Samsung v. Apple: “Think…appropriate!”

by Alin Voicu

In the wake of the suit and verdict in the Samsung-Apple patent dispute, The Financial Times claims that the “American law is patent nonsense.”[1] LA Times also points out that the “fuzzy math” involved in the calculation of the award by the jury which found the infringement by Samsung “willful” led to a hugely disproportionate amount, 30,000 (thirty thousand) times the average per patent per phone value.[2] But before all that happened, the jury should have understood what, if anything, is innovative about Apple’s mobile devices that’s worth protecting at such high costs to, ultimately, consumers.

Looking back at Schumpeter’s framework, a modified version of which was employed in developing the Oslo Manual by the OECD with the aim of “measuring” innovation in some sense, the Apple work (and Samsung’s, probably) could possibly come under the at least two headers: introduction of a new (or new quality of a) good and development of (or entry in) new markets, whether these had existed or not.[3]

From a business model standpoint, with the iPhone, Apple was entering an already crowded field that was approached by players with “business offerings” (RIM/Blackberry) and “everything else” (everyone else). The RIM model involving not just handset sales but also the required and very high-margin proprietary software delployment (the Blackberry Enterprise Server, BES). This gave them sunk cost advantages over any other potential entrant. As selling to CIOs and IT departments is notoriously hard slugging and Apple did had not traditionally been in the “enterprise” business, the entry vector had to be different: Apple makes devices and interfaces so attractive, in former CEO’s Steve Jobs’ view, one would be inclined to even lick them.[4]

In an early and path-breaking paper that could have easily deserved a Nobel prize, “The Pure Theory of Consumer’s Behavior,” Nicholas Georgescu-Roegen, besides solving the (in)famous integrability problem in a genial manner, distinguishes two ways entrepreneurs take advantage of the “multivariate penumbra of demand”: to induce consumers to buy more of the same commodity; or to change consumers’ tastes.[6] Mainly through its marketing prowess, Apple is legendary at the latter; nowadays, it has come to master the former as well.

What worked for Apple in changing consumers’ tastes is an image-oriented business model blurring the lines between business and entertainment and creating pull-through from consumers to IT departments and enterprises as a whole (which are eventually adopting a BYOD mobile model) and playing to its marketing strengths–this made it the most valuable company in the world in mid-2012.

The association of existing offerings such as the Blackberry with a stodgy corporate image provided an “artificial” restriction on the consumer set for RIM. In a testament to Apple’s remarkable absorbtive capacity, it updated the famous “1984” attitude to the new millennium and, again, it worked–the (semi-) rebel with an amazing, and amazingly looking, product. The focus on efficiency rather than innovation induced on RIM by its long-running preeminence in that arena provided competitive advantage icing on more nimble Apple’s cake. Caught flatfooted, RIM came out with half-baked offerings like the Blackberry Torch and the infamous RIM Playbook tablet which even now is not selling at Best Buy for something like 85% discount; and in an act of corporate desperation, HP decided (then reconsidered) to exit the tablet business and sell its remaining inventory of TouchPads for, essentially, scrap.

With the cell functionality, Apple jumped Foster S-curves through a qualitatively different product, and that could put the iPhone in Schumpeter’s category of a new quality of a good. The marketing strategy carried out with arguably great insight and panache would also help place it in the “new market” bucket.

The capabilities of the iPod may have screamed for connectivity unrestricted by the availability of a wi-fi hotspot nearby. The logical next step towards use of cellular communications is obvious in retrospect (although, remember, voice calls could be made with some apps even within the wi-fi world but not by “serious” business types). The user inconvenience of carrying an iPod and a mobile phone at the same time could have been another driver, especially since the form factor was and is still similar (the iPad is a somewhat different story as it seems to be assimilated to the computer rather than phone part of the users’ psyche). The non-sense, and disingenuity, according to people suing for false advertising, of celebrity loaded Siri commercials is perhaps simply intentional noise, decoy flares of the marketing kind. Siri is essentially the significantly-less-than-brilliant granddaughter of ELIZA which would miserably fail on Turing’s imitation game. On further thought, there should be no surprise, perhaps, that movie celebrities are attracted to Rogerian psychotherapists of the archetypal kind…

But, in that context, the other details of Apple’s marketing strategy were also reinforcing and savvy in order to get consumers to buy more of, or new versions of, the product. Just one example of that was the exploitation of the form factor of the devices, transmitting the immediate look and feel to users through sheer sight, in their product introduction sequence and the signaling of various versions and functionality (understandably, now, that led to apparently ridiculous, even if only for tactical litigation purposes, claims for patents on things like “a rectangle with rounded corners”[5]): the iPod’s scooped shape initially applied to the iPhone and then the bifurcation–of the scoop back to the iPod from the iPhone parallelepiped of iPhone 4– leaving a single form factor to carry the iPhone image forward, etc. Another example is the intentional creation of a certain mystique around the launching events of new versions of the products–this piques media and user interest, creates “buzz” and fuels speculation, keeping Apple and particularly its mobile product in the agora–all good catalysts for future sales.

