Smart Phone War: Why You Should Care About Lawsuits and Mergers in the Smartphone Tech World

Introduction

It seems that every other day there is a new lawsuit in the smart phone technology world. Apple and Samsung are suing each other all over the world (and Apple is winning more battles than it lost). Companies are also merging left and right in this space. AT&T wants to merge with T-Mobile, and Google is buying Motorola Mobility.

Ever wonder Why? What are they trying to accomplish?

The answer is simple: they want to "own the stack", the four layers that make up the entire smart phone "ecosystem", and the more they control, the more ways they will be able to get money out of you, the consumer.

And that's why you should fight back, and help those who are indeed fighting already.

First of all, what are the 4 layers of the phone ecosystem?

The 4 layers of the stack

The smart phone "eco-system" is composed of four layers:

Carrier networks -- AT&T, Verizon, and so on, provide the data connection smartphones use

Devices and their makers-- the actual phones, made by Samsung, HTC, Motorola, and so on, that runs on the carrier networks

Mobile Operating Systems -- the software basis that runs on the devices, which allow them to run the apps, which is the final layer... Like Android OS, iOS, Blackberry OS, and so on.

Apps and app developers -- the little programs that runs on the phones inside the operating systems, that access the phone networks

These layers integrate, and whoever controls as much of the layers, and as much of the layer itself, has control over more consumers and thus, the revenue stream. And they exert control through licenses, agreements, patents, copyrights, and trademarks. Consumers and government fight back with lawsuits and consumer protection laws.

Let us examine each layer and how they affect you and me.

Carrier Network vs. the other layers

Carrier Networks, such as AT&T, Verizon, Sprint, T-Mobile, and so on. are the "backbone" upon which all other layers are based on. And they want to control the other layers as much as possible, or to prevent other players from dominating other layers.

Traditionally, carriers exert the most control upon the hardware layer, which they are adjacent to, though recent years you see them attempt to influence the OS and app layers as well.

Carrier vs. Hardware

Carriers enjoy a somewhat symbiotic relationship with the hardware makers.

GSM carriers are fond of making their phone locked to a specific carrier when you buy them, because they don't want to give up their control over "their" devices. They don't want you to move to other carriers, who also use GSM hardware. Laws eventually forced them to unlock their phone once your contract ran out, and unlocked phones are available for purchase when they are legally mandated.

Carriers also sign exclusivity agreements with hardware makers. For several years, AT&T had signed an exclusivity contract with Apple for their iPhone, through multiple generations, for better control. Only in 2011 was the iPhone exclusivity broken when Verizon was able to offer the Iphone 4 as well.

Carriers also request hardware makers to make them 'unique' phones, even though the differences are often rather insignificant. The Samsung "Galaxy S" phones are available in various flavors in the US, with minor differences in features, under four different names. This way, they can claim that phone as their "exclusive".

Carrier vs. Operating System

Carrier don't touch the operating system, as that is usually under the purview of hardware maker, being one layer too far.

Carrier vs. Apps

Carriers, in order to control the apps layer, often offer their own "app store", in order to counter the "app store" from the device maker or the OS maker. Carrier app store can offer billing directly to the phone bill, rather than to a separate payment system altogether.

Device and Device Makers vs. the other players

Device makers share an uneasy alliance with the carriers, as they have done so since the beginning of cell phones. However, they do try to control as much of what they can access.

Device Maker vs. Carrier

In general device makers have a symbiotic relationship with the carriers, by ceding to carrier's whims to make various "unique" handsets as selling points. Apple chose to sign an exclusive contract with AT&T for several years, and let them have the iPhone. Hardware makers, on the other hand, spend a lot of money to make their stuff really enticing, usually in cooperation with the carriers. Most phone ads are paid by both.

Device Maker vs. Operating System

Device makers often customize the operating system, such as HTC Sense, LG TouchWiz, and so on for Android. However, they have to stay within the licensing terms of the operating system. They also have to pay licensing fees to the OS maker, such as HTC paying Microsoft to make Windows Phone 7 phones. Android OS is a game changer in that it offers the OS for free (with certain restrictions).

Apple, of course, chose to make their own OS AND hardware, so they are BOTH device maker AND OS maker.

Device Maker vs. Apps

Device makers don't have direct access to the app market or compete with the app market, unless, of course, you're ALSO an OS maker.

Mobile OS vs. Other Layers

Mobile OS maker have quite a bit of control over the other layers, esp. when you also have pretty exclusive control over at least one other layers.

OS Maker vs. Carrier

OS Maker generally don't interact much with the carrier, leaving that to the hardware maker, as it is TWO layers away. (Unless of course, you're Apple, who is both OS Maker AND device maker)

OS Maker vs. Hardware Maker

OS Maker enjoys usually a symbiotic relationship with hardware maker, because they need each other to survive. Hardware makers usually have a bit more bargaining position because they can make multiple devices running different Mobile OS. HTC makes phones for Android and Windows Phone 7 (and before that, for Windows Mobile).

