Samsung's Apple patent loss: The financial hit is manageable

Samsung's Apple patent loss: The financial hit is manageable

Summary: Should the Galaxy S3 and Galaxy Note---two products that Apple will ask a judge to ban from the U.S.--- elude an injunction, the fallout from Samsung's patent lawsuit defeat is likely to be minimal.

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Samsung has been hit with a stinging patent lawsuit defeat at the hands of Apple, but assuming the electronics giant can keep its Galaxy S3 and Galaxy Note away from an injunction the financial hit is minimal.

In other words, the fact a jury ruled that Samsung must pay at least $1.05 billion in damages to Apple for infringing on three design patents isn't the hit it's portrayed to be. Even if Apple's gets three times that amount in damages---something that is possible---Samsung has a few things going for it. A hearing Sept. 20 on whether Samsung's 25 models should be banned from the U.S. is the next key item in this patent scrum.

Among analysts, the Apple-Samsung outcome broke down predictably based on what side of the planet they were on. For instance, Morgan Stanley analyst Katy Huberty gushed about Apple's competitive position and potential market share gains. Analysts in Asia noted that Samsung can weather the storm handily.

ZDNet: Miller: Will Nokia and Microsoft be the winners after Apple - Samsung verdict? | O'Grady: With Samsung spanked, could Google be next? | Kendrick: Samsung / Apple verdict: The aftermath | Foley: The real winner in Samsung vs. Apple: Microsoft? | Burnette: The verdict is in: Samsung vs. Apple | Vaughn-Nichols: Apple vs. Samsung verdict: It doesn't matter | King: Apple v. Samsung verdict: What it means

CNET: Apple v. Samsung: Juror says both sides' lawyers were persuasive | Exclusive: Apple-Samsung juror speaks out | Top evidence according to juror (pictures) | Full coverage: Apple v. Samsung | Techmeme

For now, there are a few key points to consider from the Samsung side of the equation. To wit:

It's all about the Galaxy S3 and Galaxy Note. An injunction on Samsung's 25 models highlighted in the Apple lawsuit really wouldn't matter much. Why? The products aren't on the market and certainly don't have significant volume. Apple will try and get an injunction on the Galaxy S3 and Galaxy Note. However, that move isn't a slam dunk given that Samsung's S3 is different than the S2. Should Apple get an S3 injunction it'll effectively freeze most Android handsets in the U.S.

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If the Samsung Galaxy S3 avoids an injunction in the U.S. the Korean electronics giant won't see much Apple patent fallout beyond initial damages.

Should the S3 elude an injunction, Samsung is in good financial shape. Deutsche Bank analyst Seunghoon Han said:

We note that the smart phones subject to the court ruling are older models and not the flagship models (Galaxy S3/Galaxy Note) that Samsung is currently selling in the U.S. market, and as a result may only have limited impact on Samsung smartphones sales in the US in 2H12. We believe the longer-term impact may be limited as Samsung has already been re-designing smartphones since Apple filed its patent claims in April 2011.

The U.S. is big, but not everything to Samsung's profit power. The U.S. accounts for 20 percent of Samsung's smartphone shipments. If all Samsung devices were kicked out of the U.S.---unlikely---the worst case is 20 percent market share evaporates. That hit would hurt, but losing to Apple in Europe and China would be far worse. Barclays analyst SC Bae said in a research note:

If Samsung were to lose its EU and China markets, the impact would be critical. We believe that the U.S. verdict may impact negatively on the ongoing lawsuits in other regions to some degree; however, the magnitude of the impact won't be significant given the conflict of the interests. For example, China, Japan and Taiwan have a number of smartphone manufacturers that could be directly affected by the result of the lawsuit. Other regions, including the EU, might have more neutral positions than Asian countries. However, we believe they might also consider the point that Apple's win would result in the inflation of smartphone prices. We believe the preliminary results from the Japanese court, which will be delivered on 31 August, will give an early indicator for the rest of the lawsuits.

