Both Apple (AAPL) and Samsung (GM:SSNLF) reported record earnings for the first two quarters of 2012. With recent news of astounding sales of the new iPhone, Apple shares broke the $700 mark. Samsung has also benefited from its powerhouse Galaxy S III smartphone launch last quarter and has long been the force that has prevented even great companies like Nokia (NOK) from being a dominant player.
Sadly, however, Samsung has run afoul of Apple recently. The August 24 jury verdict found Samsung guilty of willful patent infringement, awarding Apple damages of $1.05 billion. Looking at the 'business end' of the Apple shotgun is a dangerous position for any company, much less one that has been running full steam to stay competitive. While it might not be long term, I predict some ramifications in the next few months for Samsung, as well those companies that supply them such as Qualcomm (QCOM) and Nvidia (NVDA).
What is Happening?
Samsung and Apple are the two companies responsible for nearly half of all smartphone units sold worldwide. While Samsung has earned its stripes by rolling out several models and variations, Apple has reached this level with only one product: it's iPhone, which, by the numbers, is now the most popular phone sold in the world.
Samsung also claims the title of the world's largest tech company by revenue for 2011, while Apple bears the belt for 'Richest Company' overall. But the two do not stand alone. Apple partners heavily with chipmaker Qualcomm for its user friends functionality. Samsung has found a solid partner in Google (GOOG) and its Ice Cream Sandwich platform. Combining it with a quad-core processor has allowed the phone maker to maximize profits through rolling out multiple versions of current product lines.
With both of these companies responsible for almost 25% of the global market share of smartphones, it was bad news for one to be hit with a billion dollar fine. According to the original suit, Apple, claiming patent infringement, had originally sought $2.75 billion in damages. A jury found Samsung infringement of Apple utility on five of six patents.
Now, Apple is seeking an additional $3 billion. A hearing is set for Friday in which Apple will argue its case. Though unlikely to win, it does keep Samsung's name and brand on the receiving end of more bad press.
What Has Happened
With such fierce competition between these two companies, butting heads both in court and out is expected. In April 2011, Apple issued a similar suit against Samsung over smartphone designs and patents. Samsung countersued, and their legal battle spread to courts in nine countries. Samsung also faces the headache of battling a three-month-old U.S. ban on its Galaxy Tab 10.1 tablet, allowing Apple to gobble up more market share in the tablet world.
As it stands, Samsung will not have to pay the billion-dollar fine in a lump sum - nor any time soon. What is more, the devices that Apple has identified are almost two years old. In the tech world, this means nearly obsolete and, in numbers, they account for about 1 percent of the company's total worldwide profits. Certainly this is a blow they can bounce back from, but that won't make working with Apple any easier.
And working 'with' is the key. It is interesting that Apple continues to be the largest customer for Samsung's component divisions, purchasing materials such as chips and display screens.
Some feel this win will embolden Apple to redouble its legal efforts against major Android companies. There has already been movement against HTC and Motorola Mobility. But the concern will be whether Apple will flex its muscles at companies that will not fare so well, such as LG or Sony. A fight with Apple could spell disaster for the two companies, whose combined value is less than a third of Apple's.
In addition, other companies who still want to engage in the smart phone market will have to take on the added task of differentiation. While most companies seek to provide a similar product for a cheaper price, on the heels of this decision, a company might have to go out of its way to avoid even the slightest hint iPhone likeness. Samsung in particular might now be forced to pull product and spend even more in redesigning efforts. Legal fees, plus loss of sales, plus design expenses equals a quickly dwindling profit margin.
The benefit Samsung has is its interchangeability and adaptability of its products. The Samsung business model is similar to many companies from the far east in that it is founded upon broad base consumer demand and rapid implementation. In other words, this company can turn on a dime - something most companies cannot do. Because several lines of its smartphones have the ability to run on different operating systems, the company is able to identify high 'sellers' and funnel more resources behind that.
In addition, the company has also capitalized on a successful ad campaign of being the alternative to Apple. Unknowingly, this move has set the stage for a massive differentiation strategy that is now forced on them by the courts.
The mobile phone industry has been characterized by fast-moving and quickly-changing product cycles. Companies release new product lines and updates to current ones in order to convert consumers to customers and maintain customer loyalty. Both these companies have the ability to maintain public interest in the smartphone market, however, Apple clearly has the upper hand because it can compete in several markets such as tablets, entertainment platforms (iTunes), and now, its own operating system - the iOS 6.
Based on Samsung's track record of innovation and strategic implementation of products, I predict it will bounce back quickly from the court decision. Even so, Apple now has some great ammunition to go after other smartphone companies. And Apple is not an enemy you'd want to have.