum, replace devices and pay additional patent license fees—well founded or needless?

Many MNOs, particularly in Europe, were very disappointed with their transitions to 3G in the early 2000s, due to high spectrum costs and initially disappointing demand for new data services. Conversely, in the US, AT&T waited until availability of mobile broadband with HSDPA in 2005 and deployed this on its existing spectrum. With exclusivity over iPhones in the US, its network became overloaded and in dire need of capacity expansion by around the end of the decade.

The very first commercial launches of LTE were in Scandinavia by TeliaSonera in late 2009. Following several more launches in 2010, the new standard was most significantly established with its introduction by Verizon at the end of that year and by AT&T in 2011. Both of those MNOs largely deployed LTE initially in new spectrum at 700MHz. It provided great coverage, together with much improved data speeds and network capacity. That was just the beginning for LTE.

Consumer demand surges with smartphones and LTE

While press and consumer attention in the smartphone and mobile broadband revolution over the last decade or so is mostly with device original equipment manufacturers (OEMs) including Apple and Samsung, the increases in communications performance have largely been down to others in their technology development and through chip component and network equipment supply, together with network deployments by the MNOs.

While mobile broadband data initially grew from a low base at a fast rate using 3G technologies CDMA EV-DO and HSDPA from the mid 2000s—with most demand from PC data cards and dongles— that exponential trajectory has been maintained with data growth compounding at around 60 percent or more annually for the last decade.

Mobile broadband data consumption has grown enormously in recent years

This was significantly due to the rapid adoption of smartphones following the introduction of the iPhone 3G and the first Android operating system device in 2008. Smartphones embodied a variety of innovative new technologies including applications processing, displays and sensors. Improved communications with LTE, in conjunction with an increasing supply of licensed spectrum for mobile, were perfectly placed to accommodate demand growth. The first Android smartphone with LTE was launched in 2010 and Apple’s first LTE smartphone was the iPhone 5 in 2012. It took less than a decade for smartphones to overwhelmingly substitute for feature phones.

Smartphones predominate in U.S. handset purchases since 2011

Market dominance and concentration in supply

Other measures commonly used to assess economic efficiency in antitrust investigations also indicate that mobile technology markets are healthy and dynamic.

Some industries are inherently and necessarily highly concentrated. For example, Boeing and Airbus have a duopoly in supply of large commercial aircraft. The number of suppliers and the relative positions among them reflect industry economies of scale, barriers to entry, strategic focus and competitive strengths in execution with customers purchasing largely based on technical specifications, cost and delivery performance. Trends in market concentration over several years are very informative about how market competition is developing.

The supply of mobile handsets including smartphones has remained unconcentrated for many years because merchant supply of highly standardized components and open standards in cellular technologies have reduced barriers to market entry to low levels. In the 2000s, Nokia dominated with a vertically integrated supply chain, up to 40 percent market share in handsets and even higher in the high-end devices that were precursors to modern smartphones. Since smartphones became mainstream in the 2010s, there have been many new market entrant OEMs and the positions of some leading incumbents including Nokia and BlackBerry have collapsed due to competition.

Concentration is inevitably rather higher in digital baseband modem chips than in mobile phones, because supply is rather different than in handsets including much higher barriers to entry with R&D requirements and economies of scale in product design and production. While some modem chip vendors have exited the marketplace in the last decade, MediaTek’s share of LTE modem chip sales rose to 24 percent in 2016 before falling with significantly rising shares for vertically integrated suppliers Samsung and Huawei with its HiSilicon division. Large shifts in market share away from leaders and rapid reductions in concentration indicate intense competition.

The extent of concentration in supply can be quantified by reference to the Herfindahl-Hirschman Index, a widely accepted measure of market concentration in competition analysis. The HHI is calculated by summing the squared market shares of all firms in any given market. U.S. antitrust authorities generally classify markets into three types: Unconcentrated (HHI < 1,500), Moderately Concentrated (1,500 < HHI < 2,500), and Highly Concentrated (HHI > 2,500).

High concentration in LTE modem chip supply was very transient. Concentration in new market segments is likely to be high as the first few suppliers enter. Between 2013 to 2016, LTE modem chip supply concentration trended down to lower levels than in the 3G UMTS, 2G GSM/GPRS and 3G CDMA modem chip segments. LTE supply concentration has fallen to a Moderately Concentrated level and Qualcomm now accounts for less than 40 percent share. In contrast, UMTS (i.e. WCDMA/HSDPA) and GSM/GPRS/EDGE modem chip supply concentration has increased as MediaTek’s shares have grown to exceed 50 percent in each of these market segments while Qualcomm’s shares have diminished to only a few percent in UMTS and zero percent in GSM/GPRS/EDGE. While the FTC also alleges that Qualcomm has illegally dominated CDMA chip supply, since 2017 it is VIA Telecom (acquired by Intel in 2015) that has the highest share of this market segment and largely accounts for the high and increasing HHI in this market segment.

Market concentration in supply of baseband modem chips and handsets including smartphones

Qualcomm has excelled in bringing the latest advanced features to market most rapidly, as has MediaTek with mid-range, low-cost solutions and VIA Telecom has focused on CDMA.

A lot more bang for your buck

Meanwhile, consumer prices—measured in dollars or whatever currency prevails nationally per gigabyte of data—have fallen dramatically to a small fraction of levels around the turn of the last decade, as is evident in the US. This has been due to the low costs of LTE technology and fierce competition throughout the value chain.