Future royalties may be minimal. Bae noted that Samsung is likely to run around most Apple patents except for Apple's pinch to zoom patent. Samsung would have to pay royalties on that one.

Samsung could screw up Apple's supply chain. The Apple-Samsung relationship is very complex. Apple is Samsung's largest customers. Here's the supply chain moving parts via Bae:

  • Apple's component purchases from Samsung don't amount to more than 5 percent of the Korean giant's operating profit.
  • Apple, however, depends on Samsung for memory and screens.
  • Should Samsung tell Apple to take a hike, Apple's negotiating power won't be as strong.

Samsung's brand can recover and may improve outside the U.S. To the rest of the world, Apple clearly had home-field advantage in the U.S. lawsuit. Samsung may look better outside the U.S. Travel abroad and you notice that Samsung devices are everywhere. 

Appeals will delay any profit hit. Apple was awarded less than the $2.5 billion it wanted. There are already arguments brewing that the jury was off.

Topics: Mobility, Android, Apple, Legal, Samsung

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84 comments
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  • Summary is missing a few words?

    Should the Galaxy S3 and Galaxy Note what?
    zhangkhaien@...
    • Should be free of ban; however, Larry is not quite correct with his ...

      ... approach.

      From late spring of 2011 to late spring of 2012 Samsung sold over 20 million SGS 2, and 5 million of SG Note. But overall smartphone sales for that period topped 100 million.

      So while, of course, flagman devices have bigger profit margin, they only make like 25 percent of all sales. The rest are mostly iPhone imitations -- like Galaxy Y, Galaxy Ace, and so one. There are bigger sales and profits.
      DDERSSS
  • Of course it's manageable.

    After all, Samsung can simply increase what it charges Apple for parts to cover the financial loss.

    That of course assumes that the award is not overturned on appeal.
    Letophoro
    • I doubt that it is that simple . . .

      "After all, Samsung can simply increase what it charges Apple for parts to cover the financial loss."

      i suspect that Apple would have long term contracts that control costs.
      Wakemewhentrollsgone
      • you're joking right?

        So Apple controls the Samsung manufacturing, wholesale & distribution of it's own (i.e. Samsung's) electronic components & inventory?

        You sorry, RDF blinded moron.

        There is no customer - corporate or otherwise - on this planet that can dictate the price of any raw material, product, part(s) or service ... else Apple would surely be asking for free components from Samsung.

        Please, you can't be that stupid ... oh, wait.
        thx-1138_
        • What?

          What are you talking about? Huge volume parts purchasing contracts typically cover years, with the prices and min/max quantities spelled out. It might be that Samsung is patiently waiting to spring a huge price increase on Apple when the contract runs out, but not until then. I doubt Tim Cook would be blindsided by that... he'll have alternative suppliers lined up before it becomes an issue.

          By the way, Apple -does- control the manufacturing facilities of some of its suppliers ( I do not know if any of the Samsung-produced parts are among these). Apple does this by either leasing the facility and factoring that into the price, or paying for all of the output up front. The "manufacturer" is basically a facility operator in those deals; Apple owns the parts at every step of the process, and may also own the design.
          Robert Hahn
          • wonderful series of arguments here...

            one thing I did not see mentioned, Apple is building a new display factory and licensed LG to manufacture the displays in the factory. I think they sued Samsung because they were already planning on not renewing their contract.
            aiellenon
        • @thx Can YOU possibly be that stupid?

          Contracts like this are made for years so Samsung cannot arbitrarily jack up the price it charges Apple for it's services until the contract is renegotiated. Samsung can break the contract and pay whatever fees are set up in that contract but then Samsung would lose their insider's look at what Apple is doing.
          NonFanboy
          • NonFanboy & Rob ... guys, i don't need a primer

            on how the manufacturing contracts work, thank you very much. I'm amazed you guys are basically suggesting the contracts are somehow non-negotiable and Samsung cannot control it's own BOM's, wholesale parts pricing *or* withdraw from a contract with Apple (or any other corporate customer). That's what you'd have the rest of us believe?!?

