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. .

A new IP dawn for Microsoft?

Whereas being most definitely one of USA's patent champions with 3,094 patents awarded in 2010 (in 3rd position behind IBM and Samsung), Microsoft is not making the IP headlines as much as its US counterparts such as Google - in the midst of acquiring Motorola Mobility which is now being sued by Intellectual Ventures, or Apple - embarked in an all-out and global patent war against all its competitors on the smarphone market with Samsung as primary target. However two interesting item of news are revealing that this situation might be about to change.

On September 29th Microsoft announced in a press statement a landmark agreement with Samsung 'to cross-license the patent portfolios of both companies, providing broad coverage for each company’s products'. Given the current difficulties encountered by South-Korea's top smartphone seller to launch its products quickly (if at all) on various markets all around the world notably in Germany, the Netherlands and in Australia, such an agreement will certainly provide Samsung with the necessary patent ammunition against its newfound archenemy Apple, while bringing a large amount of money in the bank accounts of the Redmond-based corporation. Well-informed Joff Wild of IAM Magazine speaks of a royalty-based deal ranging from 10$ to 15$ per android device sold. Moreover the announcement also reports the cooperation of Samsung in the development and marketing of Windows Phone, whose latest OS version called Mango received very encouraging critics.

More interesting is another piece of news published on IAM Magazine's blog which reveals that Microsoft hired Florian Mueller to conduct a research on standard-essential/FRAND-related patents. The unorthodox choice of well-known anti-software patents activist Florian Mueller to perform such a research certainly demonstrates Microsoft's keen awareness that negotiating in fair and reasonable terms with all its competitors will help the company exploiting its heavy patent porfolio at its full potential, instead of using it primarily as defensive leverage.

Microsoft active patent licensing strategy could be another sign showing that 'IP really starts taking centre stage in corporate thinking' as many IP licensing specialists start believing after the groundbreaking Nortel patent auction...

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 .

South Korea's Deficit in Patent Royalty Payments

The Korean firm of C&S Patent has just sent around its regular newsletter which included a reference to a report by The Bank of Korea in which , the amount of royalties that S. Korean companies paid as fees to "access intellectual property rights" (presumably as royalties) in 2010 was a total of 5.8 billion dollars. This was apparently an increase of approximately 2 billion dollars as compared to the figure of 3.9 billion dollars paid out in 2009 and compares to 2.6 billion dollars paid as royalties in 2006.

C&S Patent report this in the context of a licensing payment of 550 million dollars from  Samsung Electronics to Kodak and 400 million dollars from LG Electronics for the use of a patent relating to mobile phone imaging technologies (reported here). This patent has now been held by the US International Trade Commission as being invalid (although Kodak announced that they are appealing the case).

Whatever the merits of the Kodak patent, the case shows the effect that royalty payments can have on the balance of payments of a country. It's no wonder that many national governments in Asia are encouraging their domestic companies to become more active in formulating standards and also to patent aspects of those standards.