Why Would Apple Buy Displays From Samsung?

| About: Apple Inc. (AAPL)

Summary

The Korea Herald has reported that Apple has selected Samsung OLED displays for use in the 2017 iPhone.

Apple may have found a better screen technology in its new 9.7 in iPad Pro.

Business considerations probably weigh against a partnership with Samsung in any case.

Recent reports out of Korea that Apple (NASDAQ:AAPL) plans to use Samsung (OTC:SSNLF) OLED displays for iPhone starting in 2017 ignore a number of technical and business considerations. The common belief that OLED displays are superior to LCD is debatable. Furthermore, the fierce competition between Apple and Samsung argues against a supplier relationship that would make Apple once again dependent on Samsung for a critical iPhone component.

Source: Apple

Consider the Source

Since Samsung and many other Apple competitors started using Active Matrix Organic LED displays (AMOLED), it's become a common criticism of Apple that its displays were inferior. This was pointed to by Apple critics as yet another area where poor old clumsy Apple was falling behind the times.

Apple has often been an early adopter of technologies such as AMOLED. In fact, one criticism I've heard is that Apple is merely an early adopter, and doesn't originate technology development of its own. Why then has Apple not jumped on the AMOLED bandwagon?

The usual explanation is that Apple is just defending its margins, and LCD offers lower cost compared to LCD. That might be true, but I'm not convinced that would restrain Apple significantly. Also, AMOLED manufacturers are arguing, with justification, that the bill of materials is smaller. AMOLED displays are simpler, requiring no backlight. If AMOLED really offered a superior display, Apple would probably be attracted to it by virtue of being simpler, lighter and thinner.

In fact, the claim that AMOLED displays are superior ignores many of the problems with them, and these problems are largely ignored by the media. The most important problems with AMOLED are the limited display lifetime, especially of blue pixels, and color and intensity non-uniformity across the display.

The limited lifetime of blue OLED materials is well known and is the subject of ongoing research. Dr. Steve Forrest, a researcher on the subject at the University of Michigan last year summarized the state of the art. Blue pixels typically last less than 1% as long as the green and red pixels.

To help blue pixels last longer, AMOLED screen makers typically make them bigger, as can be seen in this magnified image of the Samsung display layout used for the Galaxy S6 and S7.

OLED pixels don't die a sudden death, but decline gradually in light output from day one, depending on the amount of use and operating brightness. For that reason, OLED displays are subject to burn in, which isn't a problem with LCDs at all. What's burn in? If you need to ask, you're too young to remember the olden times of pre-LCD televisions.

Burn in is where a very bright image leaves a permanent after-image in the screen. Screen savers were devised to reduce this effect by continually changing the content of the screen. Screen savers stopped being necessary once LCD displays became prevalent.

In addition to burn in, AMOLED displays are subject to considerable response non-uniformity, which can produce a grainy image when displaying a uniform color. This problem is hardly ever treated in reviews of AMOLED display. I've only seen one review that even broached the subject, Ron Amadeo's review of the Blackberry (NASDAQ:BBRY) Priv in Ars Technica, which suffered from particularly severe non-uniformity.

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Even though reviewers tend to ignore the problem, one can find plenty of anecdotal evidence that it's still an issue in various Android discussion forums. Even Samsung's latest Galaxy S7 has received complaints. Complaints are not confined to the S7. One can find similar complaints about almost any phone that uses an AMOLED display, including the Nexus 6P, and the One Plus. In the the Galaxy S6: The Ugly Truth About Its Screen, one unhappy owner posted a series of photos detailing the problem, as shown below.

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In his recent review of the S7's display, Dr. Raymond Soneira (Displaymate) alludes to the improvement in uniformity of the display, but offers no quantitative measurements. Dr. Soneira provides excellent, comprehensive technical reviews, and I wish he would address this issue. All displays, including LCD, suffer from some non-uniformity artifacts of various types, and it would be interesting to get a better feel for how Samsung's AMOLED displays compare to other AMOLED and LCD displays.

Perhaps the biggest drawback of OLED is that it's less power efficient than LCD when the background of the display is mostly white. This is not an uncommon scenario. When reading an ebook, or visiting most web sites, the background is predominantly white.

