iPhone war: more than just a name

(Business 2.0 Magazine) -- Think Cisco's lawsuit against Apple is just about a name? Think again.

When Cisco sued Apple this week over the 'iPhone' name, it wasn't your typical legal move to wring lucrative licensing fees out of a deep-pocketed company. Rather, it was the first salvo in what's set to become an epic war between the two companies over how consumers talk on the phone.

And there's much more than stake than just some cool gadgets.

To recap: At Macworld Tuesday, Apple CEO Steve Jobs announced a long-rumored device that combines a cell phone, iPod, and handheld computer. Jobs dubbed it the iPhone - and, in the process, picked a big fight with Cisco.

It turns out, Cisco (Charts) acquired the iPhone trademark in 2000 and had been in talks with Apple (Charts) up until the night before Jobs' speech over rights to the iPhone name. Cisco's Linksys division has been selling Internet phones under the iPhone brand for almost a year.

Here's where it gets interesting: Today cell phones and Internet phones are essentially different kinds of devices. One day soon, however, these two devices are going to be virtually indistinguishable - and that's the future Apple and Cisco are fighting over.

Most people use a regular handset to make calls at home, cell phones to make calls on the go, and special software or hardware to make calls on a personal computer. But as more calls move onto the Internet - a shift to technology called Voice over Internet Protocol, or VOIP - those distinctions are disappearing.

How so? Cell phone makers are building in VOIP software so that their phones can run over either cellular networks or Wi-Fi connections. And VOIP providers like Skype, an eBay (Charts) unit, are licensing their software to Cisco and other networking gear makers, so that they can make phones that look like regular home phones - but the calls are routed over the Internet.

This is the direction in which both Cisco and Apple are headed.

As Cisco general counsel Mark Chandler revealed in a blog post this week, the two companies weren't just negotiating over the iPhone name.

Talks between the two companies bogged down over some larger issues. Cisco wanted guarantees that its devices would work together with Apple's products. and to make sure the brands were distinct. Translation: Cisco wanted a say in the design and direction of Apple's iPhone and to make sure that Apple stayed out of its VOIP turf.

Apple wasn't having any of it - to no one's surprise. Apple is famous for setting its own standards in design and technology. There's no way Jobs was about to let Cisco dictate, or even have a say in, the Apple iPhone's future.

Another factor that likely came into play: Apple and Cisco already compete in the VOIP and Wi-Fi markets.

Apple makes VOIP software that runs on its Mac computers called iChat. And while Apple hasn't disclosed plans for VOIP on its iPhones, there's no reason why it couldn't build that technology into its phones, as other manufacturers are already doing.

The two companies also compete head to head in the market for home Wi-Fi routers - the devices that turn a broadband connection into the wireless Internet signal that most VOIP phones will use to transmit calls.

Long-term, this war is about the future of VOIP. But that doesn't mean the first battle over the iPhone trademark should be dismissed out of hand.

Apple thinks it's done nothing wrong by using the iPhone name. Company representatives have called Cisco's lawsuit "silly," pointing out that Apple is the first company to use the iPhone name for a cell phone.

That's a shaky claim. Cisco's trademark seems broad enough to include cell phones: It covers "communications terminals ... providing integrated telephone, data communications and personal computer functions." Sounds like a lot like the iPhone that Jobs described for nearly two hours Tuesday. In the wireless industry, "terminals" are synonymous with cell phones.

Some legal experts think Apple has a better shot at fending off Cisco if it attacks the underpinnings of Cisco's trademark.

Curtis Smolar, managing partner of Bay Capital Legal Group and an intellectual property expert, says Apple could claim that "iPhone" is a generic or descriptive word for Internet phone (much the same way that Kleenex and FedEx are now part of the lexicon). If a court agreed, Cisco would lose the trademark.

Apple could also make a case that Cisco has failed to protect the mark, which is another defense to trademark claims that courts consider. To be sure, plenty of companies have used the iPhone name - including Nuvio, Teledex, and Comwave - without Cisco publicly complaining. Amazon.com also sells iPhone-branded VOIP phones made by at least one other manufacturer besides Linksys.

But consider this: both Cisco and Apple could lose if the iPhone trademark disappears. Smolar says Apple would be left with a weakened name that it won't be able to protect from widespread use. "The arguments Apple makes could come back to haunt them," he says.

That's a key reason why this legal battle might be settled without a court ruling.

The last thing Apple or Cisco want, after all, is for Motorola (Charts) and Nokia (Charts) to come out with iPhones of their own - something those companies could conceivably do if Cisco's trademark claims don't hold up in court.

The next few weeks and months should be intriguing. But even if Cisco and Apple sign a truce over the iPhone name, we'll be seeing these two companies fight for years over the devices we use to communicate - no matter what they're called.