On August 24, a U.S. Federal District Court found Samsung (SSNLF.PK) guilty of patent infringement against Apple Inc. (AAPL). As part of this verdict, the San Jose jury is ordering Samsung to pay $1.05 billion in damages to Apple. Samsung is expected to appeal this decision, which effectively bans many of its current Android phones from the U.S. market. Samsung's recent Japanese court victory over an Apple patent case in Japan further muddles the waters. These contradictory decisions may serve as evidence that South Korean Samsung is doomed to fail when forced to challenge Apple litigation in Steve Jobs' very own Silicon Valley backyard. On a global scale, this Samsung-Apple turf war is likely to neutralize its own self in the courts. In turn, these verdicts will do little to alter the current smartphone market pecking order.
Microsoft (MSFT) cheerleaders, of course, would beg to differ. Logically, Samsung's loss would force this corporation to abandon its Android platform and begin to aggressively hawk Windows 8 phones in the United States. In reality, Samsung is not the ideal proxy to represent Microsoft in its ongoing war against Apple. The Windows 8 versus Android versus Apple iOS relationship is far from an absolute, zero-sum game for either party. If anything, courtroom gridlock against Samsung will drive even more customers towards the Apple iPhone, instead of any complimentary Windows 8 smartphone offering.
The Smartphone Duopoly
Apple's operational excellence serves as evidence of the Steve Jobs' halo effect. Apple is "cool." In Wall Street parlance, Apple leverages its fusion of technical expertise and art to establish "goodwill" for its brand. Financially, the iPhone is the centerpiece of Apple's closed and integrated ecosystem that includes the iMac, iPod, iTunes, and iPad platforms. During the third quarterly period ended June 30, Apple netted 26 million in iPhone unit sales. This performance calculates out to $16 billion in revenue, or roughly half of Apple's $35 billion in total sales for the period.
In response to the Apple iPhone smartphone revolution, Samsung and Google (GOOG) joined ranks to provide alternative solutions for consumers. In 2005, Google bought a then-unknown Android start-up for a mere $50 million. Last spring, Google closed out its $12.5 billion Motorola acquisition largely to secure patents and proactively defend its towering smartphone empire against lawsuits. The Android and iOS systems have effectively merged together, as demonstrated by eerie similarities between the iPhone and Samsung's standard-bearing Galaxy SIII. According to critic Mike Elgan, only the most devoted "fan boy" can differentiate between the Apple and Android "feel," based upon technical specifications.
Research firm comScore presents recent telecommunications data that highlights an industry dominated by two players. The Google Android and Apple iOS operating systems account for 52% and 33% of all smartphone subscriptions, respectively. In terms of hardware, Samsung carries 26% of the market, while Apple ships out 16% of handsets sold. Taken together, Google, Samsung, and Apple lord over a rag tag bunch that includes Nokia (NOK), Research in Motion (RIMM), and Microsoft.
Microsoft's meager 3.6% share of the smartphone market actually represents a small decline from the prior quarter. Microsoft executives, of course, are banking upon their symbiotic relationship with Samsung to help drive Windows 8 phone sales and power bottom line growth. On August 29, Samsung unveiled its ATIV S handset prototype at IFA in Berlin, in an attempt to answer Microsoft's call.
Samsung ATIV S Windows 8 Phone Specifications
Prospective Samsung ATIV S sales performance, of course, will be heavily linked to market acceptance for Windows 8. Set for an October 26 release, Windows 8 will be a fusion of traditional personal computer, smartphone, and tablet interfaces. For example, a Windows 8 user may opt to use touchscreen technology to execute desktop commands, before picking up his Samsung ATIV S phone and toggling through tiles for Microsoft Word and Excel. This fusion of software contradicts Steve Jobs' Apple Way, where distinct operating systems are engineered for each machine. Microsoft brass are likely to be disappointed, when they discover that smartphone consumers are more in the market for a fashion accessory, than they are for a functional workstation.
The ATIV S is notable for its brushed aluminum finish, which is a stark departure from Samsung's typical plastic look that is somewhat flimsy. Weighing in at 135 grams, the Samsung ATIV S stands 5.4 inches tall by 2.8 inches wide, and is 8.7 millimeters thick. This phone's 4.8-inch high definition AMOLED screen generates 16 million different colors in 720 x 1280 resolution. As a camera, Samsung features an 8-megapixel sensor and can record 1080p video at 30 frames per second. Beneath the surface, Qualcomm's Snapdragon 1.5 GHz dual-core processor powers this Windows 8 phone. The Samsung ATIV S packages two separate versions of memory at 16GB and 32GB. Most likely, this phone will begin at the $100 price point, if you agree to the terms and conditions of a two-year phone service contract.
This Samsung ATIV S phone is likely to launch prior to this Holiday season. This scheduling is concurrent with the looming Nokia 920 release. Unfortunately for Microsoft, these two Windows 8 phones juxtaposed against each other will cannibalize sales.
The Bottom Line
As an investment, Microsoft is a technology corporation in name only. In terms of performance, Microsoft is comparable to a utility that dominates a particular sector, generates stable levels of cash flow, and makes regular dividend payments. In other words, Microsoft is now a beta stock that merely tracks the S&P 500 Index. As such, Microsoft shares offer little in terms of capital appreciation throughout this dead money decade. The Windows 8 release and Samsung ATIV S phone will be unable to significantly move the needle at this $260 billion behemoth. Over the course of the past five years, Microsoft's profits have stalled out near the $17 billion watermark.
Microsoft doubled its quarterly dividend payout between 10 and 20 cents per share between fiscal Q4 2007 and Q1 2012. At this rate, the Microsoft cash cow is likely to pay $1.60 in annual dividends by 2015. If Microsoft flat lines at $30, its dividend yield would then calculate out to be a tidy 5.3%. Investors starving for yield, however, can always dump money into Altria Group, Inc. (MO) stock.
For growth, $680 Apple stock trades for a mere 16 times earnings and remains the best conduit to leverage the smartphone market.