Apple Makes Peace With an Android

This isn't quite what I'd call "thermonuclear."

Just when you thought Apple (NASDAQ: AAPL  ) was intent on pursuing a decade-long patent war against its Google (NASDAQ: GOOGL  ) Android archenemies, the Mac maker has decided to call a truce. Apple and HTC have announced a "global settlement" that dismisses all patent disputes and enacts a 10-year licensing agreement. That agreement covers all current and future patents from both companies. The specific terms of the deal are (unsurprisingly) confidential.

That doesn't quite line up with Steve Jobs' infamous comments about waging "thermonuclear war" on the operating system he viewed as "wholesale theft." But that was then, and this is now.

This is Cook's Apple
It may sound surprising at first to think that Apple is licensing some of its technology to competitors, considering its adamant stance against Android. That's especially true in light of Apple's recent legal victory against Samsung a few months ago. You'd think that would give Apple more fortitude to keep on fighting the good fight, and yet here we see it settling with an Android OEM. What gives?

Cook has never shared his predecessor's view on patent litigation. When you consider Cook's disdain of litigation, the move makes a little bit more sense. Here he is on the April conference call:

I've always hated litigation, and I continue to hate it. We just want people to invent their own stuff. And so if we could get to some kind of arrangement where we could be assured that's the case and a fair settlement on the stuff that's occurred, I would highly prefer to settle versus battle. But it -- the key thing is that it's very important that Apple not become the developer for the world. We need people to invent their own stuff.

He's also had some other choice words on the topic. With Cook's clear contempt of litigation, investors shouldn't be too surprised that he's willing to settle with the enemy if he's able to do so on favorable terms.

Bigger fish to fry
On top of that, we also have to consider whom we're talking about here. A couple years ago, HTC was one of the top Android OEMs, rising to the top after making a name for itself as a "white label" OEM. More recently, the Taiwanese company has fallen on hard times as it spread itself too thin by offering too many models, diluting its brand.

Then the company took this Apple lesson of the day to focus on product depth over breadth, and streamlined its smartphone lineup into its HTC One family. Still, that hasn't been enough to stop HTC's profit in the third quarter from plunging nearly 80%.

With that in mind, HTC isn't the biggest Android fish to fry right now. That title goes to Samsung.

It's the principle of the matter
For HTC, it's probably cheaper to simply settle and pay up. The company says the deal won't have an "adverse material impact on the financials of the company." Translation: It's not gonna cost us a fortune. Sterne Agee analyst Shaw Wu estimates that HTC is actually forking over $6 to $8 per Android smartphone sold.

With HTC moving between 30 million and 35 million smartphones annually, that translates into anywhere from $180 million to $280 million in licensing fees every year. With Apple's net profit of $41.7 billion last fiscal year, this deal clearly isn't about the money -- it's about the principle.

Give it up for Mr. Softy
That's in addition to the estimated $5 per device that HTC also pays to Microsoft (NASDAQ: MSFT  ) in Android-related licensing. Combined, we're talking about $11 to $13 per unit right off the top in licensing fees to use Android. Who ever said that open-source Android was free?

This also gives HTC even more reason to continue exploring Windows Phone 8. Not only is HTC's Android strategy not working as well as it used to, but it's also becoming increasingly expensive. That's not to say that Windows Phone is cheap by any means. In fact, earlier this year ZTE inadvertently spilled the beans and pegged Windows Phone licensing fees between $20 and $30.

More to come?
Incredibly, this now means that both Apple and Microsoft receive licensing fees related to Android, while Google does not. Google extends support to OEMs through collaboration and only hopes to benefit through adoption of its plethora of online services, which reinforces its advertising moat.

The bigger implication of this agreement is that it shows that Apple is willing to license its patents to the Android competition. Even with Samsung, Apple had reportedly extended a licensing offer years ago before the patent wars escalated and quickly got out of hand.

HTC might just be the beginning.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2012, at 10:09 PM, applefan1 wrote:

    It's more like HTC avoiding going to court.

  • Report this Comment On November 14, 2012, at 7:42 AM, jdmeck wrote:

    Evan, Your bias is showing again. Why not an Android makes peace with Apple, since that's what most other analyst believe.

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