Samsung can’t afford to lose Apple fight

Samsung Chairman Lee Kun-hee

Samsung Electronics is prepared to take the ongoing court battle with its biggest client Apple to the U.S. Supreme Court because it regards continuation of the dispute as inevitable.

The two sides failed to reach a compromise despite mediation talks ordered by U.S. federal Judge Lucy Koh who is presiding over the biggest technology industry dispute in history.

Closing arguments are set for Aug. 21 and each company will have two hours to make their case with a ruling due Aug. 25. A jury will decide the verdict. Meanwhile, the Korean company is busy preparing its “Plan B.’’

For Samsung’s top decision makers, Apple is the “right target’’ to inspire and encourage its employees before seeing another corporate transition, lowering the possibility of it opting for comprehensive cross-licensing of patents in the near future.

“There had previously been doubts about whether we could defeat Sony and Nokia. But we did. The key point is that Apple still underestimates Samsung. This is intolerable,’’ said Corporate Strategy Office Chief, Choi Gee-sung in a meeting with reporters when he was chief executive at Samsung Electronics.

In 2010, the company was asked by Apple to pay $30 for each Samsung smartphone sold and $40 for each tablet. “This is too rude and Apple isn’t ready to respect Samsung, though they are using our patented wireless technologies,’’ said another executive asking not to be identified.

“Apple and Samsung differ over their views about their patent values. But Apple still thinks Samsung as just a component supplier. This is a mistake as we aren’t the Samsung that Apple saw a decade ago,’’ said the executive, adding that the company is ready to take the issue to the Supreme Court.

Legal and industry experts view the fight as a “matter of pride’’ and generally agree that it’s difficult to measure the positive and negative impacts of the litigation.

“It’s costly and has unpredictable consequences. That makes it a very bad business model. I suppose both companies have agendas that are not visible in court and perhaps Apple is signaling to other parties, and perhaps Samsung is using it to raise its profile. It still seems that unintended consequences may arise and the result could be very bad for everybody,’’ said Horace Dediu, founder of equity-research firm Asymco, in an e-mail interview with The Korea Times.

The inability of Apple and Samsung to agree on proposed jury instructions has hinged upon a few key issues, particularly the distinction between simple copying and patent infringement.

Apple, which started the court battle with Samsung years ago, is consistently insisting Samsung’s Galaxy line of items copied the unique surface design of Apple’s i-devices.

Samsung said the claim by Apple is an overreaction and insisted that the design of iPhones was also inspired by Sony styles, citing comments by a former Apple designer Nishibori Shin. That also means Apple isn’t free from the image of being a “copycat company.’’

In the Northern District California Court, the main venue for the fight, Samsung designers testified that they “didn’t copy’’ the surface designs of Apple products.

Woodward Yang, an electrical engineering professor at Harvard, also testified that Apple’s products used Samsung-patented features for mobile devices, including the process of seamlessly emailing photos.

“Because Apple patents are heavily dependent upon design-related ones, Samsung will be better positioned as the trial goes by. Apple insists it doesn’t make sense for Samsung to file a patent infringement as the latter’s wireless patents are common and standard intellectual properties. But those patents are not fee to use,’’ said Yoon Dong-ryeol, the chairman of the Korea Patent Attorneys Association (KPAA), by telephone.

Apple is saying it was ready to pay in return for using the wireless patents based on fair, reasonable and non-discriminatory (FRAND) standards. In 1998, Samsung vowed to abide by the FRAND commitment.

The company demands a 2.4 percent rate on the “entire selling price’’ of Apple’s mobile products, Apple said in the filing. Apple refused that Samsung offer and rather said it should pay one-half of 1 cent per unit for each infringed standard essential patent.

“That’s very humiliating for Samsung. How can it accept that offer by Apple. That means Apple still regards the Korean tech giant as one of its parts suppliers not as a healthy business partner,’’ said Yoon.

This year, Apple is expected to increase its purchasing of Samsung flat-screens, memory chips and mobile processors for use in i-devices to $11 billion from $7.8 billion last year.

Apple failed to find an alternative to replace Samsung as a parts supplier, though the Cupertino based firm has previously approached Taiwanese and Japanese companies to cut its dependency on its South Korean corporate friend and foe.

A U.K.-based credit ratings agency Fitch Ratings has issued a statement that it predicts the legal battle will continue for at least the next 12 months with over 40 different lawsuits pending across several countries.

Who will win?

Then which company will declare a complete victory in this dirty and increasingly ugly fight?

The answer to this question isn’t simple because ultimately in businesses, there are often no clear-cut winners and losers.

KPAA’s Yoon said both Samsung and Apple are trying to find “the right excuses and the right timing’’ before signing a peace treaty.

But he cautiously commented that “agreement will take more time” because he believes the fight mirrors the fight between Google Android alliances and Apple.

“It would be unlikely for the major courts around the world to rule in a manner which bans the Android operating system-based equipment from competing against Apple’s devices,’’ Fitch Ratings said in a statement to The Korea Times.

“Samsung has been slower off the mark than Apple in initiating its litigation activities. Samsung Electronics’ significantly longer history in wireless technology, and the substantial number of patents it has filed in this regard, suggest that it may win more cases,’’ the credit ratings agency said.

So far, the fight has proven quite effective as a means for Samsung Electronics to raise its corporate profile around the world, a view agreed by on many of its executives.

“It’s true that Samsung mobile products saw substantial progress in terms of design and software. Our products are becoming more stylish and cooler than several years ago,’’ said a senior designer.

Before the patent disputes started, Samsung was formerly the runner-up behind Finland’s mobile titan Nokia. But now the Korean firm is the world’s biggest phone manufacturer both of smartphones and budget phones because Apple was a good incentive target used by senior executives to motivate employees.

The Asymco founder Horace said it’s possible that Samsung could sell 290 million smartphones in the next 12 months while Apple could sell about 200 million within the same timeframe; but stressed that software is still an issue for Samsung.

“Software is hard and expertise can’t be quickly acquired. It takes time. The only advice I can give is that efforts must be patient and there need to be many experiments like Bada and Tizen,’’ he said in the interview.

But Apple isn’t happy about the fight because it is losing its grip on a decades-long internal policy of secrecy after the American firm publicized more internal documents that include sales numbers and business strategies, which are highly-sensitive.

Analysts are in little doubt that the two companies will sign a peace treaty “sometime’’ and Samsung is facing another big challenge not Apple, though the Korean firm made the right to rise as the “sole answer’’ to take on Apple.

“What is more likely to be a problem for Samsung is ZTE and Huawei. They are on the same trajectory that Samsung was on 10 years ago. For Samsung to beat them in the future it will need to develop products that nobody can copy,’’ said Horace.

He said it’s important to understand that Samsung competes with Apple on a different basis.

“Apple is a platform firm that sells access to the iOS ecosystem across many other device types. Samsung sells consumer electronics with limited network effects but desirable features. The gap in device sales is asymmetric and not reflective of the actual competition,’’ according to the guru in numbers.

Samsung’s Choi and Apple CEO Tim Cook failed to reach an agreement despite two previous mediation meetings ordered by Judge Koh.

“But Tim Cook is different in management style. Cook is paying more attention to businesses and partnership with Apple suppliers. We will wait to see how things develop,’’ said another high-ranked Samsung executive.

Samsung might not have started out with the intention of creating a ubiquitous Web-enabled experience, but that is the direction in which the company is moving. In doing so, Samsung has the potential to lock users in and foster consumer loyalty that its rivals can only dream of. <The Korea Times/Kim Yoo-chul>

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