Apple 2.0

Covering the business that Steve Jobs built

What were the terms of the Apple-HTC settlement?

November 11, 2012: 7:42 AM ET

The two sides aren't saying, but we can make some educated guesses

The HTC phone that started it all

FORTUNE -- In Oct. 2010, Apple (AAPL) offered to license its portfolio of smartphone patents to a major Android phone manufacturer for $30 per unit -- a figure it said it was willing to reduce to $24 as part of a patent cross-licensing deal.

On Saturday, Apple announced that it had signed a 10-year cross-licensing deal -- the terms of which are confidential -- with a second Android phone maker.

The first company was Samsung, which chose instead to take its chances in a California jury trial that resulted in a $1.05 billion judgement it is currently fighting to reduce.

The second was HTC, the very first Android maker Apple sued for allegedly "ripping off" the iPhone.

In a deal that caught industry watchers by surprise, Apple and HTC agreed Saturday to dismiss all their pending lawsuits and to cross license "current and future patents" for the next decade -- thereby ending more than two and a half years of acrimony and litigation.

In retrospect, the deal makes a lot of sense, both for HTC and for Apple.

  • Unlike Samsung, whose smartphone sales have reportedly overtaken the iPhone, HTC's share of the global smartphone market have been shrinking rapidly (to 4% last quarter from 10.3% in the same quarter last year, according to IDC)
  • Its revenue and profits have fallen four quarters in a row
  • It already lost one patent fight with Apple at the U.S. International Trade Commission (ITC), leading to a temporary ban on the sale in the U.S. of two of its newest phones
  • It lost a high-profile countersuit, suggesting that the $300 million it spent on a portfolio of patents to gain leverage against Apple might have been wasted
  • A preliminary ruling in yet another Apple lawsuit was due from the ITC in two weeks

Apple, for its part, has made it clear that it prefers settlements to the wave of lawsuits Steve Jobs initiated and which Tim Cook has described as a "pain in the ass." HTC no longer poses the threat it did when Apple first sued it in March 2010. Although Jobs complained bitterly at the time that the company was "steal[ing] our patented inventions," HTC's imitations were never as brazen -- or well documented -- as Samsung's.

Although neither side will say what there terms of the deal struck Saturday were, an HTC spokeswoman told the Wall Street Journal that the company doesn't expect the license agreement to have an "adverse material impact."

We can probably assume that Apple settled for something less than the $24 per unit it demanded of Samsung. (Microsoft is reportedly charging Windows Phone 8 licensees $10-$15). According to IDC, HTC sold 7.4 million smartphones last quarter. At $24 per phone, that would have worked out to nearly $180 million.

I'm not an accountant, but for a company that announced last week that it sold  $588 million worth of smartphones in October -- down 60% from last year's $1.5 billion -- $180 million every three months sounds pretty material to me.

Unless, that is, HTC is planning to shift its smartphone efforts from Google's (GOOG) Android platform and to someone else's -- say, Microsoft's (MSFT).

UPDATE: In a note to clients Monday, Sterne Agee's Shaw Wu estimates the licensing fee to AAPL to be in the $6-$8 per phone range, which means about $180-280 million in annual revenue given the 30-35 million Android smart phones HTC will likely ship in 2013. More important, he believes the deal provides a "blueprint" for future settlements with Samsung and Microsoft.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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