HTC is braced for Apple smartphone patent war

Taiwanese smartphone maker HTC has said it is prepared to wage a patent war against Apple.

A week ago, HTC was found to infringe two iPhone patents in a case brought by Apple at the US International Trade Commission (ITC).

But chief executive Peter Chou has said HTC would win the appeal, and threatens Apple with a raft of patents that HTC recently acquired with S3 Graphics.

"We have enough patents to make a stand," said Mr Chou.

Speaking exclusively to the BBC, Mr Chou predicted that in December the full ITC panel would overturn last Friday's ruling, which was made by a single judge.

Even the ITC's senior staff attorney had been of the opinion that HTC had not infringed Apple's patents, he claimed.

"We are confident that we have a strong case," said Mr Chou.

The HTC boss said the "war" over smartphone customers should be fought in the market place, not the courts.

HTC is one of the fastest-growing smartphone makers, now the world's third-biggest by market value. Between April and June the company sold phones worth $1.55bn, doubling its profit to $608m (£380m).

It's a far cry from the days when HTC made phones to order, which were then sold under the label of network operators like Vodafone or T-Mobile.

These days, the company is confident enough to promote its own brand aggressively. The corporate slogan may pronounce the company to be "quietly brilliant", but the names of its phones are brash: Hero, Legend, Desire and - most recently - Sensation.

The ITC ruling, however, is potentially a huge setback. Not only did HTC's shares drop 7% on the news. More importantly, the patent dispute goes to the heart of HTC's success - its big bet on making phones that use Google's Android operating system.

It's not just HTC who is in Apple's firing line. The California-based company, which reinvented the smartphone market, is squaring up to Google and all its partners.

Patent expert Florian Mueller believes that Apple's lawsuit against HTC goes to the heart of Android's "operating system functionalities." He predicts a "serious patent problem" for "the entire Android ecosystem."

Apple's chief operating officer Peter Cook, who runs the company while chief executive Steve Jobs is on sick leave, puts it this way: "We love competition... but we want people to invent their own self, and we're going to make sure that we defend our portfolio."

It's a fight for market share, and it's spilling into the courts. Motorola, Nokia, HTC, Apple, Google and Samsung are all involved in some patent law suit or other.

Ultimately, the outcome will depend on the balance of power - not market share but strength of patent claims.

In Apple's patent war with Nokia, it was the Finnish phonemaker who emerged as the winner, at least in terms of royalty payments, in a comprehensive cross-licensing deal.

Another Apple target is Samsung Electronics. The South Korean company has countersued, claiming that Apple is infringing some of its 28,700 patents held in the United States alone.

But Samsung is both a supplier friend and a mobile phone enemy to Apple.

A top Samsung executive told me that more than 50% of an iPhone's components (by value) are made by Samsung. Several hundred Samsung engineers work at Apple's headquarters in Cupertino to help develop the next iPhone.

The Korean firm is keen not to damage its relationship with Apple "just to sell a couple of million more phones".

Apple, in turn, may find it difficult to find a new partner that can match Samsung's production capacity.

The launch of the next generation iPhone and iPad, expected for late summer, will provide crucial hints. If a teardown of either product indicates a move away from using Samsung parts such as LED screens, memory chips and microprocessors, the patent war is likely to escalate.

After all, says Florian Mueller, "Apple doesn't have a history of being a particularly cooperative patent holder."

Mr Mueller, author of the Foss Patents blog, believes that it is "absolutely positively not a foregone conclusion" that Apple will license its "key patents" to rival HTC.

Apple, he says, optimises for product differentiation, not patent licensing revenues. "What Apple needs to achieve is as much of a technological gap as possible between its own products and the Android-based products offered by HTC and other vendors."

Carolina Milanese, who leads mobile devices research at technology analysts Gartner, agrees: Apple "want to safeguard the things that give them the competitive edge" and "prove that the Android platform is not as good as people make it out to be".

Where does that leave HTC?

When I first interviewed Peter Chou a couple of weeks ago, he refused to comment on the case.

Now that round one has gone to Apple, he is ready to go on the offensive, squeezing in a second interview between attending a Royal Garden Party and a flight back to Taiwan.

HTC is working on "multiple solutions" he says, defending its case at the ITC while innovating workarounds for Apple's patent claim.

But softly spoken Peter Chou is also about to carry a rather big stick. HTC is in the process of buying S3 Graphics, part-owned by HTC's co-founder and chairwoman Cher Wang.

Mobile phone industry experts may be praising HTC for its smartphone innovation. "Their DNA has always been about technology innovation," says Ms Milanese. But the company holds just a couple of hundred patents, according to Mr Chou.

S3 Graphics, however, has another 235 patents, including two where Apple has already been found guilty (by the ITC) of infringing S3's intellectual property.

Mr Chou uses a Chinese parable to send Apple a message.

"We all have been living in this village for a long time, making war. But one day this powerful man came and took all weapons and said these are my powerful weapons. But this war belongs to all and nobody has a right to ask other people to leave. "

"What it means," explains Mr Chou, is "we started making smartphones before him... We don't want to copy anyone, we want to be a premium product."

"This war, this market is very big, this war is for all of us. Nobody should tell other people to leave and we should compete in the market place, let consumers decide... rather than in court."

And it is a big market indeed. Ms Milanese even believes that Android phones don't really compete with Apple.

"The brand is such a strong component of the iPhone that you won't walk into a store wanting an iPhone and come out with something else."

Apple and its huge profit margins actually help the makers of Android phones, says Philip Pearson at technology hedge fund GLG Partners; iPhones are providing a "pricing and margin umbrella" under which Android can flourish.

Apple could damage Android's Asian "mobile phone food chain" only if it were to launch a cheap version of the iPhone, says Mr Pearson.

HTC hopes to stake out its own ground in this smartphone war.

It does not sell plain vanilla Android, but bundles phones with what it calls HTC Sense, an intuitive user interface and a raft of services - from music and films over the internet to the ability to locate or wipe your phone if it's been lost or stolen.

Carolina Milanese sees this as a key factor in HTC's success: Among Apple's competitors "they are the ones that have the better grasp of the importance of the ecosystem, of delivering more than hardware. They don't always get the credit that they should be given."

As the patent battle grinds on, Mr Chou speaks of a mobile future filled with 3D phones (like HTC's Evo), high-speed 4G networks, and cloud computing services that will arrive "faster than we expected and will completely change how people get things done and get information."

Industry analysts agree the company is set for growth.

HTC is "eating Nokia's breakfast," says one. "They're having [Blackberry maker] Research in Motion for lunch," says another.

Mr Chou just has to make sure that his stick of patents is hefty enough.