Pointing to the Near Future

Dr. Soneira has generally favored OLED screens for having better color and contrast, but his recent review of the screen 9.7 inch iPad Pro probably indicates where Apple is going for the next few years. The Pro set new standards for LCD screens in terms of color gamut and brightness. Color gamut pertains to the saturation and richness of the color as seen by the human eye. Most displays don't achieve the full range of color that the eye can perceive. The iPad Pro comes very close to the gamut of the S7, which has been a key area of superiority for AMOLED.

The Pro also is brighter than the S7 when displaying an all white background. Although AMOLED has higher contrast ratio (when viewed in the dark), the Pro's contrast ratio when viewed in bright light conditions was actually better than the S7. Under typical usage scenarios, the Pro provides a better experience, and uses less power.

The reader is probably wondering why Apple chose AMOLED for Apple Watch. Here, the difference is usage scenario. Most of the time, the background of the Watch is kept dark. In this scenario, AMOLED is more efficient, and this would be a key consideration for Watch battery life. Most of the time, users aren't reading a lot of text, such as an ebook, and messages can be displayed with white characters on a black or dark background.

The improvements in the 9.7 inch Pro display are so substantial that they probably cancel any perceived advantage that AMOLED might offer in terms of color accuracy and contrast. The sole advantage that AMOLED might have is in being lighter and thinner. But this is offset by the need for a larger battery to support use of the screen for light backgrounds. For instance, the battery of the S7 is 3000 mAh vs. the 2750 mAh battery of the larger iPhone 6s Plus.

Business Considerations

While the technical considerations for AMOLED are debatable, business considerations will probably have the final say. Apple and Samsung are locked in a fierce and acrimonious competition. Apple has waged a legal battle against Samsung's violations of Apple's patents. Apple is shifting its processor production to TSMC (NYSE:TSM), even though it used Samsung for part of the production of the A9 processor for the iPhone 6s.

When Apple signs up a supplier, it is in effect agreeing to share profit with that supplier. Why would Apple want to share profit with Samsung? The rumor really doesn't take into account the bad blood that must exist between the managements of the two companies.

The rumor also doesn't take into account the recent purchase of Sharp by Foxconn (OTC:FXCOF), in which Apple may have played a part. Sharp was reported to be the supplier of the screen for the larger iPad Pro, and I think it's likely that Sharp is the supplier of the 9.7 inch Pro display as well. Regardless of Apple's involvement with the Sharp purchase, I doubt Foxconn would have bothered with Sharp if it didn't have a ready customer in Apple for Sharp's display output.

This says at the very least, Sharp/Foxconn will be the preferred supplier for Mac and iPad displays for the next few years. Since volume is really in iPhone, probably Sharp/Foxconn will be the preferred supplier for iPhone as well. I consider this probable by virtue of the excellent display performance achieved in the 9.7 inch iPad Pro.

Even if Apple were to elect to use AMOLED for iPhone, it would probably prefer to stay clear of Samsung and use its current supplier of AMOLED displays for the Apple Watch, LG. LG was reported to be expanding its OLED production capacity, and this might have been in anticipation of increased demand for OLED for a future iPhone.

Investor Takeaway

The rumor, coming as it does out of Korea, really amounts to a not very subtle putdown of Apple. It's a statement that Samsung's display technology is so superior that Apple will elect to use it despite all that has transpired between the two companies.

I seriously doubt it. I think it's possible that Apple may skip AMOLED altogether in favor of an emerging technology, the quantum dot OLED or QLED. The advantage of QLEDs would be that the blue pixel would be as efficient and long-lived as the red and green pixels, thereby solving one of the major problems of current AMOLED displays. Quantum dot technology is already in use to improve the color gamut of LCD backlights, and may even be used in the 9.7 inch iPad Pro.

Apple doesn't have much to gain from using AMOLED, but it has a lot to lose in terms of market credibility by turning to Samsung as a display source. I believe Apple management fully realizes this and will steer clear of Samsung. I remain long Apple and recommend it as a buy.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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