Samsung vs. Apple – Hint of sanity

The glacial creep towards a settlement continues.

• Samsung and Apple have agreed to drop all litigation against each other that is taking place outside the US.
• No licencing terms have been signed and both companies will now focus their efforts on pursuing their fight in the US.
• This is similar to the agreement between Apple and Google in May 2014 where both companies dropped their suits and walked away. (see here).
• It is known as a second class settlement and does not prevent hostilities from being re-opened should either wish to do so.
• However, I think that this is very unlikely and believe that both companies are beginning to realise the futility and crippling expense of this long running and increasingly pointless war.
• Events have shown that Samsung does infringe some of Apple’s IP but they have also shown that it is very difficult to force Samsung to pay for it.
• Furthermore, the value of Apple’s portfolio took a massive blow when it was awarded just 5.4% of what it asked for at trial (see here).
• Combine this with the legislative agenda moving against the use of standard essential patents in US and EU, and it is clear that the whole landscape is becoming very difficult for both sides.
• For both of these companies, the US is their biggest market in terms of revenues and I suspect that they will use the outcome from this market for a global agreement.
• This gives me hope that there is some pragmatism and rationality growing in both camps as this war has already cost both sides more than either is ever likely to earn or pay in royalties.
• Apple’s approach has historically been more emotional in that it did not want others to use its innovations and sought to keep them from the market.
• While well within its rights, it has proven to be impractical and I am hopeful that Apple is beginning to realise that it will have to do a deal of some description with Samsung.
• This deal is likely to involve a net payment by Samsung to Apple but the ending of crippling legal fees is likely to mean a profits increase at Samsung.
• I remain optimistic that a deal will be reached this year.
• This issue is increasingly irrelevant for Samsung which is struggling with the profitability and growth of its smartphone business.
• Now that it ceded control of the ecosystem to Google there is nothing to prevent margins falling to 11% over the next 3 to 4 years. (see here)
• The result is a 25% decline in group EBIT and a share price very likely to underperform.