            "...Samsung can break the contract and pay whatever fees are set up in that contract but then Samsung would lose their insider's look at what Apple is doing."

            You, and anyone else (believing nothing changes at Samsung's production plants) had a point up to the day before the landmark win for Apple ... i mean, are *YOU* possibly so stupid as to believe Samsung would carry on with the status quo and NOT re-evaluate their production contract(s) with Cupertino? Do you actually think they're not going to want to either drop any reference to Apple design and product componentry on their manufacturing lines now they've just been slammed with a $1B penalty or hammer Apple, contract-wise?

            @Rob Hahn ... "...By the way, Apple -does- control the manufacturing facilities of some of its suppliers ( I do not know if any of the Samsung-produced parts are among these)."

            Another outlandish dreamer ... please tell me you thought through the repercussions, alternatives and possibilities before you chose to take a pot shot at me. I mean, seriously?? Do you actually believe Apple has the control & power over Samsung's production plants? That's basically what you're alluding to - without actually coming out and actually saying so. That said ... (to paraphrase Foxworthy) "here's your sign".

            So it's like this: Apple have declared open season on Samsung. All things Android (and ultimately Google) are next in the patent firing line. Don't expect anyone (esp. not me) to buy that these guys (i.e Samsung & Google) aren't going to retaliate & return fire in a massive way - either via litigation or by physical, industrial and covert marketing or supply-line pressures.

            Apple has won this battle (versus Samsung), but there's still a War to be fought though - and if Android doesn't chip away at Apple's fortress - or falls by the wayside, then don't bank against WP8(+) and a (currently) struggling RIM to enter any void left.

            "The enemy of my enemy is my friend."
            thx-1138_
          • One VERY minor correction...

            Wasn't Jeff Foxworthy - it's Bill Engvall routine with "Here's Your Sign" Foxworthy had, "You might be a redneck..." Sorry - blue collar humor purist. =)
            Fark
          • Sure they can

            Pay the contract fines and change things. Apple can as well and go other places for their parts.

            Who do you think would lose in the end?? Hint it would not be Apple.
            JeveSobs
          • It's a deal like any other

            Nobody said Apple owns "Samsung's production plants." They do lease individual production lines, and even entire facilities from their vendors, where that makes strategic sense. I do not know whether any specific Samsung production lines or any specific Samsung facilities are involved in such deals.

            If you owned a big factory with excess capacity and somebody came to you with a deal to lease a production line to make X24 Widgets, wouldn't you take it?

            I'll disagree with you on the impact. I don't see the sort of people who run $150-billion companies acting like petulant jerks because they lost a lawsuit. They lose lawsuits every day. They win lawsuits every day. It's business. Apple will sell north of 140 million phones next year. Samsung can have parts in each one, or not. LG, Toshiba, and others will be happy to make parts if Samsung doesn't.
            Robert Hahn
          • The Apple thug team is attacking you

            Notice the coordinated effort? That isn't by accident. Apple is a corporate thug and it shows in their online presence here at ZDNet.
            toddbottom3
          • Your arguments do not seem cogent

            1. Again nobody was suggesting or implying that contracts cannot be broken but there is a cost to that. One which Samsung might or might not be willing to take.
            2. No one is or was implying that nothing changes at all. It IS UNLIKELY that they will have some knee-jerk, extremist reaction, though as you seem to imply. In the case of the the contracts, if Samsung chooses not break those contracts, as it may, then it will have to abide by them for the duration of the contract. The contract then does dictate what it dictates.
            3. Samsung indeed has choices it can make but some of them may not be as desirable as others. The choice of "massive way" retaliation is seldom a viable business approach. And Samsung executives aren't dumb. There may be some saber rattling but in the end it is about doing business. Shooting yourself in the foot through a knee-jerk reaction is not good business.
            4. Your use of the word "stupid" and the reactionary way that you say things mitigates against the credibility of your opinions. Professionals don't talk that way. It seems that you, not the others are the one, taking the pot shots.
            DevGuy_z
          • DevGuy_z .. you & your cronies can split hairs all you like

            and try nit-picking my words. But don't insult me by trying to pass yourself off as anything other than an RDF doped Apple sycophant.

