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Spillikins #116. Apple vs. Samsung Ц A Patent War
Apple filed a lawsuit on April 15th US District Court in Northern California against Samsung claiming that the South Korean company knowingly copied the design of Apple iPhone, Apple iPad in the Galaxy products family (Galaxy S, Galaxy Tab). In particular, the lawsuit alleges that the infringement concerns the looks and the interface of the devices. Here is an excerpt from the lawsuit:
"Rather than innovate and develop its own technology and a unique Samsung style for its smart phone products and computer tablets, Samsung chose to copy Apple's technology, user interface and innovative style in these infringing products."
This is a very serious allegation that came out of nowhere especially if you take the relationship between Apple and Samsung into account. I will remind you that more than a half of the components of iPhones as well as iPads are manufactured by Samsung. Samsung parts are also used in other Apple products such as MacBook Air (the SSD drives). To fully understand the interdependence of the two companies it is enough to say that in 2010 out of 142 billion dollar income of Samsung the Apple's share is 4% or about 5.7 billion US dollars paid by Apple for components. Apple is one of the Samsung's strategic clients for the semiconductor business as well as for the screen sales Ц the second most important after Sony.
In the same time the dependence of Apple on Samsung is at least as significant. If the company refuses to buy from Samsung it will have to turn to other suppliers which will immediately affect the quality (changes in logistics and production lines will increase the defects rate) and the cost of production due to more expensive supply routes and lesser production orders. Besides there are not so many companies the size of Samsung in the world and their production capacities are limited. The corollary is Ц these two companies need to cooperate to succeed. So, what made Apple file the lawsuit in the first place?
The main reason is by no means the popularity of the Galaxy family mentioned in the claims. You just need to have a look at these devices to see that there isn't much in common between them and Apple products.
Apple could as well start suing every company on the market claiming that they copy Apple iPhone design Ц the looks are often similar but iPhone was not the first touchscreen phone and before iPhone touchscreens looked pretty much the same. There has never been straightforward copying Ц no major manufacturer would do that.
One of the similar cases we find in the litigation between Apple and the Chinese Meizu and their M8 phone. Apple lawyers demanded to stop production of M8 back in 2008 claiming it is copycat of iPhone. Meizu is a rather small company and it tried to settle the issue peacefully but received a court order prohibiting both production and sales of M8 in China. Meizu got the message and counterattacked successfully lifting the ban for production and sales by proving that Apple patent have no legal force in China. They used a technicality and were able to return on the market.
But Meizu have not stopped there. Just last week the company's CEO Jack Wong announced that they plan to open a division in the US in California and launch sales of new products. Very soon Mobile-Review will publish a review of M9 which turns out to be pretty interesting. And I don't think that Apple will be able to do anything about it Ц Meizu is playing by rules and the phone has an original design no matter what Apple's lawyers say.
This example illustrates the fact that Apple is not an all-mighty corporation destroying everyone with lawsuits. Last year Apple started legal campaigns against several companies. the blamed Nokia and HTC for violating a dozen of patents. The claims against the Taiwanese company were ridiculous and the the real target was Google and its Android OS which is de-facto number one operating system in North America. You can refresh your memory by reading the respective Spillikins issue.
Unfortunately, all Apple's legal actions in the domain of the patent law is rather a big PR campaign than a real assertion of rights. The cost of such campaigns is insignificant compared to the effect. Today Apple is suing practically every call phone manufacturer and all lawsuits contain no real case, the proceedings take years and no party suffers any significant losses. And there have been no precedents of banning a product or compensating for damages.
The scenario of a patent war is very simple. First comes the offensive of the claimant party with a mass of various documents both relevant and irrelevant to the case. As a matter of fact, the goal of the lawsuit is not legal victory but to tie the hands of the opponent. The defense follows the exact same steps: the defendant party files countersuits enumerating the patents infringed by the claimant. And since the patents usually list same technologies applied by the opponents the whole thing ends in a tie. Neither party can ever get the opponent's patents declared null and void. The courts dare not to risk the patent law since it will lead to a bigger mess. The lawyers meanwhile keep counting cash.
So why fight if you cannot possibly win? This is the most interesting part. There can be many reasons. For example, in case of Apple vs. HTC the target was Google and Android. The campaign against Samsung is probably also another offensive against Google since the mentioned products run on Android. But there is more in it. One of the possible reasons is Apple's desire to acquire a number of components of Samsung's next gen devices. Moreover, Google will be taking a bigger part in those devices for the first time allowing the manufacturer to use its name and logo in an unusual way. Samsung will keep the names of the products unaltered as well as its brand name on them. I cannot go into details but it is a fundamentally different approach to collaboration of the two companies (Google and Samsung) than anything we have seen before. Google is doing it for just one reason: in terms of technology Samsung ambitions on the phone and tablet markets are best backed by the devices in development. The flagships will be changing every 6=7 months and there is no other manufacturer that can keep up with Samsung. By the time iPhone 5 is released in fall 2011 there the Samsung's next flagship phone will be ready. One of the key features of the future phone will be the screen (a new generation with a number of serious improvements). As far as I know, Apple was dying to get those screens but Samsung refused them. Subsequently, the lawsuit is one of the leverages of executing pressure on Samsung. The real issue is not the existing products Ц Apple and Samsung are battling over the future sales.