Source: Qualcomm’s Opening Statement presentation, p29, at trial on April 16, 2019. In Re: Qualcomm litigation Case No. 3:17cv0108-GPC-MDD (S.D. Cal.)

“I skate to where the puck is going to be, not where it has been”—Wayne Gretzky

Surviving, let alone winning in industry sectors with rapid technological change and major investment requirements is not easy. Sound strategic and commercial judgment as well as a modicum of good luck are as important as technical competence. Intel’s various incoherent forays in cellular chips make a pertinent case study in strategic failure, not of abuse by a much smaller company.

Each generation of mobile technology is commonly portrayed and perceived—particularly in hindsight—as a single entity. However, with a new 3GPP standard release every year or two, LTE was first specified in Release 8 (2009) and then improved with increased functionality and performance six times before 5G was first standardized in Release 15. Whereas LTE and 4G are now universally regarded synonymous, it was only with Release 10 (2011) that LTE became compliant with International Telecommunication Union’s IMT Advanced specifications which are generally regarded as defining 4G. LTE Advanced Pro in Release 13 (2016) was another significant performance upgrade milestone.

Numerous technological improvements in LTE’s introduction and continuous development have increased spectral efficiency, spectrum reuse, data speeds, network capacity, reduced latency and also provided entirely new capabilities. Improvements include the OFDMA waveform, carrier aggregation, MIMO, advanced channel coding, higher order modulation, use of unlicensed spectrum and improved positioning technologies.

Standards setting organizations (SSOs) map out, for all to see, which new features will be introduced in each new standard release. That is very helpful for product developers, but so much resulting from the collaboration among SSO participants and appearing in the standards means chip and network equipment vendors are chasing multiple moving targets. The general direction of travel might seem obvious in hindsight, but fast pace and good judgment with selection and commitment to the most important improvements are essential. Some features turn out to be much more important than others. While device OEMs design and manufacture smartphones, it is largely the modem chip vendors and network equipment OEMs that have developed and supplied the technologies and products that implement or enable MNOs and users to benefit from latest standard-based improvements.

Leaders must not only be the fastest to invent and bring to market, they must also know where and when to place their big bets. Those that make the wrong call will suffer significant adverse consequences with exacting requirements from OEMs and their MNO customers.

Self-harm

While Intel its portrayed as the major injured party in the FTC’s case against Qualcomm, Intel failed in modems for several significant reasons at Apple and elsewhere, despite its deep pockets, position as a leading semiconductor chip designer and silicon fabricator. It even squandered the advantages of its incumbency as the sole modem chip supplier to Apple for iPhones and iPads from 2007 until 2011, while also being, in that period and continuing to be ever since, Apple’s sole supplier of CPUs for its Mac computers.

Intel failed to recognize the (mis)match between what it was pushing and what OEMs wanted.  It foreclosed itself from all but a relatively small proportion of the LTE modem chip market segment. Most smartphones include chips that integrate the baseband modem processor with an application processor that is based on the ARM instruction set and architecture. There was never a distinct “thin modem” market—in the sense of defining a relevant market for competition purposes. Modem suppliers need to address the entire market segment of modem supply—including thin and integrated modems—to be efficient in development and production of technologies and products. The proportion of thin versus integrated modems in smartphones has fallen from around 40 percent in 2011, when most smartphone OEMs were just getting started, to only teens of percent in the last few years.

Intel has offered no ARM-based application processor since it sold its XScale business to Marvell in 2006. It failed in its alternative strategy with attempts to get its “Intel Architecture-based [X.86] processors” adopted in smartphones and tablets. Its x.86-based Atom application processor was uncompetitive for many reasons including higher power consumption and its inferior supply ecosystem with higher costs for the associated components needed to support the chip. Intel fared poorly despite spending billions on subsidies in its attempts to build a mobile device beachhead in tablets. It never achieved any more than a small share of supply to tablet OEMs and no more than a trivial share of supply to smartphone OEMs.

Intel captured Apple, as Apple’s sole 3G modem supplier for iPhones, when Intel re-entered the market with its acquisition on Infineon’s cellular chip division in August 2010.  However, Infineon would have known by then— as Intel should have also known through its acquisition due diligence, if that had been carried out thoroughly and competently—that modem business was about to be lost with the upcoming February 2011 launch of an iPhone 4 model based on a Qualcomm chip. Intel’s other 3G thin modem customers included Samsung and Huawei that subsequently have significantly switched to vertically integrated supply. Apple aside, Intel’s share in LTE supply was never more than a percent or two. Bad luck or poor market intelligence, judgment and execution?

Intel was too late in finding its voice

Having been ejected from Apple in 3G, Intel was very anxious to get back in there with LTE. But it failed to keep up with the pace of standard-based developments in LTE. Intel was late with LTE-Advanced (i.e. actual 4G) improvements and was at least two years late in being able to offer voice over LTE (VoLTE). LTE had no voice capability before VoLTE was standardized. Leading mobile operators—including AT&T and Verizon in the US—demand certain features in devices to exacting schedules.  For example, with major operators including T-Mobile US and Verizon launching VoLTE services by 2014, they were insisting on VoLTE in new phone models beforehand. This was significantly driven by their desires to seed the market for use of the new service and so that they could shut down older-generation networks, such Verizon’s 3G CDMA network by the end of 2019. Despite the above efforts, this date has slipped to 2020 to avoid leaving customers with phones that cannot make phone calls.

