Are Apple’s Patent Wars a Marketing Strategy?

The latest battle in the three-year long Apple-Samsung patent saga concluded few weeks ago. In contrast to previous litigation between the two tech-giants—which revolved on the overall look of the phones—this case focused around autocomplete, tap-from-search and slide-to-unlock software. Despite the technical nature of these innovations, there are a few broad managerial lessons that have emerged from this prominent patent case.

Often, managers think about patent litigation as a “narrow” strategy to protect a particular technology against a specific infringer. Plenty of management books describe patent litigation in such a narrow way: you file a suit to recover damages from someone who is copying you. The Apple-Samsung battle shows that patent litigation can be a much broader and powerful strategy. In particular, there are two features of the case which are worth pointing out.

The first one is the marketing effect of IP litigation.  “Apple says Samsung copied iPhone” was the typical news headline during the first weeks of litigation. The case was not only mentioned on specialized business press; it was front page news material for major newspapers around the globe. International news channels devoted several minutes of their prime time to the patent case. The opening statements by Apple’s lawyer, Harold McElhinny, alleging that “Samsung copied the iPhone” and that “Samsung went far beyond the world of competitive intelligence and crossed into the dark side” were translated in a multitude of languages and displayed next to pictures of Steve Jobs, one of the most charismatic CEOs of all time. How much would it cost to have similar media coverage through a traditional advertising campaign? Probably way more than Apple’s lawyer bills. And this is particularly interesting given the aggressive marketing strategy implemented by Samsung in the past few years. AdvertisingAge reports that in 2012, Samsung increased its U.S. advertising budget more (percentage-wise) than any other high tech company. For the same year, Samsung global ads expenditure was $4.3 billion; that is more than four times the expenditure of Apple. At this point it seems reasonable to add patent litigation to Apple’s history of non-traditional marketing strategies.

A second lesson from the case is that IP litigation with one competitor may strongly affect the patent strategy of other competitors. The most interesting aspect of the Apple-Samsung patent battle is that the actual technology war is not between Apple and Samsung. The real enemy of Apple is Google, whose Android operating system runs on Samsung’s phones.  So why has Apple not sued Google?  The answer is Google’s business model. Android is an open-source system, and hardware companies do not pay for it. Google profits are generated indirectly from ad revenues derived from Android device use. Instead, Samsung makes a lot of money selling phones that use Android. It is much easier to persuade a jury to force Samsung to give up some of its phone revenue than it is to persuade a jury to convict a company that gives away software for free.

But taking Samsung to court affects Google, too. First, it makes other hardware makers more reluctant to use Android after seeing Apple litigating with Samsung, the leader among Android device makers.  Second, it shows Google the value of Apple’s patents. Unsurprisingly, Google and Apple called a truce on their litigation on Google’s Motorola unit patents only a few days after the Apple-Samsung court decision. Firms need to learn the value of each other’s patents to settle disputes, and court decisions are a powerful way to learn.

In a research article recently published in the Journal of Economics and Management Strategy, I study a number of patent litigation cases which took place in the semiconductor industry between 1985 and 2005. I show that very often, a suing and counter-suing pattern, as the one observed in the Apple-Samsung battle, ends with a grand settlement in which firms enter a broad cross-licensing agreement. This is particularly likely for capital intensive firms that invest heavily in manufacturing facilities. The study suggests patent litigation plays a key role in convincing companies of the value of each other’s patent portfolios. It is not uncommon for top managers to overestimate the value of their technologies, and the damages awarded in the Apple-Samsung case confirm such overconfidence (Apple obtained less than 6 percent of the $2.2 billion requested). Court assessments help create more reasonable expectations and facilitate future technology exchange. This perspective can also explain why the settlement agreement between Apple and Google is not as broad as other cross-licensing deals observed in high-tech industries. This is because a broad cross-license agreement between Google and Apple would require much more information than the subset indirectly released from the Apple-Samsung court decision.

The Apple-Samsung patent war illustrates how patent litigation has impacts that go far beyond stopping a specific firm from copying a particular technology. This narrow view overlooks the effect it has on brands, and on other competitors not named in the suits. In considering their own IP strategy and in responding to litigation, managers can benefit from thinking more broadly about patent wars and recognizing their multiple effects.

Go to Source