Does Apple's Win Spell Disaster For Samsung?

| About: Samsung Electronics (SSNLF)

The Trial of the Century has come to a close and Apple (NASDAQ:AAPL) has emerged as the resounding winner against Samsung (OTC:SSNLF). This case has been the talk of the technology world for the past month and has had more drama than a Grisham novel. A jury ruled that:

  • Samsung violated six of seven Apple patents presented in the case (five of which were "willful" and could bring triple damages)
  • All seven of Apple's patents at issue are valid
  • Apple did not violate any of the five Samsung patents presented
  • Samsung ordered to pay $1.05B for its violations

(Source: US Northern District of California Apple vs. Samsung Full Jury Verdict Form)

This was certainly an "all-in" trial for both firms as both Samsung and Apple revealed key proprietary information in an attempt to emerge victorious. This was an even larger issue for the notoriously close-lipped Apple which made public sales and profit information on some products for the first time. The disclosure of information was certainly worth it for Apple and it shows the degrees to which Apple will continue to go in order to beat rivals. Apple's commitment should provide investors' confidence. On the other extreme, Samsung's blatant infringement should make investors question the degree to which the company can out-innovate rivals in the future.

The ruling will have sweeping implications in the near-term for Apple, Samsung, and Google (NASDAQ:GOOG) but Samsung will likely feel the largest impact. Aside from the obvious financial ruling, the intangible impacts of the case will reverberate for years. Samsung will likely have to make dramatic updates to the 'look-and-feel' of its smartphones in order to avoid infringing on Apple's patents in the future. Key patents mentioned in the case include "pinch to zoom" and "bounce back" that rivals have copied and consumers now come to expect. Apple will likely offer to license most patents to the tune of approximately $30 per device but may be reluctant to offer the key patents to competitors.

Make no mistake, Samsung will appeal this ruling vigorously and it will likely be months before the case is finalized. Samsung will seek to have the ruling overturned or have the damages reduced while Apple will seek injunctions against infringing products and to collect more in damages from Samsung. Apple appears to have the lead in appeals as legal experts believe that the Federal Court has already "blessed the jury's findings". The possibility still exists that Apple will settle with Samsung if the company drops its plans to appeal since the companies are still critical partners in many different markets. Remember, Apple is Samsung s largest customer and accounts for almost ten percent of Samsung's sales. Just this week Samsung announced plans to invest $4B in a key chip plant that produces Apple's A5 and A5X chips.

While the case has focused primarily on Apple and Samsung, Google will face serious repercussions as well. Google produces the alternative operating system, Android, that is essentially the only competitor to Apple's iOS. Some of the utility patents that the jury ruled Samsung infringed upon are staples for Android. If these features are taken away, consumers may slow their adoption of Android devices. This ruling could cause HTC, Motorola, and other companies involved in litigation with Apple to take pause before pursuing the case. It is likely that all competitors will at least delay the releases of their newest smartphones to ensure that they are not infringing on the key patents involved in the case.

On the bright side for Samsung, the financial damages could have been far worse. Most analysts expected Samsung to lose the case so you would think that most of the downside was priced into the stock. The $1B ruling is less than half of what Apple was seeking although it could rise depending on Apple's appeals. For reference, Samsung has approximately $21B in cash so the firm can afford the verdict. So no, the verdict will not be ruinous for Samsung but it will force the company to finally stand on its own legs and innovate. Can the company do that? Only time will tell.

Disclosure: I am long AAPL, GOOG. 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.

Additional disclosure: Disclosure: Short AAPL Aug 31 $660 Calls.