Many devices are used on networks for more than five years following new model introduction. Popular models are commonly sold for more than three years before being withdrawn from sale. For example, Verizon is still selling the iPhone 6s (2015) and Galaxy S7 (2016). The last of those sold are likely to be used for another few years before being retired.

It was not until 2016, with chip supply for launch of the iPhone 7 in September that year, that Intel could meet voice specification requirements of Apple and its MNO customers in LTE. In contrast, Metro PCS launched VoLTE with the LGE Connect 4G in January 2012 and VoLTE was incorporated in the iPhone 6 (September 2014). Qualcomm LTE modems were included in both devices.

What was he smoking?

In addition to strategic conflicts, Intel also suffered from delusions at the highest level. For example, despite Intel not being able even to do voice in LTE, in 2016, former Intel CEO Brian Krzanich proclaimed that Intel was the leader in 5G, including in modem technology. This was way off the mark. In fact, the main reason Intel exited modem supply, announced by replacement CEO Bob Swan in April 2019, and why Apple settled all its litigation with Qualcomm the very same day, was that Intel could not keep up the required pace and schedule in its 5G technology developments. Apple was clearly fearful it would not be ready to introduce 5G iPhone devices in 2020 without switching back to Qualcomm’s supply.

While the period of Qualcomm’s alleged misconduct is only to 2016, the FTC regurgitates the Court’s contention that Qualcomm will remain dominant in the transition to 5G, but without explicitly alleging any abuse there. Qualcomm has clearly competed on the merits in establishing itself as the leader in 5G modem chips. With a new air interface and addition of mmWave bands (i.e. with high-band frequencies at 24 GHz and abo)  its astute competitive strategy has included unmatched technology development in modems and acquisition in RF front-end components.

Voodoo economics II

The FTC’s most significant but hotly contested theory of harm, and that the district court has accepted, is that Qualcomm’s royalty charges to OEMs impose a “surcharge” on chip competitors that limits their ability to invest in R&D and makes them unable to compete on the merits such as in technical performance. Why the royalty charge is any different to any other necessary input cost—such as that for the display or battery components—is a mystery. OEMs are charged royalties non-discriminately regardless of modem supplier. According to the FTC’s allegations, and despite evidence to the contrary, Qualcomm’s royalty charges are excessive and are only paid because it supplies “must have” chips and has a “no license, no chips policy.”

That theory suggests that elimination of the alleged surcharge should enable a chip vendor to become competitive. However, Intel still failed despite that supposed relief. It commenced LTE modem chip supply to Apple for the iPhone 7 in 2016 and was the sole modem supplier to Apple for all subsequently launched models, including the iPhone X (2018) and iPhone 11 (2019). By April 2017, royalties paid to Qualcomm on Apple products, including those with Intel’s chips, had ceased and were not resumed until April 2019.

Rather than capitalizing on this window of opportunity, Intel failed on the merits, as indicated by its chip market exit, despite this non-payment of any royalties including the alleged surcharge to Qualcomm. While Intel’s dollar expenditures on R&D had been increased, R&D decreased as a percentage of its rising sales (i.e. including new sales of modems to Apple): $12.7 billion (21.4 percent) in 2016, $13.0 billion (20.8 percent) in 2017 and $13.5 (19.1 percent) in 2018. Based on the FTC’s economic theory, Intel supplying Apple should have had lower costs than other chip suppliers whose customers were still paying Qualcomm royalties. LTE modem chip market segment shares for Huawei (HiSilicon) and Samsung, that also buy Qualcomm chips and pay it licensing fees, have continued to increase since 2016.

Be careful what you wish for and be grateful for what you have

There will always be prophets of doom and self-serving interests who predict harms such as market failures if changes are not made. The kinds of accusation made by the FTC about Qualcomm in LTE echo those made against Qualcomm in UMTS, just before mobile broadband with HSDPA took off and before those charges were dropped  by the European antitrust authorities.

Prior to the introduction of LTE and for several years subsequently it was alleged that royalty stacking would make the technology prohibitively costly, particularly since LTE royalties would stack on those that had to be paid in multimode equipment including 2G and 3G.

A royalty stack never appeared in 3G and in never appeared in 4G. The only harms are the contentions over patent royalties that are costing a lot in legal fees and are enabling implementers including Apple and others to “efficiently infringe” by holding out from payment while enjoying the benefits of rich standard-based technologies.

As I explained here last month and previously, with patent licensing fees paid less than five percent of handset prices, such costs are dwarfed in comparison with the value that has been created with annual revenues of around half a trillion dollars in handsets, more than a trillion in operator services plus huge revenues to the over-the-top players that have flourished over the last decade in the smartphone and mobile broadband revolution with LTE.

Uber, Instagram, FaceTime and Netflix all launched in 2010 and have, among many other OTT providers, significantly benefitted from LTE’s mobile broadband capabilities. For example, Netflix has enjoyed a 4,000 percent stock rally with its streaming services significantly used on mobile devices. Smartphone OEMs have benefitted from these services because users want devices that can best access these services. Mobile operators benefit because they generate mobile broadband service revenues even from “free” services that are delivered on top. These services are transforming the way we work and play with daily hours of smartphone usage even exceeding TV watching.

