Advantage, Samsung

Last week’s Silicon Valley jury finding that Samsung has infringed Apple patents has been presented in the U.S. media as a tremendous Apple victory that will assure its dominance in the smart phone market for years to come while cutting the legs from under Samsung.

But I’m not so sure. Of course, winning is always better than losing, and Apple will certainly gain significant benefits from the decision, especially in the immediate future if it can succeed in having the sale of certain offending Samsung products banned in the U.S. market. However, for the longer term it is important to keep in mind several salient facts. First, the United States is not the only smart phone market in the world, and, as of this year, is not even the single largest market. That would be China. Second, Samsung’s global market share of 32.6 percent is nearly twice that of Apple at 16.9 percent. Third, it is not surprising that a Silicon Valley jury with American engineer patent holders on it would find in favor of Apple. But it should be noted that at about the same time, a Seoul jury found in favor of Samsung in another Apple-Samsung dispute and a Tokyo court dismissed Apple’s complaints in yet another Apple-Samsung intellectual property battle in Japan. Courts and juries in other countries may well take a much different approach to intellectual property protection than those of the United States. So that Samsung could win in the rest of the world despite losing in America.

Thus, the litigation strategy is not a slam dunk for Apple. But its biggest vulnerability is not so much infringement of its intellectual property as the fact that it is so dependent on outside suppliers for its parts and their technological development. Indeed, Samsung is its biggest supplier, accounting for an estimated 30 plus percent of the content value of Apple products.

Whereas Apple’s strategy has been to outsource the development and production of parts and components and to concentrate on conceptualization, design, software, and integration, Samsung has adopted the opposite tack. It believes deeply in the ultimate convergence of technologies and in the innovative potential of that convergence. It therefore has invested heavily in developing cutting edge technological and manufacturing technology in all of the parts and components of its products and is the world’s biggest producer and supplier of most of them. Thus, ironically, Apple is dependent on Samsung in some ways for its technology.

A good example of the situation may now be developing.   Apple is apparently planning the launch of a new iPhone later in the month. Sharp is one of its main electronic display suppliers, but Sharp is reported to be late with deliveries because of difficulties in mass producing the newest type of displays. Samsung, in contrast, is a leader in the new display technology and makes its own. So while Samsung may, in the short run, have to design and build around Apple’s look and feel patents, the Korean giant may have the greater hard technology development capability in the long run.

At the same time, it’s superior and rapidly rising market share and production volumes will give Samsung greater economies of scale than anyone else. It will thereby reinforce its position as the low cost producer and will thus be able to increase pressure on its competitors.

Apple clear won a battle. But the war is far from over.