Part and parcel of supporting that model, however, is a defensive mechanism, in this case patenting, which may or may not fit to the type of innovation that Apple claims for the iPhone and against Samsung–that’s where “patent nonsense” may need some examination, rebuke and reformulation from the folks on Capitol Hill. From a Schumpeterian standpoint, it may be certainly be misleading to say that a weaker patent regime inhibits innovation. Not only is that concept dialectical in Georgescu-Roegen’s sense (i.e., it is not crisp but has a penumbra around it) thus presenting vast wiggle room for “innovators”, but its indiscriminate and absolutist formulation and enforcement, in law or equity, may inhibit the very capitalist development it takes upon itself to promote. Schumpeter’s view of “creative destruction” and his explanation of on the business cycle explicitly called for “swarms” of entrepreneurs [6] which follow in the wake of the innovator by imitation and small improvement thus eventually eliminating its entrepreneurial profit, i.e., enforcing the laws of economics in the face of the law of patents. (It is true, on the other hand, that the later Schumpeter did see innovation as becoming more and more the province of large corporations, rather than of individual “high-achievers.” Efforts to build the theory in that direction do exist.[7]) In any case, the fact that significant positive externality/network effects are taking hold among iPhone and even iPo/ad users, ranging from preferential texting to iTunes and AppStore-facilitated multi-player gaming, may weaken the device protection “manifest needs” that Apple may make in the future and may also provide a hint towards the potential and as yet unheralded forward strategy of Apple’s next pyatiletka.

The image model is only as strong as the public is fickle, so to speak, requiring therefore ruthless defense–and Apple understands that very well. That is what Apple is trying, at the core, to protect–not necessarily a new manufacturing process or a secret formula or new functionality, but an image, “meaning, without limitation”, everything from the look of the buttons and icons to the intricacies of operating system design, etc.

The main issue here is appropriability–who is going to make money off the “innovation”, the innovator or others? In a weak appropriability regime, those who control complementary assets, in this case the wireless carriers or the part/assembly manufacturers, would be able to extract significant value from the innovator. The iPhone cobbled together existing technologies in Apple’s own image, in a useful but not very complex way, and raising their functionality bid (camera, better display, Facetime, etc.) up to the point its competitors could not keep up–except Samsung, apparently.

In this, the story is similar to the invention of the CT scanner by EMI. Appropriability was problematic and eventually impossible for EMI because “the technologies it harnessed were quite well known and understood”[8]. Although these technologies were combined in “a complex and precise manner,” GE later ate their lunch and appropriated a great deal of the subsequent value of the CT scanner market. Mobile device functionality and wireless technologies were also well known and understood before the iPhone appeared, even in the world of closed systems a la Apple (e.g., RIM’s operating systems as contrasted with something along the lines of Android). Facing the same issue, Apple solved that problem, as of now, by applying a concerted and well-thought-out marketing strategy handling all relevant aspects from the single home button of historic Apple significance to form factor (parallelipipedic vs. scooped) and employing its other strengths in pull-through marketing, manufacturing ourstourcing, distribution, etc. (complementary assets).

Notes

  1. Sebastian Mallaby, “American law is patent nonsense”, The Financial Times, 28 August 2012, http://www.ft.com/cms/s/2/ea9503c2-f0f9-11e1-89b2-00144feabdc0.html#axzz25i2wsRT2
  2. Brian J. Love, “Apple-Samsung patent fight: Fuzzy math”, Los Angeles Times, 30 August 2012, http://www.latimes.com/news/local/la-oe-love-apple-patent-damages-20120830,0,3981673.story
  3. Joseph Schumpeter, The Theory of Economic Development, ew Brunswick, N.J. and London: Transaction, p. 63-4, also qtd. in https://socot.wordpress.com/2012/07/31/whats-an-ephor/
  4. http://en.wikiquote.org/wiki/Steve_Jobs
  5. ***, Apple v. Samsung: Patents, The Wall Street Journal blogs, 3 August 2012, http://stream.wsj.com/story/apple-v-samsung-trial-over-patents/SS-2-38559/SS-2-41552/
  6. Nicholas Georgescu-Roegen, “The Pure Theory of Consumer’s Behavior”, The Quarterly Journal of Economics, Vol. 50, No. 4 (Aug., 1936), pp. 545-593
  7. Joseph Schumpeter, Theory of Economic Development, New Brunswick: Transaction, 1911/1934/2008, p. 223 and “The Explanation of the Business Cycle”, Economica, Dec. 1927, pp. 286-311, reprinted in, J.A. Schumpeter, Essays on Entrepreneurs, Innovations, Business Cycles and the Evolution of Capitalism, R. V. Clemence ed., New Brunswick: Transaction, 1997, pp. 21-46
  8. See, for instance, Martin Binks and Philip Vale, Entrepreneurship and Economic Change, Berkshire, England: McGraw-Hill, 1990
  9. Chistopher A. Bartlett, “EMI and the CT Scanner”, p. 2
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