Significant ongoing development has been required since introduction of LTE and the first 4G technologies. Whereas coverage and capacity were easily established with the deployment of additional spectrum at 2 GHz and below, there is nowhere near enough spectrum available there to satisfy escalating mobile broadband capacity demands. New technologies including Massive MIMO antenna arrays and HPUE to increase device uplink radio transmission performance in the latter LTE releases and in 5G are expanding capacity by better exploiting frequencies above 2 GHz. 5G has been designed to access mmWave bands with orders of magnitude more bandwidth than is accessible with previous generations of technology. All this, yet alone what is yet to come with URLCC and mMTC in the Internet of Things, would not be possible without major ongoing R&D investments. These should not be taken for granted—particularly in the race to establish and maintain global leadership and national security in 5G.

This article was originally published in RCR Wireless in a very similar form on 7th January 2020.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.

US Copyright Royalty Board Significantly Raises Rates on Streaming: Is it Enough?

The Copyright Royalty Board in the United States has issued an initial determination and accompanying regulations that raise the amount of royalty available to songwriters for streaming, which will impact services such as Pandora, Spotify, Apple and YouTube.  Variety has an excellent article on the impact of the decision, which seems substantial—almost boosting royalties by 50%.  Paula Parisi of Variety explains:

The ruling effects only the mechanical license, a term that literally references the rolls mechanically cranked through player pianos – arguably the first mass distribution media for recorded music. Albums, CDs and downloads also fall under the mechanical license (the thought being that like piano rolls, these are “physical copies,” although the idea that a digital stream is concrete by virtue of being stored at various points (on a server, in a buffer) is somewhat specious; analog broadcast signals also collect at various points, and digital radio and TV in practical terms is distributed in the manner of a stream.

But broadcasts – digital or analog – are considered a public performance, and garner what is currently a higher  “performance license” rate. Songwriter Rodney Jerkins illustrated the discrepancy in September at the Recording Academy’s District Advocacy Day in Los Angeles by sharing an accounting statement for “As Long As You Love Me,” a top 10 hit for Justin Bieber in 2012. By 2013, Jerkins’ stake in the song generated $146,000 in performance royalties, while streaming revenue from the same period garnered $278 for 38 million Pandora plays and $218 for 34 million YouTube streams. “If I owned 100 of the song I would have made $1,100 from YouTube,” Jerkins said, proclaiming, “Those numbers are criminal.”

The article explains how arguments for the lower rate were justified because of the need to allow the industry to grow.  Of course, once the industry grows there are public choice issues associated with an industry’s attempt to maintain benefits or lack of regulation to allow the industry to flourish.  Even at a 50% increase, the songwriter will still only receive around $560 for 38 million Pandora plays under Jerkins' example.  It looks like we’re still trying to give the streaming business more time to mature. 

US Treasury Department Issues White Paper Critiquing EU State Aid Investigations of Transfer Pricing Rulings

On August 24, 2016, the U.S. Department of Treasury issued a White Paper titled, “The European Union’s Recent State Aid Investigations of Transfer Pricing Rulings,” explaining United States transfer pricing concerns with the EU Commission.  The state aid investigations of note, include Apple, Starbucks, Fiat/Chrysler and Amazon.  There are indications that there may be more investigations launched.  Notably, the EU Commission’s positions, apparently, mostly involve transfer pricing concerning intellectual property. 

In February of 2016, Treasury Secretary Lew authored an open letter to the President of the Commission, Jean-Claude Juncker, stating:

that the Commission’s “sweeping interpretation” of State aid doctrine “threatens to undermine” the progress made by the international community “to curtail the erosion of our respective corporate tax bases” and described four principal concerns.  First, the Commission has “sought to impose penalties retroactively based on a new and expansive interpretation of state aid rules.”  Second, the investigations appear “to be targeting U.S. companies disproportionately.”  Third, the new enforcement theory “appears to target, in at least several of its investigations, income that Member States have no right to tax under well established international tax standards.”  Fourth, the Commission’s investigations “could undermine U.S. tax treaties with EU Member States."

The White Paper further explains the concerns and in the Executive Summary states:

The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions.  The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases.  Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.

The Commission Should Not Seek Retroactive Recoveries Under Its New Approach.  The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries.  Because the Commission’s approach departs from prior practice, it should not be applied retroactively.  Indeed, it would be inconsistent with EU legal principles to do so.  Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries. 

The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System.  The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations.  Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law.  The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.

[Hat tip to Pepperdine University School of Law Professor Paul Caron's TaxProfBlog]

Subsidized IP Litigation Insurance in Japan and Increased Enforcement in China

As reported by Ellie Wilson on the IP Kat blog, the Japanese Patent Office (JPO) has announced a program whereby half of the premiums for IP infringement insurance will be covered.  The program is a partnership between the JPO, the Japan Chamber of Commerce and Industry, The National Federation of Small Business Associations, and three insurance companies.  Specifically, the subsidy is directed at making affordable IP infringement litigation insurance for SMEs that are operating in countries outside of Japan. The announcement appears to cover both the need for the SME to fund IP infringement litigation against alleged infringers and to defend litigation.  Notably, the announcement explicitly mentions China as a market of concern; although my guess is that a concern with so-called patent trolls in the United States is also an issue. 

