Weekly Update

Why Apple should walk away from its patent fight with HTC

There is no shortage of hype heading into Apple’s unveiling of a new iPhone on Wednesday: iSuppli predicts the gadget will be a shot in the arm for the smartphone market, J.P. Morgan analysts claim sales could actually boost GDP in a measurable way, and Topeka Capital’s Brian White breathlessly predicts the iPhone 5 will be “the biggest upgrade in consumer electronics history.”

But a nasty patent fight may be on the horizon with HTC regarding LTE connectivity, which the new iPhone will almost surely have. So Apple would be wise to try to settle the matter as its much-anticipated new phone comes to market.

Perfect timing for a redesigned iPhone

There are plenty of reasons to be bullish on the iPhone 5, of course: In addition to LTE support, the handset will be the first redesign in more than two years, featuring a larger screen in an overall thinner phone. And it will run iOS 6, an upgraded operating system that includes compelling things like Passbook, Facebook integration, and new functionality for Siri (which currently offers pretty limited functionality).

And the smartphone market is ripe for a new iPhone. Microsoft still hasn’t disclosed a launch date for its much-anticipated Windows Phone 8, but it looks like we won’t see those handsets for two more months. Meanwhile Android continues to make gains worldwide but is showing signs of peaking in the U.S., as Strategy Analytics recently suggested. And a recent survey from the deal site TechBargains indicates strong demand for the iPhone from competing platforms: More than one-third of BlackBerry owners and 22 percent of Android owners plan on upgrading to the next iPhone, and 32 percent of those who don’t own a smartphone will buy Apple’s next handset.

What a patent fight could mean

But HTC is accusing Apple of infringing on two patents it owns regarding the transmission of data via LTE. Apple hopes to invalidate those claims, but its chances of doing so appear long, considering last week’s remarks by U.S. International Trade Commission Judge Thomas Pender. “Clear and convincing means something to me,” Bloomberg quoted Penders as saying during trial. “I have to be pretty darn certain a U.S. patent is invalid.”

While it’s dangerous to read too much into Pender’s words, they certainly have to give Apple some discomfort in a fight that might have enormous implications. An HTC victory could allow the Taiwan-based manufacturer to seek an import ban against Apple products that support LTE — a portfolio that includes the current iPad and, likely, the new iPhone.

Patent guru Florian Mueller wrote last week that the ITC is unlikely to ban Apple’s 4G hardware, particularly following the urging of the Federal Trade Commission earlier this year to consider alternatives to outright bans. Apple has filed a counterclaim regarding these same two patents, so we may be a long way from any resolution. But the world of patent litigation is a complex, murky one where outcomes are unpredictable, and Apple has a tremendous amount at stake here. Its iPad continues to dominate the tablet market, and its upcoming iPhone could steal substantial users from Android and pull the rug out from under Windows Phone 8 before Microsoft’s upgraded platform even becomes available.

Many possible outcomes

Even if Apple fails to invalidate HTC’s patents and a ban on the iPad and iPhone is granted — a long-shot scenario, to be sure — several scenarios could play out. Apple might already be developing a work-around that would solve the problem. It could pursue a lengthy appeals process, or it could quickly come to terms with HTC. But Cupertino has a chance to build on its dominance in mobile in a very big way in the coming weeks and months, and it has the deep pockets to make these kinds of problems go away. I think the company should strongly consider doing just that.

Question of the week

Should Apple settle its patent fight with HTC?