Apple's (NASDAQ:AAPL) Latest Victory

Samsung Ban Upheld

By Tim Conneally
Tuesday, October 15th, 2013

I was one of the first people to play with the Samsung Galaxy Continuum at a pre-launch event back in 2010. It had a quirky second touchscreen mounted beneath its main display that was its chief sales gimmick. Even before it launched, under the proud eyes of Samsung, and with a belly full of wine and hors d'ouevres, I wasn't all that impressed.samsung

Three years later, the US International Trade Commission is upholding a ban on the Continuum and another aged mid-tier smartphone, the Transform, for infringing upon two patents owned by Apple (NASDAQ: AAPL).

Apple filed a patent infringement complaint with the Commission in 2011, and won an injunction on the devices, preventing them from being imported into the United States. The Galaxy Tab 7.0 and Galaxy S II were included in the complaint, but were not found to infringe upon Apple's patents.

Samsung appealed the decision and called for a presidential veto of the import ban, but the ban is to stay in place. In this matter, Apple is victorious.

But how much of a victory is it?

For Apple, the smartphone refresh cycle is strictly one year. Every year, the company releases a new iPhone with new hardware features and discounts the price of the previous model. The fact is three-year old smartphones of any make are not going to compete with new iPhones.

However, Samsung and Apple are fierce competitors in the international mobile device business. They are ranked first and second in global unit shipments. Samsung leads the world overall, but in important markets like the United States, Apple is the leader.

Because Samsung sells dozens of different smartphone and tablet designs, every Samsung item that can be kept off the market is a boon for Apple, because it might weaken that particular segment of Samsung's market. In this case, the segment in question is the mid-to-low cost consumer, a population upon which Apple does not strongly focus.

Friends...for now.

What makes stories like this interesting is that while Samsung and Apple are competitors on the level of consumer products, they are colleagues in the component business.

An estimated 26 percent of the iPhone's material cost went to Samsung, which accounted for the important flash memory and DRAM. Even the iPhone 5's signature A6 and A7 processors have been found to be made in Samsung's chip fabrication facilities.

This has put Samsung in a win-win situation in regards to competition with Apple. If Samsung's devices sell well globally, it benefits, and if Apple's devices sell well, it benefits as well. The degree to which Samsung benefits from iPhone sales, however, has yet to be determined.

In the long run, however, Samsung's benefit from Apple's success will only diminish.

Apple is reportedly looking to source its processors from different manufacturers. Korean newspaper Hankyung reported last month that Apple pegged Taiwanese chipmaker TSMC to make approximately 80 percent of the next-generation A8 iPhone processor, expected in 2014. This will appreciably reduce Samsung's benefit from Apple's success.

A teardown of the iPhone 5s revealed the main circuit board to contain memory chips from SK Hynix (KSE: 000660), Samsung's second-largest chipmaking competitor in South Korea, and essential chips from Qualcomm (NASDAQ: QCOM), Broadcom (NASDAQ: BRCM), Texas Instruments (NASDAQ: TXN), TriQuint (NASDAQ: TQNT), Avago, and Skyworks (NASDAQ: SWKS).

Samsung's presence inside the iPhone is shrinking with each generation, and that is far more substantive of a move against Samsung than small import bans on out of date devices. 


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