This announcement comes close in time to reports of increased enforcement of intellectual property rights in China, particularly as China reportedly is attempting to move toward an innovation and services based economy.  Interestingly, the official website for The Supreme People's Court of the People's Republic of China published an article by Ma Si (China Daily) concerning the move of smart phone wars to China titled, "Chances high for more patent cases."  The article discusses the recent stayed injunction against Apple and the prospects for more patent cases given actions in the United States concerning Huawei.  Huawei and Samsung are also embroiled in litigation in China.

Given the importance of SMEs to economic growth and job creation as well as the general high cost of litigation, it will be interesting to see if more countries move to subsidize IP litigation insurance.  Are there any other countries subsidizing IP litigation insurance?  Instead of regulating against so-called patent trolls, is this where government should intervene--helping insurance markets develop and lowering the cost of insurance, particularly for SMEs?  Should government back insurance funds for IP litigation?    

Beijing Regulator Issues Injunction Against Apple iPhone 6

Ali Qassim authored an article titled, "Expect Frequent Fast Injunctions in China, Says US Lawyer," on June 7, 2016 published in Bloomberg BNA.  The article reported on the remarks of a Beijing based-US attorney at a conference concerning the availability of remedies, including injunctions in China [behind a pay wall]. Today, June 17, 2016, Eva Dou of the Wall Street Journal has reported in an article titled, "Beijing Halts Sales of iPhone 6, Citing Patent Infringement" that a regulator in Beijing has issued an injunction against the sale of the iPhone 6 for infringing a design patent of Shenzhen Baili.  The article notes: 

It wasn’t immediately clear what impact the order would have. Some mobile-phone stores in the city said they had already stopped selling the two models months ago, switching to newer models. Apple will soon end production of both models, according to a person familiar with the production plans.

According to The Street, shares of Apple are falling.  Should we expect more investment in research and development, and patenting in China given the reported easy availability of remedies in China's huge market?  

 

East Texas Jury Awards over $600 million to VirnetX against Apple

In a long running patent dispute generally involving internet related processes, VirnetX has been awarded over $600,000,000 against Apple by an East Texas jury.  After reviewing the history concerning the patents in suit in Westlaw, I have to say that this is quite a convoluted matter.  It looks like the stakes are high, so all of the litigation and related activity is presumably justified.  PR Newswire notes that VirtnetX previously was awarded $358 million, but the U.S. Court of Appeals for the Federal Circuit vacated that award.  Notably, the allegedly infringing technology was Apple’s “modified VPN On Demand, iMessage and FaceTime services.”  East Texas juries fail to disappoint.  Importantly, Professor Dennis Crouch at the Patently Obvious blog notes: "Interesting, after the huge verdict bump, the market cap for the company is $250.9M. That may be about right after paying for fees, costs, and taxes." (Hat tip to BNA and Professor Dennis Crouch’s Patently Obvious Blog). 

Patents and Share Prices - Ericsson

Apple and Ericsson have been engaged in a number of patent infringement suits over the past few years. Finally, on Monday Ericsson announced that it had reached a settlement with Apple under which Apple would be granted to all of Ericsson's standard-essential patents, as well as to certain other patent rights (which are not named). We've often reported on these patents on this blog and my fellow contributor Keith Mallinson has studied them extensively and their effect on competition.

The Apple settlement will apparently boost Ericsson's revenue from licensing of intellectual property rights in 2015 to SEK 13-14 b (around USD 1.5 billion) compared to 2014's revenue of SEK 9.9 bn reported here. It's not surprising that Ericsson's share price jumped yesterday from Friday's closing price of USD 9.12 to USD 9.62 at 09.50 Eastern time after announcement and closed today (Tuesday) at USD 9.56. Apple's price did not change much during the same period.

It's clear that licensing revenue is becoming a significant contributor to Ericsson's bottom line. In 2014 operating income was reported to be SEK 11.1 Bn, which included a payment from Samsung for an IPR licence of SEK 2.1 Bn.  The amount paid by Apple remains confidential and will include an ongoing royalty (as does the Samsung agreement) and so there will be further contributions to Ericsson's bottom line over the next few years.

The European Commission, among other organisations, have been concerned that the smartphone patent wars damage competition, as reported in the Financial Times. The Apple/Ericsson agreement show how patent can work - Ericsson receive additional revenue for their work on the development of telecommunication standards and Apple pay for access to this technology.

World's Powerful Brands

Most parents know the value of the Lego brand. It’s the toy of choice to give children and keeps them happily amused for hours, with only the occasional interruption as an unhappy child asks you to help her take apart something that was put together wrongly or intepret the pictorial instructions. It was therefore great to see that the London-based company BrandFinance have now identified the Lego brand as one of the most powerful in the word - apparently overtaking Ferrari.

Powerful is, however, not the same as valuable, the report by BrandFinance concludes that Apple’s valuable trade mark is apparently worth USD 128 billion. The authors of the report (available here) note that Apples ability to monetize its intellectual property really sets the company apart.

Anyone wishing to review the full table of brand values can find it here.