Apple has always been setting the fashion for touchscreens and has de-facto cornered this market Ц the company makes the most cash on cell phones than any other manufacturer yet it sell much fewer handsets. The closest competitor, as strange as it may seem, is Samsung. In terms of the brand value a much weaker opponent Ц Apple is far ahead in this regard. But what's important here is the dynamics of the market Ц the Galaxy family takes the bread out of Apple iPhone's mouth, not much of it so far but a noticeable bit. And the intention of Samsung to give their products the advantage of unique technologies that no other manufacturer will be able to offer is yet another annoying issue for Apple.
There have been a lot of rumors on the market about the future Apple iPhone 5. You can stumble upon mockups like this one below which I think is rather accurate depiction of what it is going to look like.
I have not seen Apple iPhone 5 but I know how one of its competitors is going to look like and there is a striking similarity with the mockup iPhone 5 - there is also a "frameless" screen, almost no bezel. Also there will be no Home screen, only touch keys completely invisible creating an impression of a monolith. It will be based on a display that supports multitouch (yes, a display not just touch buttons). It will have a very thin body made of metal (currently, but apt to be substituted with plastic). A better camera and a next gen screen with higher resolution. This accounts for quite a number of enhancements and all this will be available in the same time with iPhone 5.
Apple is not worried about the current sales Ц they are doing just fine. Today we witness a struggle for the future, the year 2012 and later. And in the future the main threat for iOS is Android and Apple makes every effort to neutralize this phantom menace. Apple even dared to risk the partnership with Samsung while they perfectly understand that cell phones and tablets for Samsung are strategic products.
Samsung responded promptly. Firstly a company's rep stated that they will have to react sharply to the Apple allegations. And soon enough they did Ц Samsung filed lawsuits in Germany, South Korea and Japan against Apple alleging infringement of ten patents in Apple's phones and tablets. In particular they mention energy saving technologies in data transfer processes and other similar technical aspects.
This patent war has just started and it will last many years and we will surely see continuation of this story in the future but so far we can only wait and observe. Anyhow, Apple has given Samsung a grand favor Ц before this lawsuit many people could not imagine that the products of the two companies are on the same level but thanks to Apple know it very well now. And this is ig a giant leap for Samsung Ц in the eyes of the consumers the company has made a breakthrough and I am talking the mass consumer Ц the ones who never read resources like Mobile-Review just regular John and Jane Does. And it is very difficult to affect the way John Doe thinks but Apple knows how to do it. But in the pursuit of their goals Apple has obviously gone over the edge and received an opposite reaction.
The story that is as old as the hills Ц someone has learnt something we already knew but presented it the way fit to cause a scandal. And today's press scapegoat is Apple that was accused of illegal collection of information on users and breaching information privacy by keeping track of location of iPhone and iPad with iOS version 4.0 or later. The accusations are very serious and they are backed by the fact that on your PC and in the memory of your iPhone/iPad you can find the file called consolidated.db which contains coordinates of your phone and the time the reading was taken. The stored coordinates are those of the base stations or WI-Fi spots the phone used. So in fact there is a very big calculating error but nevertheless this is enough understand where you have been and what you have been doing in a particular moment.
However, on June 21 2010 when iOS 4.0 was released the Apple customer agreement was updated with a new provision saying that the company can collect information about the location of the device and use it for various purposes (such as marketing, performance of the devices and so on). But the identity of the owner will not be traceable.
Or at least this is how it was supposed to be and this is how it looks from the point of view of Apple. However, from the point of view of regular users the non-encrypted file consolidated.db can tell everything about their places of interest to anyone who gets an access to the phone. And this is a serious security issue of the phone and the OS. We see that the data stored in the phone is not protected well enough against malefactors. While the collection of data about the location of the user does not contradict the consumer agreement on its own Ц the carriers permanently trace the location of your phone Ц this is just how mobile communication works. But no one goes paranoid about carriers being after them.
so the fault of Apple is that such a basic feature was so poorly designed allowing serious security problems. I believe that in the future iOS version this file will be encrypted and inaccessible and the issue will be gone. The US government was already questioning the legitimacy of such data collection last summer and Apple has prepared a very comprehensive response which leaves no unsolved issues. Here is a link to the letter.
So you can relax for a while Ц the Big Brother is not yet there. But considering the modern technologies he will be here in a few years.
