Both companies benefit from turning patents into a bulwark against innovation, the general public pays the price when two corporations divide the market between them

Story Transcript

SHIR HEVER, ECONOMIST, ALTERNATIVE INFORMATION CENTER: For over a year, a legal battle between the IT giants Apple and Samsung has been widely reported in business newspapers, but the significance of these trials to the shape of the world’s economy has been mentioned only by a few.

The market for smart phones and tablet computers has grown dramatically over recent years and is now dominated by two companies. Apple Inc. is the biggest corporation in the field, followed by the South Korean headquartered Samsung.

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Apple sued Samsung first, claiming that Samsung had copied Apple’s design in its products. Samsung retaliated with lawsuits of its own, making similar claims. The lawsuits were filed in courts in the U.S, Britain, and Japan.

The struggle was compared by the participants and by the business media to an actual battle. The war metaphor is prevalent in newspaper titles, but can be traced back to the late Steve Jobs, former CEO of Apple, who threatened to go “thermonuclear” against companies that would copy Apple products. Judge Lucy Koh said in a San Jose hearing in August 2012 that it is “time for peace.”

But this war is a mock war. Neither Apple nor Samsung suffer any casualties. The legal debates have very little effect on the companies themselves. The largest compensation that was awarded in August 2012 by a U.S court against Samsung was a sum of $1.1billion. A week later, Samsung won against a similar lawsuit in Japan. This March, Judge Koh reduced Samsung’s compensation due to Apple by about half a billion dollars, which would amount to about 5percent of Samsung’s net profit for 2011.

Both companies have tried to ban their competitor’s products in various countries. Apple tried to ban Samsung products from the U.S. Samsung tried to ban Apple products in Japan. So far, the courts have refused to ban any of the products.

But that is not to say that the court cases amounted to nothing. While building up the image as if Apple and Samsung are slugging it out, the reality is that the companies complement each other. And the trials create dangerous precedents, building layers upon layers of complexity into patent law and effectively locking the smaller companies out of the market.

Apple and Samsung are in fact doing business with each other. Apple, order to preserve its high profit margins, chooses to employ only about 60,000 workers worldwide. In order to dominate the phone and tablet markets, Apple sources its supply of components through cheap producers–Apple-sourced components, and especially flash drives, from Samsung. The South Korean company is smaller than Apple, although it employs over six times as many workers.

Apple now claims in court that Samsung learned how to design and produce phones and tablets by serving as a supplier for Apple.

But Apple doesn’t need Samsung only for the parts. In order to maintain its image as providing a line of high-end products, it needs Samsung to provide cheaper products to compare its own products against. Apple therefore dominates the market in developed countries, and Samsung dominates the market in developing countries, in which the average household income is lower.

Samsung’s EVP, Kim Hyun-suk, told The New York Times in February that the company doesn’t try to create markets, but is driven by markets. Samsung therefore helps create the illusion that the electronic gadgets are produced in a competitive market.

Mainstream economics teaches that if a certain product turns out to be profitable and in high demand, small companies will try to gain a foothold, will create competition and make prices fall. Samsung has built up the image of such an “underdog” company, growing fast and taking a bite out of Apple’s hegemonic monopoly.

This image serves both companies, as it distracts from the process in which both companies secure ownership of staggering amounts of patents, while at the same time reinforcing their ability to keep the market divided between them.

There are estimated to be a quarter million different patents registered which are relevant to the production of smartphones. Each patent can be grounds for the owning company to sue any company or individual who is producing a similar item. Apple went so far as to include in its lawsuit the claim that the rectangular shape with rounded corners is an Apple design feature. This claim, at least, was rejected by the jury.

Patent law is frequently understood as a mechanism to safeguard the rewards for innovation. But companies who employ batteries of lawyers and spend hundreds of millions of dollars on patenting every possible aspect of their products are not rewarding innovation but doing the exact opposite. They are putting up bulwarks against competition.

If a company would attempt to design a gadget to compete with existing smartphones, it will need to go over a quarter of a million patents in order to make sure that it will not be sued for patent infringement. If it somehow overcomes this obstacle and designs an entirely new product, it might not even be recognizable as a phone, and the company will have to spend millions in advertisements to educate the public that their gadget can indeed be useful.

In the first week of March, a U.S. court has rejected a demand by Samsung to open up a new trial to ban Apple products in the U.K. Two days later, Judge Koh ruled that Apple may continue to trial with further accusations it has against Samsung. Each additional trial, each additional ruling serve as a warning message to potential competitors that they should be wary of entering into this market unless they are prepared to pay large amounts of money in legal battles.

Although Samsung and Apple both spend many millions of dollars in their lawsuits against each other, both companies remain extremely profitable. The legal battles help them keep their control over the smartphones and tablets market, and, in general, in shaping a world economy built on a monopoly over patents and the threat of lawsuits restricting innovation.

This is Shir Hever for The Real News.

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