Lessons from the Apple-Psystar Battle
Psystar, the Florida-based startup that has been hawking PCs running unlicensed copies of Apple's MacOS software, isn't going down without a fight. After Apple (AAPL) sued the company for copyright infringement and other alleged violations, a federal judge on Nov. 13 ruled in Apple's favor without even letting the case go to trial. On Dec. 1, Psystar announced what its lawyers described as a partial settlement, whereby it would pay Apple $2.7 million—no small sum for a company that filed for bankruptcy protection earlier this year. Psystar has since emerged from Chapter 11, but anemic sales to date suggest it's not exactly flush with revenue. A witness hired by Apple could find only 768 Psystar units sold. Yet the terms of the settlement suggest Psystar is serious about appealing the case. On Dec. 14, Federal Judge William Alsup is due to decide whether to grant Apple an injunction that would bar Psystar from selling its Mac clones. Even if the judge grants the injunction, Psystar argues that it should still be able to sell a separate $50 software program called Rebel EFI that computer hobbyists could use to install the MacOS on a PC themselves. In other words, Psystar's customers—not the company itself—would do the allegedly dirty work. Defending the Whole EnchiladaWhatever the outcome of Psystar's ongoing battle, even now the saga carries some important lessons for other would-be challengers to tech's status quo. Don't pick a legal fight you can't win (put another way, don't mess with Apple). The onetime underdog is now one of the staunchest defenders of its intellectual property, and it has a $24 billion cash hoard to help press its case in court. Also, Psystar's young founders, Rudy and Robert Pedraza, could have checked their Apple history books. After Apple CEO Steve Jobs returned to the company in 1997, one of his first moves was to nix deals Apple then had with Power Computing, Motorola (MOT) and Umax, which briefly enjoyed a license from Apple to sell Mac lookalikes. Although Power Computing had vaulted to $400 million in sales thanks to Mac clones, Jobs got the company to leave the playing field in exchange for a payment of just $100 million. "Jobs has never stood by for anyone to go near Apple's IP, and they always go to the mat" to protect it, says Roger Kay, founder of Endpoint Technologies Associates. Mac users want the whole enchilada. The world has changed immensely since Power Computing and the other cloners were trying to build their business. Back then, the Mac customer base was mostly companies and technically sophisticated consumers. Now, the company sells millions of Macs a year, to all manner of consumers. When they head out to buy a computer, they're not defining the Mac as an operating system. The Mac is a stylish machine that runs a well-designed operating system—and a machine that is backed up by support from a company with one of the world's strongest brands. In consumer electronics, especially those made by Apple, price isn't everything. Psystar has sold Mac clones for as little as $400—roughly half the price of the cheapest Mac. But Apple's customers are clearly willing to pay full price. How else to explain Apple's dominance of the market for PCs costing more than $1,000, where its share is north of 70%. Why? There's a host of reasons, ranging from catchy commercials, to slick industrial design, to the machine's association with the popular iPod and iPhone. Another reason is the network of 200-plus retail stores, where Apple customers can bring in a Mac in a pinch to get face-to-face help from technicians at a Genius Bar. This alone could help Apple maintain leadership, even if Microsoft continues to close the innovation and ease-of-use gap between its Windows operating system and the Mac. "Where Apple really shines today is in service," says longtime Apple watcher Tim Bajarin, founder of consultancy Creative Strategies. Psystar, on the other hand, can't even assure its customers that its hardware will take full advantage of future versions of the MacOS. Antitrust Suit in FloridaOf course, Psystar could still beat the odds and survive by selling PCs and its Rebel EFI software. But that's a far cry from its plan to build a major enterprise that once promised investors it would sell as many as 12 million Mac clones by 2011. And Psystar certainly has scrappiness on its side. The company has filed an antitrust suit against Apple that is proceeding for now in a Florida court. And despite the demise of its Mac clone business, the company as of Dec. 1 was still hawking the machines on its Web site. Psystar's attorney, Kiwi Camara of Camara & Sibley in Houston, is hopeful the copyright case in California will be reversed on appeal (the partial settlement stipulates that Psystar won't have to pay those damages until all appeals have been exhausted). And Camara says Apple's decision to drop a spate of remaining claims against Psystar—on trademark infringement, unfair competition, and others—shows Apple wants to end this saga as well. "This [partial settlement] is too good to be true," he says. "I don't know why they did it." A bigger unknown for Psystar, though, is why its founders decided to take on Apple in the first place.