Why Apple and the iPhone Are Giving the Wireless Industry a Nervous Breakdown

(MoneyWatch)  The Apple (AAPL) patent infringement suit against HTC, the Taiwanese handset maker, has puzzled lots of people. It shouldn't: The lawsuit is a sign that the mobile industry is melting down and that companies are starting to panic, even if they won't admit it. Fear permeates the air because fundamental business practices are shaking apart and no one knows how things will come back together again.

Needless to say, this isn't a common sentiment. The last time most of us can remember Apple actively trying to slap down another company for "stealing" its ideas and developments was back in the late 1980s, when the company sued Microsoft (MSFT), claiming that Windows copied the look and feel of the Mac. Some argue persuasively that the suit expresses Steve Jobs's personal sense of being treated unfairly. Others say that the company is turning "evil."

It's actually deeper than that. A complex system -- like an ecosystem, an economy, or an industry -- is in a steady state when it's in equilibrium. Change some factors too much and you send everything tumbling as the system tries to find a new point of stability. Everything adjusts to the new conditions.

For years, the wireless industry has been in a steady state. Handset manufacturers made predictable phones, sometimes with with incremental improvements. Carriers created variations on otherwise similar rate plans that brought in enough revenue to satisfy investors. Then came the iPhone, which tipped the scales and pushed the industry into flux:

• A handset drove demand to such a degree that people chose a carrier based on it.
• Large numbers of consumers were willing to spend significantly more on a device than ever before.
• Traditionally cheap carriers suddenly had to pay historically high fees and agree to unusual conditions to gain access to the device.
• Phone applications became a huge business and a drawing card for consumers, meaning that the handset was actually a computer.
• For the first time, users pushed so much data over wireless networks that carriers talked of metered payment plans.
• Regulators and Congress began questions and pressure over termination fees and took a stance on net neutrality.

All that was just the beginning. Then Google (GOOG) released Android. After a year of availability, Android handsets are on track to potentially pass the iPhone in unit sales. That makes Apple nervous and upset. First, Apple is consciously shifting from a focus on Macs to a focus on mobile devices, where its future appears to lie. Losing the limelight in that area is a big strategic problem. Second, given that Google's Eric Schmidt was on Apple's board, Jobs and the other directors probably feel betrayed. Magnifying those fears is Microsoft, whose Windows Phone 7 looks like it could be a huge winner.

Also, since Apple and Google are coming into the handset business, their entry created a disruption in the usual game of patents. Traditional handset vendors and various chip makers like Qualcomm (QCOM) hold huge numbers of foundational patents in cell phone and wireless technology. They co-exist by cross-licensing, so the patents become a protective weapon ensuring that all have access to what they need.

Apple and Google -- plus Kodak (EK), which wants to cash in on some IP as its old film business continues to die -- aren't part of the existing pacts. In addition, established vendors are concerned about losing their competitive advantage as their patents age and new technology looms. That translates into what the New York Times rightly calls an explosion of mobile patent lawsuits. Look at this graph from the Times:

What's amazing is how quickly this legal time bomb went off, as Nokia (NOK) and Kodak sued everybody. Suits by RIM (RIMM), Elan, and Apple seem whimsical in comparison.

All told, we're seeing a shift in the balance of power from those who had it -- carriers and the biggest handset manufacturers -- to the elegant barbarians at the gate. Every rule has gone out the window. The vendors are like animals trembling and running from a forest fire long before you can see flames or catch the acrid smell. A new stability is probably years in the future. Welcome to chaos.

Source Image: RGBStock.com user branox, site standard license, image manipulation by Erik Sherman.