The pressure will be on HTC to quickly come up with a workaround following an International Trade Commission (ITC) preliminary ruling that the Taiwan-based device maker is infringing on two Apple patents.
Apple filed an ITC complaint against HTC in March. Apple accused HTC of violating 10 patents. With a preliminary ruling in its favor, Apple is looking toward a final ruling in December. HTC, which said it will appeal the ITC preliminary ruling, announced it will buy back 2.4 percent of its outstanding shares to try and halt a stock slide. Apple also has a separate lawsuit against HTC over patents.
The two Apple patents, which date back to the mid-1990s via the L.A. Times, are the following:
- U.S. Patent No. 5,946,647 for a "system and method for performing an action on a structure in computer-generated data."
- U.S. Patent No. 6,343,263 for a "real-time signal processing system for serially transmitted data."
So what does this patent scrum mean? Here's the short list:
- The charade that Android is a free mobile operating system is over. The patent headache for Google means that Apple, Microsoft and potentially Oracle could collect fees on Android. Adrian Kingsley-Hughes and Florian Mueller have noted that Android is in big trouble with these Apple patents.
- HTC is going to take an earnings hit. Analysts in Asia have noted that HTC could have to settle with Apple and pay ongoing royalty fees. Damages are also possible. Barclays Capital analyst Dale Gai said in a research note:
- The company's S3 acquisition will matter more, but HTC lacks leverage against Apple. Morgan Stanley analyst Jasmine Lu said that HTC bought S3 for patents so it could better fight Apple, but the ITC takes away negotiating leverage.
- HTC will have to find a workaround and that could hurt the Android user interface. Without a workaround, it's possible that Apple refuses to settle and HTC devices won't be imported into the U.S.
Our base case remains that HTC will seek a settlement with Apple in the next six months, by paying out a certain amount of the damages (a portion of which has been set aside from previous earnings), and/or future licensing royalties, subject to negotiations with Apple for HTC's S3 patents (which won an initial ruling against Apple's infringement on July 1, 2011). In the worst case, if HTC agrees to pay US$5 to Apple for each smartphone it sells in the US, we estimate the impact on EPS will be 4-5% in 2012.
That final point--the workaround--will be critical. If HTC can work around Apple's patents, it can pay damages in a settlement and move forward. Without a workaround, HTC could be faced with ongoing royalty payments--if Apple actually wants to license its patents. Apple could go for an importation ban against HTC. In either outcome, HTC needs a workaround pronto.