A California jury on Friday afternoon awarded Apple (NASDAQ:AAPL) $1.05 billion in damages, ruling that rival smartphone and tablet maker Samsung had infringed on six of its patents.
And while Samsung undoubtedly will appeal the decision, Judge Lucy Koh still hasn’t had her final say on the matter. Things could get significantly worse for Samsung, since Koh has the ability to triple the damages awarded by the jury, as well as to ban the sale of Samsung’s patent-infringing devices on U.S. shelves.
Samsung’s reaction to the ruling, as quoted in The Verge:
“Today’s verdict should not be viewed as a win for Apple, but as a loss for the American consumer. It will lead to fewer choices, less innovation, and potentially higher prices. It is unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners …”
Outside of the rhetoric, though what does this case mean for consumers and investors?
The fallout has been predictably swift. Samsung shares shed 7% of their value today, knocking $12 billion off the company’s market value. AAPL, meanwhile, gained 2% and continued to forge new all-time highs.
Samsung is sitting on a $21 billion cash pile, so any damages that are ultimately paid to Apple — even if they’re tripled to $3 billion — won’t seriously harm the company. Even a U.S. sales ban won’t be the end of the world. Samsung has repeatedly proven itself a nimble competitor, able to quickly churn out variations of products with minor adjustments if needed. Plus, while the U.S. market is big, Samsung is a global competitor — one that sells a ton of products other than smartphones and tablets.
The timing of all of this is bad from Samsung’s perspective (and pretty good from Apple’s), however, as it could result in Apple’s iPhone 5 having a fall launch window clear of its chief rival — Samsung’s Galaxy III S smartphone. That could turn what’s already expected to be a record product launch for Apple into a rout. If Samsung is allowed to continue selling its smartphone, there’s a good chance it will end up paying $10 to Apple for every unit sold in licensing fees. Either way, Apple is set to win in the short term.
The other major impact of this court case is the sense of insecurity it has sent through Google’s (NASDAQ:GOOG) Android camp. Samsung isn’t the only manufacturer selling smartphones and tablets that resemble the iPhone or iPad; it’s just the biggest. And don’t forget the “killer” patent Apple was awarded in July covering smartphone user interfaces.
If Apple decides to go all-out on the legal front — which is something it has shown a willingness to do — HTC, LG and others could be vulnerable. Smaller manufacturers lack Samsung’s cash reserves for paying off any damages, and with Samsung and Apple raking in 90% of smartphone profits, a $10 licensing fee could result in selling smartphones at a loss.
Google itself released a statement claiming that the patents don’t relate to the “core Android operating system” in an attempt to calm the waters, but its stock still dipped at Monday’s market open and was down more than 1% in afternoon trading.
Companies offering Android alternatives saw various boosts out of the ruling, as investors considered the possibility that they might either snap up some of Samsung’s market share (after all, not everyone wants an iPhone), or might have the ability to license their product to other manufacturers spooked by the possibility of Android becoming a liability.
Count Microsoft (NASDAQ:MSFT), maker of the Windows Phone OS, in the former camp, and Research In Motion (NASDAQ:RIMM) among the latter. Both were seeing gains around 1% — though perhaps Monday’s biggest short-term winner was Nokia (NYSE:NOK), which surged 9% on belief it could claw some market out of the ruling.
The long-term impact of this ruling is, naturally, tougher to call.
Despite the angst about everything going Apple’s way and this being bad for the consumer because it will result in fewer choices, I suspect that ultimately, it’s going to turn out differently.
It might even hurt Apple.
Apple introduced a pair of game-changing devices — the iPhone and the iPad — that completely disrupted their markets and virtually killed off a number of former leaders (RIMM being a prime example). Apple has continued to churn out slightly improved versions of its devices, generation after generation, while many competitors have chased the same customers using devices that owe a lot to Apple’s design.
At the same time, the company has trimmed its product line. According to The New York Times, those two devices now account for 72% of its revenue (with the iPhone alone representing 60% of its profits).
By making it much more dangerous to ride its coattails, Apple might have provided the impetus to innovation that has been lacking among other smartphone and tablet manufacturers.
They aren’t going to simply give up on a market that consists of half a billion devices yearly and is growing at an incredible rate. Instead, they’re going to be compelled to offer something very different — something that appeals to consumers, while avoiding the entire Apple patent minefield. And the risk to Apple is that by pushing competitors to this extreme, one of them might come up with something as disruptive as the iPhone or iPad.
While Apple might well have an extended run of smartphone and tablet dominance (and corresponding profits), it might be playing with fire by forcing competitors to try leapfrogging the iPhone and iPad. Anything that legitimately threatens those two devices could result in Apple’s record run coming to, if not an abrupt end, a disappointing slowing.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.