Global Insight Perspective | |
Significance | Cisco has dealt a blow to the iPhone hype, suing Apple for infringing on its trademark. |
Implications | The stage is set for an acrimonious legal battle between Apple and Cisco, which could hinder shipment of the iPhone and effectively kill off its competitive advantage in the music-playing mobile handset market. |
Outlook | Given that Apple will not want the issue to linger for long in order to limit damages to its brand, a swift settlement is the most probable outcome. As such, unless Apple has a compelling case against Cisco's claim to a trademark, a fee in excess of US$100 million to Cisco seems likely. |
Cisco Systems yesterday took a swipe at Apple, suing the iPod maker for infringing on its trademark by using the iPhone name for its latest product. In a statement, Cisco said that it wanted to keep Apple from "infringing upon and deliberately copying and using" its trademark. Cisco said that it acquired the iPhone name in 2000, following its acquisition of Infogear, the original owner of the trademark. It added that its Linksys division—part of its strategy to become a key player in the consumer electronics market—has been selling wireless products with the iPhone brand since early 2006, with new products released in December (see World: 10 January 2007: Apple iPhone Launches, Cingular Gets U.S. Exclusive).
Reacting to the news, Apple spokesman, Steve Dowling, dismissed the litigation, noting that there were already several companies using the iPhone name for VoIP products. News of the legal battle negates the belief that Apple and Cisco had reached a deal prior to Apple's launch of its iPhone on Tuesday. Apple's chief executive, Steve Jobs, had, in an interview on Tuesday (9 January), suggested that a deal between the two companies had been reached. However, a Cisco spokeswoman said on the same day that Cisco had been in discussion with Apple and believed an agreement with the latter was possible. Yesterday, Mark Chandler, Cisco's chief counsel, also weighed in, suggesting that talks might have gone awry. "Before the product was announced, we hoped and we assumed it would be concluded shortly afterward, if not in advance, but that seems not to have been the case," Chandler said. "Our goal was to collaborate with the use of the trademark on different products for the two companies.”
Meanwhile the hype surrounding the iPhone continues to grow, with speculation that the Spanish telecoms giant, Telefónica, is seeking exclusive rights to market the phone across Europe. Citing the U.K-based Times newspaper, the financial news service AFX reported today that the Spanish operator is in talks with Apple with regard to winning exclusive rights for the iPhones that will be launched in Europe towards the end of 2007. Telefónica, however, declined to comment on the speculation. The reports noted that Hutchison Whampoa's 3 Group is excluded from the race to distribute the phones as the iPhones are not 3G-enabled. Cingular Wireless has already become the exclusive distributor for the phones in the United States.
Outlook and Implications
Would iPhone be Cisco's Pay Day?: The legal battle in the U.S. Federal Court is undoubtedly the beginning of what could become an acrimonious but swift battle for the iPhone name. Having launched the device, Apple cannot accept a drawn-out legal battle that would prevent it from taking the phone to market soon. If that was to happen, Apple would lose every ounce of competitive advantage its iPhone has, as rival handset manufacturers share out the market. Cisco, though, stands on a higher moral ground. It claims to have an officially-recognised trademark of the iPhone name, and has been marketing devices sold under the name for a while. Importantly, unless Apple identified loopholes in Cisco's case during negotiations that might justify a confrontation, entering into an agreement with Cisco over the use of the iPhone name would be a tacit acknowledgement that Cisco has a veritable claim to the name. If a legal battle thus ensues, Cisco would be seeking compensation from Apple for violating its trademark, as well as royalties for allowing Apple to continue to use the iPhone name. Global Insight believes that a fee in excess of US$100 million may be a likely proposition.
The "i-" Brand: The "i-" name has catapulted Apple from its obscure position as an underperforming computer manufacturer to the status of the global leader in handheld music players. Sales of its flagship product, the iPod, have reached about 70 million globally since its launch in October 2001. Despite the presence of other music players, particularly Microsoft's Zune player, the iPod controls about 70% of the U.S. handheld music player market. Its music store, iTunes, is equally successful, controlling a significant proportion of all online music sales around the world. Besides the well known iPod and iTunes, Apple also has software applications named under the "i-" brand such as iFiles and iWorks. With these in mind, the assumption that Apple would one day seek to launch an iPhone was fairly logical. Thus, a "trademark ambush" is likely as Apple would be seen to be keen to wrestle control of the name from any party.
The Scramble in Europe: Although Telefónica has declined to comment on reports that it is seeking exclusive rights to distribute the iPhone in Europe, Cingular's triumph as the exclusive distributor in the United States is a perfect recipe to trigger a scramble for the rights in Europe. For a start, opportunities for big-hit exclusives are quite rare in the mobile industry. Apart from Research in Motion's Blackberry device, it is largely difficult for the key handset makers—Nokia, Motorola, Samsung, Sony Ericsson—to create a device that would garner as much publicity as the iPhone. Besides, although exclusive distribution helps the mobile operator boost its sales, it does not necessarily benefit the handset manufacturer. For instance, if Telefónica was to become the distributor in Europe, the handset would be initially limited to the six European countries—Czech Republic, Germany, Ireland, Slovakia, Spain and the United Kingdom—in which Telefónica operates, automatically excluding other large markets such as France, Italy and Poland. It thus limits the addressable market for the devices, effectively reducing sales in the region. If Apple was to adopt this strategy, its expectation for 10 million iPhones in use by end-2008 may be overly optimistic.