Taking Back the Market

Apple vs. HTC Will Delay iPad Competitors

Tim Nash - 2010.03.09

Apple has invested billions in bringing the iPad to market.

Just to produce the A4, the ARM-based chip designed to give good performance and good battery life, Apple bought PA Semi for $278 million and had the associated running costs for nearly two years and bought an ARM development license. A $500 million investment in LG is for IPS screens, which are only currently used in iMacs and the iPad. The iPad hardware and related iPhone OS extensions have taken a fair sized bite from Apple's R&D budget - $1.3 billion in the 2009 fiscal year. And on top of these expenses, the costs of the time of top Apple executives - while Steve Jobs $1 annual compensation doesn't add much, the opportunity cost of him working on the iPad instead of another Apple product is huge.

While consumer choice is great for consumers, companies want monopolies. That is how this kind of investment is paid back. Monopolies are where the real profits lie - the profits that fund the future, pay the executive bonuses, and keep the shareholders happy.

iPhone OS Competition

Apple can be reasonably sure that Microsoft will produce some kind of overcomplicated and not very well thought out response tot he iPad, with some kind of muddled message around Windows 7 and Windows 7 Mobile.

Linux has too many competing camps to come up with a single serious contender, and Nokia is busy transitioning to Maemo while trying to keep Symbian a viable option.

The Android Option

The real issue is Android. What started as a way to block Windows Mobile from the consumer cellphone market and keep Google as the prime search engine is now competitive with the iPhone OS, in the sense that it is good enough to look the same to many people and can run on cellphones and tablets.

...buying something cheaper is buying less.

Apple makes most gains when the average customer can see and feel the difference - when all the senses, as well as the ecosystem, say that buying something cheaper is buying less. Thus Apple has to try to delay the emergence of a mobile equivalent of Windows 3.1,* running on cheaper hardware and reducing long-term market share and profits.

Google is well financed, and all the potential tablet manufacturers are looking for a solid alternative OS that will keep them in the game - preferably an OS that doesn't cost as much to license as Windows. That way they can offer a cheaper tablet and still make a few dollars.

The Preemptive Path

Apple has chosen the preemptive path by filing suit against HTC over 20-some patents related to the iPhone OS. Unlike Google, Samsung, or LG, HTC isn't a key Apple component supplier and so is unable to retaliate by delaying supplies of key software, memory, chips, or screens.

If Apple's patents are overturned, there are few ruffled feathers to smooth. If, however, its patents are upheld by the courts, a multitouch Android will have to take a different approach and put together a different "look and feel". This will take time, and during that time the iPad and iPhone will have a chance to become as embedded as Windows is on PCs.

This patent lawsuit makes decisions very difficult for large PC companies such as HP, Dell, and Acer. Do they want to spend money entering the tablet market, which has done nothing since Bill Gates launched it in 2001? If so, can they afford to base their strategy around Android, or should they wait for a Windows solution, preferably one based on Intel?

At CES, Steve Ballmer showed an HP tablet with Windows 7, but that looks like an interim solution until Windows Touch is more developed to make it more competitive with the iPhone OS. Then developers will need to recode their software to make it work effectively on the updated platform or the biggest advantage of Windows - all the software available for it - is lost.

For most manufacturers, the opportunity will only lead to the kind of profits they see on PCs and is only worthwhile if it protects their customer base, so the temptation is to wait. And without large numbers of Windows tablets being sold, most Windows software developers will wait too and work on a more promising Microsoft initiative, such as Cloud computing.

Pushing Android Costs Higher

The lawsuit also complicates life for large contract manufacturers like Foxconn. They make most money when production lines are running to capacity on the same product. However, if the ITC (International Trade Commission) blocks Android from the US market, Android cellphone and tablet volume will be much less than anticipated or contracted for, and lower volume raises costs. Thus the price of devices will go up while Android is still working to establish itself in most major markets.

For cellphone manufacturers such as HTC and LG, partnering with Microsoft, which has a large patent portfolio and has cross-licensed with Apple in the past, looks more attractive again. If Windows 7 is a reasonable option for tablets and Windows 7 Mobile can regain some of the consumer cellphone space while Microsoft preps its Windows Phone 7 OS for launch, Microsoft will retake part of the Verizon-Sprint area that Android has been busy colonising.

That is probably the best situation for Apple as well. It would keep Android and Windows trailing the iPhone OS in cellphones and tablets, keeping both weaker.

Non-US Markets

Outside of the US, Nokia seems to be slowing down Android in most countries, apart from the UK and China. Nokia is also busy fighting Apple through the ITC. While Nokia has a rich portfolio, it agreed to license many of its basic patents to other cellphone makers on fair, reasonable, and nondiscriminatory terms. Nokia later wanted to increase the license fees for those patents that Apple uses in the iPhone. One view of Nokia's actions is that it is looking for enough leverage to cross-license Apple's patents.

While the US Patent Office has been much criticized for issuing too many software patents without looking at prior art, even before the patent explosion this would have been a "look and feel" copyright action. Apple sued Microsoft over Windows "look and feel" in 1988, but it lost the case due to a poorly worded 1985 agreement licensing parts of Apple's "visual display" to Microsoft.

Patents are now the basis for action, and HTC has no agreement with Apple to protect it.

The stakes are too high for Apple to let other organisations copy its approach to touch without a fight. LEM

* Windows 3.1 was the first version of Windows seen as a true competitor to the Mac OS and was the first version of Windows to ship with PCs by default. Windows 95, the following version, was widely perceived as offering a true alternative to Apple's offering.

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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