            Why is it you feel a need to be a mouthpiece for those other posters? Y'konw, i'm sensing an awful lot of insecurity from the Cupertino Troll Division over this subject material.

            Listen, you can try an rationalize and make pathetically lame excuses for Apple, but it doesn't alter the fact, they've started a War and now have to deal with the consequences. ...Oh, hold it ... according to the Apple Prophets / shills / janitorial staff, 'Apple shalt $#!t upon all & sundry (industry competitors, that is) and shalt be as teflon in all such dealings.'

            But to be fair, that's all fine 'n dandy. But please don't expect to be seen as anywhere approaching credible when all you do is shamelessly hold up Apple as beyond reproach - even after the amount of blatant underhanded, double-dealing crap they deal out through their patent trolling. (Speaking of trolling ... do you guys (Apple sycophants, that is) actually believe that by trolling tech' sites - and spinning your collective tripe - you'll *somehow* be taken as a great advertisement for anything Apple?!?

            I think to save you & your Cupertino Propaganda Ministry (CPM) any further laughable ignominy, you really oughta cut your losses and stop digging a deeper hole than the one(s) you're already in.

            As for me? I don't take back what anything i say - especially when i mean every word. So on all counts, you really are s#!t outta luck.
            thx-1138_
        • You are the moron

          With out a doubt there is a contract already signed. It has been plastered all over the internet for the last 3+ years about how Apple buys big using these contracts to control the cost. Tim Cook was hired specifically because this is his area of expertise.
          JeveSobs
        • They are admitting, and rejoicing, Apple's monopsony power

          When one company becomes so powerful that it is able to dictate all the terms to its suppliers and punish (then bankrupt) suppliers that don't tow the line, it is called a monopsony, and it is just as damaging and anti-competitive as a monopoly.

          Apple has a monopsony, this is undeniable. Even worse, people like Robert Hahn are cheering this.
          toddbottom3
          • Not true

            Parts suppliers have more than just one customer (Apple) that they can sell to - there is no monopsony.
            rbgaynor
          • It has to do with market power

            Whenever anyone suggests that Samsung should stop selling their parts to Apple, the fanbois pipe up to let us all know that Sammy would lose so much money if they refused to sell to the mighty fruit that Samsung is essentially forced to do whatever Apple wants. If, as you suggest, there are a ton of customers waiting to buy up their parts, then they would have nothing to worry about and would kick the fruit on the curb. In fact, we keep hearing about how much less Apple pays for their parts so if anything, Samsung could INCREASE their profitability by selling to these hundreds of customers that you say exist.

            Huh, unless they don't exist. (company names removed to get past spam filter)
            toddbottom3
          • Market power

            @todbottom3

            Indeed, Apple has market power. Doesn't matter if you or me like it. If you want Apple to lose their market power, just make your own business and order more parts than Apple at higher prices than Apple and sure -- Samsung and the likes will prefer you being their customer. Not Apple.

            It is just that today, the one with the money (in cash) and with the huge orders, often exceeding manufacturer's ability to produce happens to be Apple.

            Simple as that.

            Otherwise, yes, if Apple orders 10 million displays from Samsung at $20 each and instead, Samsung could sell those 10 million to 10 smaller customers, at $30 each then they would do just that. Thing is, again -- there is nobody like Apple and nobody else to afford that (expensive) parts at that quantity.

            Further, consider this: by providing parts to Apple, Samsung takes absolutely no risk. Multi-year contracts, paid up-front. What could be better than this?
            They "might" make more profit by stealing Apple's designs and producing rival products, but there is high risk that those things won't sell. That would be significant loss, instead of profit.

            If it wasn't the typical Korean (and Asian in general) corporate culture of the "copycat", Samsung would never, ever find themselves in this situation.
            danbi