RFM 2013 Top 5 – Part 4 – Apple vs. Samsung – Begrudged peace.

2013 could see a final settlement between the two companies where Samsung would likely pay royalties to Apple.

• The legal wrangling between Apple and Samsung is going nowhere other than to enrich their respective legal teams.
• In the early days it looked like Apple really had Samsung on the ropes with an emphatic victory in court.
• However, the last few months have seen Samsung’s legal team pull its finger out preventing Apple from winning injunctions despite the infringement.
• Furthermore, the original finding of infringement against Samsung does not look safe and it is as plain as day that the court wants the companies to settle.
• The crux of this case remains the ability of Apple to extract a remedy from Samsung for the infringement of its IPR.
• Samsung has failed to prove that Apple infringes its IPR which is probably a major reason why no settlement has been reached to date.
• Apple’s (read Steve Jobs) determination to destroy Android at any cost is also a factor but I think that time and expense is grinding this attitude down.
• The current situation remains at somewhat of an impasse with Samsung found to infringe but Apple’s attempts at a proper remedy have either been thwarted or are taking much too long.
• The large problem for Apple is the fact that the legal cycle is much longer than the handset cycle.
• This effectively means that by the time infringement has been asserted, proved and remedied, the handset in question will be no longer in the market obviating the whole process.
• This combined with a lengthy appeal process and a failure to win any real remedy is likely to put Apple in a better mood to negotiate.
• I expect that things will continue to drag on for some months to come with tit-for-tat skirmishes around the central issue.  
• At the end of the day, when both companies looks at their respective legal bills, I suspect that they will wonder whether it would not have been better and cheaper to come to some arrangement.
• This is why I suspect that this year is likely to see a settlement between the two companies where Samsung ends up paying royalties to Apple.
• I would expect a large one-off payment for back-royalties and an on-going payment.
• The royalty rate is likely to be strongly influenced by historical precedent which is why I would expect a royalty rate of 1-2% of the wholesale price of the handset to be paid to Apple.
• I expect Samsung to ship around 280m smartphones in 2013 with an ASP of around $290.
• This would translate into $81.2bn in revenues and $0.8-$1.6bn in royalties payable to Apple.
• This would hurt Samsung’s mobile margins but handsets would remain extremely profitable none the less.
• Despite the lower margins, I suspect Samsung would be a net beneficiary as:
  • Management time would be freed up allowing a better use of resources for the execution of its strategy
  • The relationship with Apple would improve meaning that the component business would be in less danger of losing its key customer.
  • Huge legal expenses would be saved. (Qualcomm was spending around $300m a year at the height of its fight with Nokia).