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Is Apple Hurting Itself?

By Evan Niu, CFA - Updated Apr 6, 2017 at 3:42PM

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All the patent warfare may not be worth it.

With Apple (Nasdaq: AAPL) waging what I'm calling iWorld War 3P (the P is for "patent"), will the spoils of war outweigh the casualties?

Before he died, Steve Jobs had vowed to go "thermonuclear" on Google (Nasdaq: GOOG) Android because he considered it a stolen product, a threat that Apple continues to make good on even after his passing. Cupertino has been lobbing patent artillery shells at Android vendors like HTC, Samsung, and Motorola Mobility (NYSE: MMI) for nearly two years now.

Even when Apple has scored court victories, it has done little to actually stop the spread of Android since the gadget makers simply redesign around Apple's patents. Samsung slightly redesigned its Galaxy Tab to skirt the German sales injunction. Apple tried to include the new version in the ban but is unlikely to have its way. Sammy is now leveraging the publicity and using the battle as a marketing ploy with Galaxy Tab ads in Australia, calling it "The Tablet Apple Tried to Stop."

It won another dispute against HTC, but HTC went as far as to call it a victory because it was only found guilty of infringing some but not all of Apple's patents. The company is confident it can easily design the features around Apple's intellectual property.

In a recent Bloomberg report, intellectual-property advisor Kevin Rivette criticizes Apple's "scorched-earth strategy" because it generates no value and its legal victories don't pack any punch. Rivette compares it to a dam: "Using their patents to keep rivals out of the market is like putting rocks in a stream. The stream is going to find a way around. Wouldn't it be better to direct where the water goes?"

Many pundits think it would be better to pursue a cross-licensing strategy, or use its IP to leverage strategic deals or better component prices. Rivette estimates that Apple could collect as much as $10 per device in royalties, likely higher than what Microsoft (Nasdaq: MSFT) extracts from its growing list of Android workers.

Don't forget that Cupertino can also be on the receiving end. Along with Research In Motion (Nasdaq: RIMM), Apple was found guilty of infringing on Eastman Kodak (NYSE: EK) patents, although to a lesser extent that Kodak was hoping for. If the ITC ends up imposing a ban because of the infringement, Apple will have no choice to but license the patents from Kodak or buy them outright before Google or someone else does.

Apple has never been keen on sharing critical technology with competitors through licensing deals, although it has done so begrudgingly in the distant past. Even though it may make sense economically, it would betray Jobs' principles, something I doubt CEO Tim Cook is willing to do.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$141.66 (2.45%) $3.39
Microsoft Corporation Stock Quote
Microsoft Corporation
$267.70 (3.42%) $8.84
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,359.50 (5.11%) $114.66
BlackBerry Stock Quote
$5.75 (7.08%) $0.38
Eastman Kodak Stock Quote
Eastman Kodak
$5.30 (-1.30%) $0.07

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