Apple Ready to Rumble with Rival Smartphone Makers

Apple's HTC lawsuit may have come out of nowhere as far as the public is concerned, but behind the scenes, Apple has been warning handset vendors for some time that it has patents and lawyers and isn't afraid to use them.

The threats and warnings to handset vendors have been going on for some time, according to a research note from Yair Reiner, a financial analyst with Oppenheimer & Co., in a note for clients.

However, it was the HTC suit that was a litigation wakeup call for many Android vendors. "The lawsuit filed against HTC thus appears to be Apple's way of putting a public, lawyered-up exclamation point on a series of blunt conversations that have been occurring behind closed doors," wrote Reiner.

"Our checks also suggest that these warning shots are meaningfully disrupting the development roadmaps for would-be iPhone killers. Rival software and hardware teams are going back to the drawing board to look for work-arounds. Lawyers are redoubling efforts to gauge potential defensive and offensive responses," Reiner added.

This is not a new development. Apple issued a warning back in January 2009 during its earnings call, when COO Tim Cook said "we will not stand for having our IP ripped off and we'll use whatever weapons we have at our disposal. I don't know that I can be more clear than that."

That threat was interpreted to mean multitouch, because Apple's multitouch and pinch to zoom is one of the iPhone's claims to fame. Some multitouch products did ship, most notably the Palm Pre, but given Palm's scale, "did not yet represent a strategic threat," Reiner wrote. Ouch.

Why HTC Out Of All Mobile Device Makers?

When the Motorola Droid and the HTC Eris hit the market with multitouch, the rest of the industry began to take notice and waited to see what Apple's response would be. "If there wasn't one, the OEMs would likely read the silence as a green light, especially after Google also moved to enable multi-touch on its Nexus One phone," wrote Reiner.

Apple chose to make an example out of HTC with the suit, resulting in the aforementioned pull back by other OEMs. Reiner speculates there are a number of reasons why Apple went after HTC and not Motorola, which has a hot seller in the Droid.

First, HTC is the earliest, and arguably the most aggressive implementer of the Android operating system, making it the best company to serve as a proxy battle with Google. Second, Apple was counting on HTC having fewer patents than Motorola with which to defend itself. Finally, Apple and HTC do not have any supplier relationships with one another that could be upset by lawsuits.

Even though the initial steps in the legal process haven't even started yet, the suit is having a desired effect.

"Our checks suggest that the combination of warnings and legal actions are having their intended effects and are causing a number of competing handset programs to be shaken off-course. Until recently, most high-end smartphone programs were focused primarily on trying to match the iPhone's user experience, and secondarily on avoiding any egregious violations of Apple's patents," wrote Reiner.

Enter Microsoft

So if Apple manages to scare any vendors away from Android, where else can they find safe haven? Microsoft (NASDAQ: MSFT), of all places. Microsoft has a compelling argument in Windows 7 Mobile, but more than that, it's now viewed as a hedge against the risk of Android becoming too strong or proving too weak.

"Our checks indicate that Microsoft has been quick to sniff out this burgeoning opportunity and has begun to aggressively promote the strength of its own IP portfolio, as well as its willingness to join battle with customers that come under IP attack," Reiner wrote.

Long-term, though, things are unclear. It's not certain that vendors really will move to the pending Windows 7 Mobile as a safe haven. More important, Apple may find itself lining up too many enemies -- HTC, Motorola, Google, Microsoft -- for its own good. "Together, these companies bring to bear an impressive arsenal of IP, money, and public relations savvy, and with it the ability to administer considerable pain," Reiner said.

On a less contentious note, Oppenheimer raised its estimates on Apple and confirmed the Canaccord report from earlier this month that the iPad did have production problems "and has failed to ramp as expected." This is primarily due to a component shortage, but also due to a yield issue at Hon Hai, the iPad's assembler.

Oppenheimer believes Apple will have 300,000 to 400,000 units built by the end of March, compared to an earlier target of more than one million units. For the year, Oppenheimer suggests that Apple continues to target production of 10 million units for the full calendar year.

Oppenheimer raised its second-quarter revenue from 11.8 billion to $12.2 billion and EPS from $2.32 to $2.40, thanks to increased iPhone sales. Fiscal year 2010 estimates are raised to $54.2 billion in revenue and $11.46 in EPS from $53.2 billion and $11.24.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

TAGS:

Android, iPhone, Apple, lawsuit, HTC

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