It is no fun to be a mid-market brand, whether in smartphone or diapers

When it comes to brand placement, it is not easy these days to be in the middle of your product segment. This was graphically brought home this week in the announcement by Apple that disclosed profits of $18 billion dollars, reportedly the single largest quarterly profit in corporate history. To a large degree, Apple’s success was due to the popularity of its iPhone 6, which has become the hands-down winner in the premium sector for smartphones. By contrast, Samsung announced another dismal quarter for smartphone revenues and faces the likelihood that Apple will recapture the lead in the overall number of smartphone sales. Samsung is staring at the dire prospect of being sandwiched between Apple at the top end, and a number of Chinese and Indian competitors at the low end of the smartphone market. In a world where the middle class is being hollowed out, being mid-market with your product is an alarming prospect.

But the danger lurking in being in the middle of your market is not limited to high profile products such as the smartphone. Something similar is happening in the market for baby diapers (“nappies” to those of you on the eastern side of the Atlantic), a product close to this grandfather’s heart. According to a report last week in Reuters, “Diaper wars: Kimberly to take on P&G through innovation, higher ad spend”, Kimberly-Clark, the well-known US personal care products company (think Kleenex tissues), faces a similar problem as it competes in the diaper market with its even larger competitor, Procter and Gamble (“P&G”). The problem for Kimberly-Clark is that P&G has come to dominate both the premium and down-market segments of the diaper market, the former with its Pampers brand and the latter with its Luv brand. As a result, the market for diapers seems a lot like that for smartphones, at least for those in the middle.

Thus consumers, aka mothers, of diaper products are increasingly opting for either premium or down-market brands, while Kimberly-Clark’s competing product is the mid-tier Huggies brand which, in a word, is a diaper product “without a real identity.” Put in dollars and cents terms, Huggies is the principal source of Kimberly-Clark’s $7 billion in annual sales in its baby care products business. By contrast, the Pampers brand itself brings in revenues of over $10 billion for P&G. As for the Luv-brand diaper product, the Wal-Mart website showed the lowest-priced mid-tier Huggies Snug & Dry 44-pack for a newborn at $8.97, while the price of the comparable P&G's 48-pack of Luv diapers is $6.99. In response, Kimberly-Clark would seem to have two possibilities, both of which involve moving beyond the mid-market segment for diapers. It can try to market a genuine low-price competitor to the Luv’s line or come up with a feasible competitor to the Pampers brand.

But how to accomplish this? At the low end, Kimberly-Clark can only cut the price of its Huggies product by such much. In tandem, the company somehow has to come up with an “improved” Huggies’ product at a lower price point, in effect to offer consumers “more for less”. In other words, in order to extricate itself from the ever-shrinking middle of the diaper market, Kimberly-Clark faces the daunting challenge of ramping up R&D and innovation to come up with diaper products that can compete both at the low end and the high end, as well as to ramp up advertising and promotional spending in support of these products. It is estimated that these efforts will cost Kimberly-Clark $500 million dollars. Once again, in dollars and cents terms, Kimberly-Clark expended approximately $3.71 billion overall on marketing and research in fiscal 2014. By contrast, P&G spent $9.73 billion in 2013 just on advertising. All of these efforts, to remind you, are directed towards moving Kimberly-Clark out of the middle of the product segment.

True, the company may have has little choice (Kimberly-Clark saw at 6% drop in its shares last week). However, one wonders to what extent a company can simply decide that it needs to innovate more (and in a hurry) to better compete in the marketplace, and to make good on its strategy. One would have thought that innovation is an ongoing aspect of company life. Branding compounds the challenge: if Kimberly-Clark succeeds in coming up with “more for less” so it can compete at the low end, it will then need to reposition the Huggies brand accordingly. How exactly does one move a brand from the middle to a down-market segment? The alternative is to come up with a new brand identify for the down-market product, but that presents its own set of challenges. The same will hold true if Kimberly-Clark also seeks to launch an up-scale diaper product under a new brand name. The upshot is that while a commitment to R&D innovation and branding support both seem worthy goals, the likelihood of success is far, far from being assured.

How “Deep” is the Connection with the Brand: Harris Interactive’s EquiTrend® Rankings

Harris Interactive has released its EquiTrend® Rankings of brands.  The rankings attempt to ascertain the connection between a brand and the consumer—in other words, “how deep is the connection between the brand and consumers.”  Harris Interactive EquiTrend®:

examines the predictors of in-market performance: Brand Equity, Consumer Connection, and Brand Momentum.

We capture and analyze the opinions of over 38,000 Americans on 1,500+ brands from 150+ industry categories and break responses down by 28 demographic attributes to help corporations target consumers, generate quality media coverage, support communication efforts, and inform future business strategy.

The capstone of the study is the Equity score, a snapshot of a brand’s strength, derived directly from consumer responses. Brands that are ranked highest in their categories receive a Harris Poll EquiTrend “Brand of the Year” award and the option to promote the award among their customers.    

The rankings are essentially broken down by industry and then product or service category.  The leading computer brand is Apple, which is followed by HP, Dell, and Sony.  The leading computer tablet is the IPad.  The next best are Kindle Fire, Google Nexus, Samsung Galaxy, and HP Slate.  In the consumer electronics category for cameras, the ranking is Canon, Nikon, and Sony.   And, in the food category for chocolate candy, Reese’s Peanut Butter Cups is first followed by M&Ms Peanut, M&Ms Milk Chocolate, Hershey’s Kisses, Hershey’s Milk Chocolate, Snickers, Kit Kat, and Reese’s Pieces.  For household products in the vacuum category, the ranking is Dyson, Hoover, Kenmore and LG.  The leading brand in telecommunications for mobile phone is Apple and is followed by HTC, Samsung, and LG.  There are over 23 "industries" and over 150 product or service categories.  Looking for a partner for branding purposes?  Enjoy! 