OS maker can't make their license too restrictive as they need several hardware makers for widespread adoption. Yet it needs control over the OS itself, to prevent the hardware maker from mucking with it too much.

One of the reasons why Android took over a portion of market so quickly is it chose to license the OS for free, thus leading to quick adoption by the members of Open Hand Alliance. On the other hand, various device makers started customizing the interface, leading to "fragmentation", and Google was forced to make the later versions more restrictive in the amount of customization by the device makers.

OS Maker vs. App Market

OS Maker has very tight control over the app market by tight control of their "developer program". It has to strike a delicate balance, in that it needs to control the developers, without discouraging development altogether. It usually does this by using a combination of licensing agreements, and aggressive enforcement through developer ID programs. You must register with valid information to become an official developer, and only official developers can put apps into the official app store.

OS maker also have full control of the "app market". OS maker often require the devices to ONLY download apps fro the official app market. It is only recently that alternative app markets have emerged. In fact, Apple have attempted to prevent Amazon from using the term "App Store" by a lawsuit. OS maker does this usually because they derive a revenue stream from the app store. Apple's store derives 30% of every sale to Apple.

Apps and App Stores vs. the other 3 layers

Apps, App Stores, and people who buy apps are the ultimate consumers, and they are almost always in conflict, and vote with their money. They need the OS, the phones, AND the carriers, but they reserve the choice to go somewhere else.

Apps vs. Carrier

Carrier never really compete with apps, unless the carrier choose to ban non-app store purchases of apps, much like AT&T did with most Android phones. That choice is usually left to the OS maker and the hardware maker.

Sometimes, Carrier can offer their own app store as competition to existing app stores.

Apps vs. Device Maker

Apps usually don't conflict with the device makers, but the OS maker. It is one layer removed, after all.

Apps vs. OS

OS maker usually have a pretty tight control over the apps, esp. the developers, but with alternative app markets, and the confirmation of the right for consumers to "jailbreak" their phones, the stranglehold has loosened somewhat.

When Two Layers Unite: Blackberry, and Apple

When Blackberry came to power, there really was no "app" layer. It's just phone, carrier, and OS, and Blackberry was both the OS maker and device maker, thus enjoying tight control and superior negotiation position over the carriers.

When Apple decided to join the smartphone market, it seems at first to be hesitant to create an app market, as it really meant to emulate Blackberry in controlling both the OS and the devices, but also add music to the devices by leveraging its power of iTunes and iPods. It quickly realized that it can emulate the the success of iTunes and music with apps, and this one, it can FULLY control. Instead of sharing the music control with the music industry with the iTunes market, it now can control the app "industry" with the app developer program.

Google, the game changer

Google joined the smart phone game late, but it decided to not play by the game book at all, by giving away the mobile OS (with some limitations), and as a result, tied the OS into its own web services.

The Smart Phone War Begins

The smart phone war is fought with trademarks, copyrights, patents, and lawsuits, and the reason is to stunt the other party's growth into your market segment, but sometimes, it's just for money.

Calm before the storm

The skirmishes actually started several years ago, with the first generation of smart phones, between Blackberry, Symbian, and the first versions of iOS, but it had not moved into and outright war. The mobile OS at the time, Symbian, and Windows Mobile, were not that widely adopted. The hardware had not matured to the point, nor had the price. The eco-system was not mature enough yet.

Yet the companies have been long preparing for the day the war will start. Each company had amassed a portfolio of thousands, sometimes, tens of thousands of patents. Think of them as missiles aimed at each other, Even a few is enough to cause massive damage. It is very reminiscent of the Cold War's "Mutual Assured Destruction", or MAD strategy of deterrence... If you shoot, I shoot back, and we all die, so let's negotiate, through lawsuits and settlements.

The First Salvo... at Blackberry

Ironically it was Blackberry / Research in Motion that got hit first in the smart phone war, and it wasn't even from another smart phone company. NTP, which holds a patent on push e-mail, the basis of Blackberry service, chose to sue Blackberry, and got a then record 615 million dollars in settlement, because Blackberry can't function without the patent, and a loss would have meant disintegration of the company and everything that it stood for. So they settled. NTP was out for money any way.

The War Escalates

With Android OS release, and its success and quick adoption, a full war ensued. Microsoft sued HTC for infringement on its various Android phones, and HTC decided to settle by paying a small fee per phone it makes to Microsoft. (Microsoft apparently makes more money off this HTC settlement than its own Windows Phone 7 devices). Microsoft don't want to kill HTC, as HTC makes a lot of Windows Phone 7 and Windows Mobile phones for Microsoft before. It just wants to increase the price of Android phones, to make them less competitive.

