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Watch Out, Apple

By A.J. Firstman | Last updated on

The U.S. International Trade Commission (ITC) recently issued an order that may stop Apple from importing Apple Watches. The decision is the result of a January 2023 ruling that upheld a patent infringement claim for a piece of light-based technology used to read blood-oxygen levels. Masimo, who initiated the claim, is a global medical technology company. Its original complaint dates back to 2021 and alleges the Apple Watch Series 6 infringed on its patents.

"Masimo has wrongly attempted to use the ITC to keep a potentially lifesaving product from millions of U.S. consumers while making way for their own watch that copies Apple," an Apple spokesperson said.

President Joe Biden now has 60 days to decide whether to uphold or veto the ban before it goes into effect. Apple will also have the opportunity to appeal the ban to the U.S. Court of Appeals for the Federal Circuit after the 60-day period elapses or if President Biden chooses to uphold the ban. In other words, the importation of Apple Watches won't be banned anytime soon.

The ITC's decision did not specify which Apple Watches will be affected by the ban, so there's also a chance that only the model initially described in Masimo's complaint (the Series 6) will be affected if the ban is upheld and Apple's appeal is rejected.

The Underdog

Everyone knows about Apple. It's hard not to. Masimo, on the other hand, isn't exactly a household name.

An electrical engineer named Joe Kiani started Masimo in 1989. He and his company worked on developing advancements in pulse oximetry, a technology used to take blood-oxygen readings, and their efforts led to Masimo growing into a leader in the space, earning enough buzz and recognition that they got the attention of a little company named Apple back in 2013.

According to Kiani, Apple approached him with what seemed like good intentions. They wanted to know about the technology, the business, the regulatory pathways standing between Masimo and the market. Kiani thought they were going to make an offer to acquire the company outright.

Spoiler: there was no offer.

Kiani alleges that Apple had no intention to acquire Masimo or its technology, and was instead looking to acquire the talent that made Masimo tick. Apple referred to this as "smart recruiting," ostensibly hoping to either recreate Masimo's technology without paying for it or to drive Masimo into such dire straits that they'd have to sell to Apple for much less than they were worth. Headhunting is legal, although sometimes narrowly-tailored non-compete agreements can affect whether an employee is able to leave to a competitor. And patent infringement is illegal, as is stealing protected trade secrets.

Companies might be hesitant to take legal action against a juggernaut like Apple – then valued at over $500 billion, now over $3 trillion. But Joe Kiani had something else in mind. Masimo's technology was valuable enough to pique Apple's interest, and Apple had acquired a few of Masimo's top people for their knowledge and expertise. But they hadn't acquired Masimo, its patents, or the licensing rights.

The Big Apple

The rulings in Masimo's favor regarding Apple's alleged patent infringement could represent a significant blow to the juggernaut's lucrative Apple Watch peripheral. The Apple Watch, while not nearly as big a seller as the company's flagship iPhone product line, still contributes billions of dollars to Apple's bottom line. A legally mandated embargo on Apple Watches probably won't be fatal to the giant firm, but it will cost the company hundreds of millions or billions of dollars in U.S. sales. That loss, plus the potential damage to the Apple Watch brand, would be quite a headache for a company that's not accustomed to facing such setbacks.

Perhaps more interesting is the fact that Masimo is a publicly traded company, and has been for some time, which means we can determine how much Apple would have had to pay to acquire the company.

As of the beginning of November 2023, Masimo's market cap (stock share price multiplied by number of stocks) was approximately $4.35 billion, down from a peak of around $16.5 billion in 2021.

Masimo's average market cap in 2013 was about $1.65 billion.

Now here's where it gets fun. Let's say Apple did a hostile all-stock takeover of Masimo in 2013 when they were pretending that they were interested in acquiring Masimo. Acquiring 100% of the company would have cost them about $1.65 billion.

In Apple's 10-K filing to the SEC for the fiscal year ending September 2023, they note that their "Wearables, Home and Accessories" category, which includes Apple Watches, AirPods, and a few smaller products, earned $39.845 billion in revenue in 2023. Apple is fairly tight-lipped about their actual sales figures and profit margins, so there's no way of knowing exactly how much money they made on their Apple Watches, but there are a few unofficial estimates out there.

If we're being conservative, we can probably say that Apple earned at least $10 billion in revenue from Apple Watch sales and services in 2023. In other words, just one year's worth of Apple Watch sales would have been more than enough to buy Masimo, its patents, its knowledge, and its trade secrets at Masimo's 2023 valuation, let alone its 2013 valuation.

Apple will undoubtedly file an appeal as soon as the review process is over, and there's a pretty decent chance they'll be able to continue importing their Apple Watches. But it just goes to show that litigation can be as expensive for a company as mergers and acquisitions.

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