Is the Apple brand getting a bit of a free-pass?

The hottest topic in the high tech world must certainly be the recent developments surrounding Apple. In particular, we refer to the drop in the share price from over US$ 700 per share to just under (for a moment) US $400 per share, the slowing profitably in the iPhone and other products, leading to the first quarterly decline in year-over-year net revenue in years here, and suggestion of the impending payment of a dividend (suggesting that the company may not have any better use for these sums). Truth be told, the hagiography surrounding the late Steve Jobs and the unprecedented success of the company over the last decade was probably unsustainable, such that this spate of less than unequivocally flattering news for Apple cannot be said to be a complete surprise. To expect the company to continue to come up with world-beating new product categories, blending design and functionality, together with a unique supporting ecosystem of contents and users, requires a certain faith more appropriate for more spiritual lines of business. Perhaps all the company's recent challenges mean is that Apple may no longer be a completely unique success story, but it is still among the world's most successful and admired companies.

Nevertheless, in listening over the last few weeds to the punditry and podcast chatter about the company, one wonders whether the company is getting a bit of a free-pass on the strength of its goodwill and reputation. We have previously suggested here that Apple's ultimate asset may well be its goodwill and reputation, which at the business level enables it to enjoy higher profit margins, even as its technological/design uniqueness may be diminishing in certain areas. But the halo effect of the company's goodwill and reputation may also color the way that commentators relate to the company. I thought of this in particular in listening to a recent Bloomberg podcast interview with Ken Segall, the Apple advertising executive who created the name “iMac” and who had a lead role in the company's famous iconic "Think Different" campaign ad campaign here. Segall is also the author of Insanely Simple here, a widely discussed book about the mind-set of Steve Jobs that fueled the company's unimaginable growth.

Two points in Segall's interview particularly stick out. The first relates to the claim that Apple, and especially the various models of the iPhone, are merely incremental rather than revolutionary, and it is "revolutionary" that has characterized the Apple story since the launch of the iPad. Segall seemed to find the very claim odd—of course the various models of the iPhone are incremental, you can only have one revolution per product (what he called the "dark side" of innovation). Nevertheless, he went to speak in rapture about his own experience with the iPhone 5, expressing the kind of personal attachment to the device and ecosystem that lies at the heart of the product's continuing success. At that moment, one of the presenters jumped in and observed that she was actually a bit disappointed with the iPhone 5, since in her view the model did not really add a whole of functionality and features to the previous model. Segall simply ignored her comment, perhaps to suggest that the presenter did not really "get it" with respect to what makes the iPhone special.

In that context, the interview went on to mention that the Galaxy s4, Samsung's about-to-be launched competitor to the iPhone 5, has received tepid reviews from pundits ranging from the Wall Street Journal here to the New York Times here. The sense one gets of this tepidness is that the Galaxy s4 is "merely" an incremental improvement of the Galaxy s3 and it lacks the "class" of the iPhone 5. To a listener such as me, I had a tough time trying to figure out why the commentary about iPhone 5 and the Galaxy s4, respectively, seem to be coloured with different rhetorical brushes, despite what seems to be a common theme. (Full disclosure, I own a Galaxy s2 device, for the simple reason that the price was right and it does what I want it to do. However, common wisdom holds that the majority of people of my generation own an iPhone. Common wisdom also holds that, at least until now, the iPhone is clearly the preferred device as a matter of status. If you want to make a social statement, you do so with the iPhone.)

It seems to me that part of the answer is that Apple may be enjoying a bit of a free-pass based on the continuing strength of its goodwill, even at the price of a bit of some cognitive dissonance between the strength of its reputation and questions about its continued superiority in product development. Don't get me wrong, there is nothing wrong with this free pass, it being one of the reasons that a company so covets creating a strong brand. More power to Apple on that account. Nevertheless, even the world's most powerful brand may not be able to enjoy such a free pass forever. At some point, the aphorism—"what have you done for me lately?"—will kick on and the answer to the question may have decisive impact on the continuing strength and staying power of the Apple brand as a major component in its phenomenal success story.

Apple v Samsung: The War Over "Cool"

Last August, we published a blog post--"Apple v Samsung: Don't Take Your Eyes Off the Brand and User App Ball" (here) in which we questioned whether Apple's successful verdict in suit against Samsung would be a game changer in the smartphone world. Views were heard far and wide than the case would have a major impact on the industry by forcing Apple's competitors to engage in more "genuine" innovation in the smartphone industry, both with respect to handsets and operating systems. Our sense was that this view was missing the mark on the role of IP; Apple's ultimate competitive advantage in this product space would be determined more by the power of its brand to connote a unique product ecosystem than by any victory in the patent wars.

At the time, our observation suggested that Apple would continue to be the winner because of the strength of its brand. With its stock reaching the $700 per share, this position seemed reasonable. But how times have changed: Apple was later denied the broad injunctive relief that it sought against the sale of certain Samsung smartphones in the US; the court cut by nearly 50% the jury award of more than $1 billion in favour of Apple, with perhaps further reductions to come; and Samsung has become the largest manufacturer of smart phones by volume of phones sold, as Apple struggles to find a convincing commercial response against Samsung's multiple price point product line.