Apple, of course, went after Samsung all over the world, suing them in Japan, Germany, Netherlands, and so on, all claiming copyright infringement AND patent infringement of its various designs, including iPhone and iPad. Samsung is firing back in various courts as well, but it seems a bit behind as it does not have a deep patent portfolio in this area. Apple is trying to head off Samsung's introduction of various competing devices to the iPhone and iPad, and it was able to do so in many countries in Europe. The more it can delay Samsung's launch, the more time Apple's own devices can hold the market, and slow Samsung's penetration.

Patent Acquisition War and Splurge on Mergers

Several companies with big patent porfolios recently got liquidated, such as Nortel and Novell, and there was a bidding war on those patents, some of which are still relevant today. Google lost one such bidding war to a consortium made of Apple, Microsoft, and other vendors, who paid over 40 BILLION dollars for them.

HTC in attempt of defense, bought out graphics maker S3 for its graphics patents, hoping to head off attack from Apple.

Google's purchase of Motorola Mobility clearly indicates it is at least partly after the thousands of patents Motorola holds, some of which are very relevant to the smart phone industry. Google's licenses does NOT obligate it to defend its licensees, but recently it turned over about 8 patents to HTC to allow it to sue Apple for infringement.

Outsiders Out to Hustle Money

In general, such lawsuits between companies with patents aimed at each other ends with a cross-licensing deal, and maybe some sort of financial settlement, as they basically agree to "share" those missiles/patents so they can't be used on each other. However, when an outside party gets involved, such as NTP suing Blackberry (Research in Motion), they are after money.

Furthermore, some companies are created for the specific purpose of holding patents, and shopping them to companies who either needs to defend itself from such lawsuits, or at least contemplating such defense.

LODSYS had patents about mobile apps, and licensed such patent to Apple. However, recently LODSYS went after some app developers, which made Apple quite mad, and Apple threaten to send in their own lawyers. to claim that Apple's app developer program would shield the developers from such lawsuits from LODSYS because Apple itself was licensed. This may involve additional payments.

Tablets as a new front on the smartphone Wars

The war only gets more serious as Apple attempts to hold off the onslaught of Android OS tablets hitting the market from the second-tier makers, by scaring them off first. There are already reports that many Asian tablet makers are switching to making Microsoft tablets as they have no resources to fight a lawsuit from Apple and such.

Microsoft's introduction of Windows 8 in less than a year, designed for tablet use, and its possibility unification with desktop interface, may yield another front in this war, in the form of a "tablet war".

Tablets, as they run very similar OS to the mobile phones, and often comes with the same 3G / 4G connectivity, are considered a part of the smart phone wars

How All This Affects You

So what does all this smart phone war mean to you, as the consumer? Two ways: stopping or slowing the competition makes a monopoly easier, and money spent on lawsuits does not improve the product or service. Both of which means we consumers pay more for less.

Lack of Competition is Bad

Government busted monopolies because they are bad for consumers, as competition keeps prices low and innovations fast. This is one reason why FTC is against the merger between AT&T and T-Mobile. it would eliminate one of the 4 major carriers in the US, reducing competition in the national market. Multiple companies offering similar things means lower prices overall.

Yet some companies, such as Apple, are using patents to keep competitors away on often very vague patent, copyright, and trademark claims. The only thing you can really say about iPad vs. Samsung Galaxy Tab is they are similarly shaped, and they are both tablet computers, and they both have similar touch interfaces, but that's pretty much where the similarities end. it's like, how many ways CAN you make a touch tablet? By suing Samsung and keeping Samsung tablets off the market, Apple can keep the prices of iPads high (and thus, consumers pay more).

Money is spent on lawsuits, not innovation

Spending money on lawyers doesn't make the products any better or cheaper. The same amount of money could have made significant improvements in research and and development of new and better products.

The "40 billion" the consortium paid for Nortel patents is one such example. Most of those patents are nearly obsolete, and its only use are to defend the owner from lawsuits. That 40 billion went to the creditors of Nortel, and produce... nothing in terms of innovation.

Conclusion

The smart phone war (and its cousin, the tablet war), can only heat up as more players join the different layers as the eco-system matures and grows in size. Instead of competing on technology on the market and let the consumer decide, some companies are choosing to compete in a courtroom where only a few people can dictate to the many.

If you value innovation and prefers to see competition, then you may want to patronize companies who only defend themselves against lawsuits, instead of companies that initiates such lawsuits. Vote with your dollars, and let them know you are not pleased at their attempt to create market monopoly through the courts.

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2 comments

Rodger 4 years ago

You might want to spell out which companies are only defenders and not antagonizers. For instance, HTC and Samsung.


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kschang 4 years ago from San Francisco, CA, USA Author

@Rodger -- I thought I was clear that only Microsoft and Apple were attacking?

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