Growing tension between Samsung and Apple ::Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Growing tension between Samsung
and Apple
Event
 Samsung Electronics (SEC) filed a lawsuit to ban the sales of iPhone 4S with the
Italian and French courts on the same day the model was launched. We believe
Korean newspapers are exaggerating the intensifying full-scale patent war
between the two tech giants.
Impact
 Samsung’s stance clearly changed from defensive to aggressive. Samsung
has been trying to defend itself from Apple’s serial lawsuits in various regions until
recently and did not retort to Apple’s public blame. After its sales of Galaxy Tab
were prohibited by a German court, we sense that its strategy has swung from
defensive to offensive. However, we strongly believe that this is a tactical move to
be better positioned in a future negotiation table. Its real intention is to not risk
losing the Apple business, as suggested by a local newspaper (Chosun Daily).
 They are mutually dependent. SEC should generate US$8bn revenues, or 6% of
the total, from Apple in 2011. This revenue stream is broken down to AP 20%
(vendor share of 100%), mobile/PC DRAM 5% (50-60%), NAND flash 40%
(vendor share of 50%+), and TFT-LCD screen 25% (vendor share of 30%). More
importantly, we estimate profit contribution is big at over 15% of the entire OP in
2011 as they are all profitable products. Meanwhile, in our view, Apple has limited
options or alternatives: AP (potentially TSMC), DRAM (Elpida), NAND flash
(Toshiba), and TFT-LCD (LGD and Toshiba).
 Both parties should settle out of court eventually. We maintain that Samsung
and Apple should sign the cross-licensing deal before a final ruling from the court.
We don’t think that the actual burden (net royalty payment), if any, should be
material for Samsung. Meanwhile, the escalating IPR war indicates another hurdle
to small players or new comers to the industry. This bodes well for the established
industry incumbents.
 Case study on 1986 DRAM patent war. We remember that TI (Texas
Instruments) in the US filed a lawsuit against eight Asian DRAM companies back
in 1986. Seven Japanese DRAM companies filed countersuits and claimed that TI
also infringed their own IPR. Later, they signed a cross-licensing agreement and
the Japanese companies paid a small licensing fee to TI. However, SEC had to
pay significant compensation (US$85m) to TI as the Korean DRAM company had
almost no cumulative patents at that time. However, Samsung currently boasts the
deepest and widest scope of patents from over a 20 year history of mobile
communication. We think it is ironic that Samsung together with LG Electronics is
the most frequently attacked target for NPE (Non-Practicing Entity) on IPR issues.
Outlook
 We’re not in the best position to predict the final outcome of the patent legal
disputes between the two. The financial impacts are often inscrutable even after
the final verdict due to the non-disclosure agreement. However, we highlight that
the risk in SEC’s component business seems exaggerated regarding the growing
conflict of interests (competitor and component vendor). In our view, it’s
challenging to find a credible vendor like Samsung in terms of volume and product
quality.
 The clash with Apple is unlikely to derail SEC’s successful mobile phone business.
At the end of the day, product leadership and user experience matter. In this
regard, we remain bullish on Samsung Electronics, which has proven itself over a
long period in a highly volatile industry with great adaptability.