Unfortunately, the dreams of Sony Ericsson CEO Bert Nordberg for his company to become the leading manufacturer of Android phones are still far-fetched. Moreover, the share of the company in the segment is going down. The reason is that SE could not return to normal ways after the R&D department was disbanded, while marketing specialists tried to prove that latest gadgets were cool and prices attractive. These attempts lead to a severe drop in sales against the background of high defects levels and tumbling popularity of the brand. I have already mentioned how Sony Ericsson changed the internal accounting system to show "high" sales for the auditing purposes. Nevertheless, even this reality distortion could not hide the diminishing market share of the company. The decline will follow the Motorola pattern with one exception. Motorola was not in such dire straits courtesy of a huge US market, while Sony Ericsson has nothing similar to fall on. The market share in Sweden continues to decrease. The next step is to make even more employees redundant. Useless marketing people will be sent packing this time and SE will withdraw from several markets.
Let's look at 1St quarter results.
The profits went down to И11 million, while the year before this parameter was 47.6% higher and amounted to "huge" И21 million. To put things into the perspective look at the sales of И1, 145 billion. The turnover went down, but even after massive layoffs in the R&D department the efficiency of the company stayed meager. On top of that SE has no future.
Of the utmost importance is the tendency of the market share fluctuations. In the 1st quarter SE managed to sell 8.1 handsets, but a year ago the same parameter reached 10.5 million items. I have described this deadlock many times. SE offers customers expensive and outdated products and the sales reveal that. Warehouses remain packed, while losses mount. Positioning is aimed at the maximum profit levels, because the company is not efficient enough and the report is a good description of the trend. The situation will continue deteriorating. 10 Satio items were sold last year, but a year later only 5 X10 followed suit with 1 Arc finding its customer at the beginning of sales. This is a clear tendency we are witnessing now. The company is losing its market share and does not do anything to stop the rot.
At the end of the quarter three models had to go on sale Ц Arc, Play and Neo. The last one was postponed until June or July as we have already mentioned before. The shipments of Arc experienced a month long delay due to an earthquake in Japan. According to preliminary forecasts the shipments will resume after May 15. The carriers, which already received their orders, will run out of the stock. At the same time Play is not popular at all. The model only gathers dust in shops. If during the first days of sales the ratio between Arc and Play was 10 to 1 today this figure is already 30 to 1 and the Play continues losing ground.
Unfortunately, the future scenario for Sony Ericsson means copying available solutions, minimal creativity in research and development due to the absence of employees capable of anything more ambitious. These products will be offered at maximum prices. A good example of the current Sony Ericsson strategy is W8 representing a Walkman modification of Xperia X8. The only difference here is in different colors, bigger memory card in the box and slightly improved headphones. Finally, the new model is 25% more expensive, though it was made of old components. The only purpose of the phone is to show that the company is represented in the mid-priced segment.
In the second quarter of 2011 the market share of Sony Ericsson will continue sliding down in absolute numbers. It's a pity, but Bert Nordberg and his team failed to rejuvenate the manufacturer, which means that at the end of the year we may see another managerial change and new strategy for Sony Ericsson.
For the first time during the last decade Nokia controls less than 30% of the global market. This situation highlights all problems of the company, which used to dominate the area for years. Remember that Samsung keeps on growing and at the moment accounts for more than 20% of the market. Nokia and Samsung move in the opposite directions. I suggest analyzing quarterly results from Nokia and paying attention to the most important indicators. The CEO of the company made a smart move by signing an agreement with Microsoft on the date of figures release. This bad news was partially softened. Analysts predicted losses for Nokia, but results happened to be a bit better. At the same time the situation is not good enough to be overoptimistic about Nokia. The company is moving down and to make a U-turn it will require no less than 2 years.
During this quarter Nokia shipped 108.5 million items, which is 1% higher than at the same time last year, but this figure is 14% lower than during the final quarter of 2010. Smartphone sales went up, but their market share decreased, which means that Nokia was not growing together with the market in this respect. In the first quarter of 2011 this figure came down to 26% from 31% in the last quarter of 2010, while in the first quarter of 2010 Nokia controlled 41% of the segment. I think you can easily calculate Nokia share of the smartphone market. It will be around 20% for 2011. The average smartphone price went down as well as the company sells such handsets aggressively. They are purchased to replace ordinary phones now. Look at the sales in monetary terms:
The next table gives sales broken down by regions. Even the home European market shows falls. This unprecedented tendency is very dangerous for Nokia.
Finally, look at the average price for every handset category. It is extremely low for phones, but the figures for smartphones are also going down.
I think these results are quite illustrative. We can expect all indicators to show negative trends as a consequence of the policy adopted by Nokia during the last 2 years.
To crown it all we have to mention that Apple released it figures for the second quarter of the year (for financial purposes the second quarter ends on March 26, 2011 and in fact we have 1st quarter results here). During this period the company sold 18.65 million iPhone handsets (growth of 113% in comparison with the similar period last year). Apple also managed to ship 4.69 million iPads. The only negative tendency is visible in sales of iPods. 9.02 million represent the downfall of 17%. Figures are quite impressive and they confirm once again that the demand for Apple gadgets is still going up, while the decrease in the sales of iPods shows that music players lose out to phones, which replace them quite successfully.
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Published 02 May 2011
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