But the most telling development was Samsung's widely-covered launch last week in New York of its new Galaxy s4 model smartphone here. For the first time, the launch of a smartphone product by an Apple competitor was being treated as a media event in its own right. While pundits differ on just how successfully "splashy" the launch really was, and just how game-changing the new features on the Galaxy s4 are here, one point stood out: many commentators opined that Samsung was on the verge of replacing Apple as the "cool" brand for smartphone devices. Thus, iPhones are for one's parents; Samsung is for the younger crowd. One noted interviewee on Bloomberg radio stated bluntly that Samsung has supplanted Apple as the product of choice, if "cool" is the driving factor in deciding what smartphone to purchase. As I recall, the patent wars were not mentioned at all during the interview.

The question is: how did this happen? How is it that the very symbol of high-tech "cool", the company that turned owning a phone into a form of fashion statement, is itself at risk at being perceived as holding the short end of the image stick? I want to suggest that it might be that the patent wars themselves have impacted on the public perception of Apple. In many popular circles patent litigation, rather than being seen as a last-resort means by a party to protect its core technology against an opportunistic and scrupulous defendant, is increasingly viewed as simply a means for hitting the jackpot of an award in the millions or even billions of dollars. When I show to colleagues or a lecture audience the design patents that were the focus of the U.S. case, the response is a combination of disdain or worse. The design patents at issue are viewed as trivial, rather than constituting the company's core technology. Moreover, in a market that is dominated by two actors, Apple's (ultimately unsuccessful) attempt to obtain wide-ranging injunctions were seen by segments of the public as a ploy to limit marketplace competition at the expense of the consumer. This is especially so when each new generation of smartphone is perceived as containing only incremental improvements in comparison with the previous model.

Apple's patent wars might make perfect sense as a matter of strategy, but they hardly reinforce the idea that the iPhone and its ecosystem are, in a word, "cool." In a world where branding and image may amount to more and more of a company's most valuable IP, Apple's patent wars may have only served to undermine the heart of the company's competitive advantage in smartphone branding. Six months later perhaps we see the result-—the company's products may be at risk of not being as "cool" as those of its competitors. If this is true, Apple would be well advised reconsider the role of its patent strategy in supporting the reputation and goodwill of the company's smartphone products. .

Apple Clocks now run to time - and how to make USD 21 Million

It's well known that swiss trains run to time - and it's good to see that Apple's iOS Operating System is using the image of the iconic Swiss railway clock on the screen. Unfortunately Apple seem to have forgotten to check the trade mark rights on the image in Switzerland which has now lead to around CHF 20 Million being paid in a one-off licence fee, according to Swiss Daily Tagesanzeiger. Given the popularity of Swiss railways (8,585 US billion kilometres travelled in the first half of 2012), this is not really going to reduce the fares in Switzerland. It's however a nice little present in the run-up to Christmas and a reminder to all Apple fans as to how well trains run in Switzerland. Presumably, however, the Mondaine watch company is not madly happy about the deal. They've been producing the "Offical Swiss Railway" watches under licence to Swiss railways for a number of years. Further information (in English) at the following link.

Apple now top dog on US stock market

It's intriguing to see the neck and neck race between electronic company Apple and oil company Exxon Mobil for the top dog position on the US stock market. A race between Apple's intellectual property and the raw materials of Exxon Mobil. It's true that ExxonMobil also has a large amount of patents on the extraction and production of fuels. Apple's IP position seems to be much wider comprising not only patent protection, but also software and probably equally valuable: design protection. The German Handelsblatt commented in an article today: Elektronik-Riesen: Apple stößt Exxon Mobil vom Börsen-Thron - Aktien - Finanzen - Handelsblatt
(German only). The price of the ExxonMobil shares follows broadly the oil price which suggested that stock analysts clearly use that indicator as the main element of value in Exxon Mobile.

On the other hand the article concludes that Apple's share price has a long way to go.

This author has been looking at Apple for some time. The company is filing a significant number of patents - not yet as many as IBM or Microsoft. The company is also becoming highly litigious in defending its rights.

Not only is Apple actively defending its patents but its injunction against Samsung based on design rights (see the FOSS blog report here and commented by our friendly Kats here) shows Apple's interest in retaining its rights to its "look and feel".

Anyone with a penchant for numbers can have goggle at the 10Q filing available here. Revenue from "other music-related products and service - in other words iTunes, the App Store and the iBookstore" rose 29% in the three months ending 25 June compared to the previous year and is now 5% of net sales. The cost of sales must be minimal which presumably means that the USD 1.5 Million generated in three months represents substantially profit based on intellectual property.

Based on all revenue and cost of sales, Apple is reporting a gross margin of 41.7% up slightly from the comparative period in the previous year. And what about our oil friends. The 31 March 2011 accounts show consolidated gross revenue of USD 114,004 million and net income of USD 10,650 million - a substantially lower marging which no doubt reflects the fixed costs associated with oil production.

So what does this tell us. An IP-rich business such as Apple has a much higher margin and this is now being reflected in its stock price. It does not come as a surprise for Apple fans to see their favourite company .