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February 08, 2012

Apple and the 'i' of the Tiger

By Peter Bernstein, Senior Editor

I am in the middle of the must-read Walter Isaacson biography of the late Steve Jobs (News - Alert). Hence, my radar is finely tuned for all things Apple. Three items this week literally jumped out of my browser (Chrome, BTW), while seemingly unrelated do say a lot about the nature of things:  

  • A series of charts put together by Asymco’s Horace Dediu which graphically shows how Apple ranks number one not just in mobile phone revenues but also profitability.  
  • The presentation tomorrow (February 9) by concerned Apple customers who will deliver more than a quarter million signatures from campaigns on Change.org  and SumOfUs.org to Apple’s Grand Central Station, NYC location demanding the company respond to recent criticisms of worker abuse in their supplier factories and commit to creating an ethical iPhone 5.
  • The report by Appleinsider.com that Chinese display manufacturer Proview Electronics (Taiwan) is well on its way to beating Apple in the intellectual property wars over compensation -- actually lack thereof -- for the rights to use the ubiquitous “i” trademark in China.

Let’s take a look

The Apple core —domination of the phone market

The only word that probably comes close to describing accurately the Asymco charts is “breathtaking.” Not only did the company, as of 2Q 2011, have 40 percent of total mobile phone revenues, it has an astounding 70 percent of the profits. The context for this is that only five years ago Apple was not even in the smartphone business. Wow!

It would be easy to say this is about phone sales, but it is not. It is about the relative success of ecosystems. For the moment, Apple’s is superior to Google’s (News - Alert) Android ecosystem, and because it is built around its own products, it does not have to rely on managing the revenue and profit desires of its device manufacturer ecosystem partners.

At the margins

The relationship between the item above and the protest tomorrow is almost inescapable. It goes to the question that even president Obama asked Steve Jobs as to why Apple did not make its products in the U.S. The answer is obvious, i.e., costs and logistics. Apple has been publicly embarrassed because of the known business practices of its overseas suppliers, particularly the sourcing companies in China. We have yet to learn what the cost of an “ethical iPhone” might be, and whether the importance of being a good global citizen is trumped by the desire to continue the trends in the Asymco charts. What the corporate response to the protest will be should be interesting.

Dotting all the eyes (“i”)

Here it is in a nutshell.  

  • 2006: Apple purchased the iPad trademark from display manufacturer Proview Electronics (Taiwan) for $55,000 by way of a front company called IP Application Development. Proview now says the deal did not include the rights to the trademark in China. It says that Proview Technology (Shenzhen), a subsidiary of Proview International in Hong Kong, owns these rights.
  • 2011: Proview sued Apple in China, alleging trademark infringement in a suit that seeks 10 billion yuan ($1.6 billion) in damages.
  • 2011: Apple countersued saying it properly owned the trademark
  • 2011 (December): A Chinese court ruled in favor of Proview and the decision is now under appeal.  

The Appleinsider posting cites the Global Times as quoting Proview Shenzhen's lawyer Xie Xianghui’s court statement which stated that the company was ready to "slap Apple with a 240 million yuan ($38 million) fine," but the ruling has been delayed due to Apple's appeal. The good news for Apple was that the Xicheng district administration denied Xie's claims of an impending 240 million yuan ruling.  

The posting said it gets better. Xie appears to like to talk with the press, and he told the China Daily that Proview wants and apology as well. He also said the company has more litigation still to come, with separate lawsuits against Apple's authorized retailers and stores in courts around China.  

So the IP bully is getting a taste of its own medicine. When you add it up, Apple is looking at $1.6B in the original infringement case, a possible $38M fine and the issuance of an apology. Even for the world’s most valuable company, this is not just pocket change. The collateral damage on this and the workplace protests could be significant. Proview has home field advantage and any disruption of either the supply chain or damage to the reputation of the company in the over-heated Chinese market for Apple products is non-trivial.

Back to the future 

For the history buffs out there, it must be noted that this is not the first time the Apple signature “i” has been at the eye (pardon the pun) of a storm.   Back in January of 2007, no less thanCisco Systems sued Apple in the Federal District Court of Northern California to prevent it from using the name iPhone and sought an injunction against Apple's use of the name.

What you say? The reason was that “iPhone,” at the time, was a registered trademark of Linksys (News - Alert), a division of Cisco, who has acquired the iPhone name when it bought a company called Infogear Technology in 2000. Interestingly, the Cisco iPhones were for use on a VoIP networks.   Prior to the suit, Apple and Cisco (News - Alert) had been in negotiations for about two years over the iPhone trademark. In fact, when Steve Jobs introduced the iPhone at Macworld, Cisco had not yet received a signed trademark licensing agreement from Apple, which was already riding the waves of its success with the iPod. 

At the time of the suit, Apple had the gall to say that Cisco's iPhone brand was about wired VoIP phones whereas Apple’s were cellular phones. Cisco shot back that two years of negotiations was an indication the Apple thought Cisco had prior use. Indeed, the back and forth was ugly at the time. TMCnet’s own technology guru Tom Keating even got in the act when he was asked whether Cisco had actively marketed their iPhone or had allowed the trademark to lapse thereby freeing Apple to use it.

The dispute flared and died quickly. As noted in an Apple press release onFebruary 21, 2007,

“Cisco and Apple® today announced that they have resolved their dispute involving the ‘iPhone’ trademark. Under the agreement, both companies are free to use the ‘iPhone’ trademark on their products throughout the world. Both companies acknowledge the trademark ownership rights that have been granted, and each side will dismiss any pending actions regarding the trademark. In addition, Cisco and Apple will explore opportunities for interoperability in the areas of security, and consumer and enterprise communications. Other terms of the agreement are confidential.”

All of this history only serves to punctuate one of the important gleanings from the Jobs biography. He understood the power and importance of the brand. Despite it being in lower case, the “i” was and remains critical. How critical? The current valuation for just the iPhone is over a billion dollars in China alone. In 2007 when the iPhone made its Apple debut, the company’s stock was trading at $97 per share. John Chambers (News - Alert) and crew at Cisco are very shrewd at a lot of things including marketing, however, they must rue the fact that they did not settle for some Apple stock at the time.

Remember what many of us in the United States were told by our parents when we were growing up, “An Apple a day keeps the doctor away!”

 


Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest and best known brands, and has served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Rich Steeves
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