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Apple: Playing A Perilous Patent Game.

  • Written by Syndicated Publisher 290 Comments290 Comments Comments
    November 3, 2011

     

    Apple has been going tooth and nail after big Android device makers, especially Samsung, accusing them in courts worldwide of lifting designs and other features from Apple products like the iPad and iPhone. But one case decided yesterday in Spain illuminated a couple of key facts: Apple’s been targeting much smaller Android licensees, too; and despite initial success against Samsung in markets like Germany and Australia, Apple is not winning everywhere.

    Paid Content reports: A Spanish Android Tablet Maker You’ve Never Heard Of Beats Apple In Court

    The case in Spain started a year ago, when a small firm based in the east of Spain, called NT-K(short for Nuevas Tecnologías y Energías Catalá) received a letter from Apple, claiming a new Android-based tablet that it developed, called the NT-K Pad, copied the iPad tablet. In the letter, Apple ordered NT-K to destroy its stock. When NT-K refused, it was landed with an injunction.

    As part of the process, the company’s devices got seized by Spanish customs officials and NT-K found itself listed on a piracy register, according to a blog post from the company (translated here). Then Apple’s case got expanded to a criminal suit, filed in December 2010.

    Yesterday, however, a court ruled that the devices in question do not infringe the Community design rights that Apple claimed.

    … NT-K now says that it will be filing an antitrust complaint against Apple, claiming loss of earnings, and loss of potential future business.

    …The implications of this case could go beyond NT-K, too. Foss Patents, which brought this case to paidContent’s attention, points out that the Community design right is the same one that Apple asserted against Samsung in its cases in Germany.

    What does that mean? The fact that this got overturned in Spain could come up again in those cases that Apple is bringing against Android-based device makers in Europe and potentially elsewhere, all of which are still ongoing.

    I have said many times over that this litigious patent aggression is a dangerous, yet necessary game for Apple. Apple is first, and foremost, a smartphone and tablet vendor, as defined by both revenues and profits. It cannot, and I repeat,,, cannot afford a mistep and lose a strategic case, for it is already signfiicanty behind the technology curve and the market share curve as compared to Android and its top three vendors. It has already lost its app dominance, and it will be a signfiicant loss if it loses a case and is hit with punitive sanctions. As excerpted from Apple on the Margin:

    … Thus, in continuing with my attempt to educate my readers on the folly of believing Apple’s position to be unassailable, I am illustrating exactly how vulnerable Apple is to either a compression of margin on the iPhone or a slow down in sales. Apple is just penetrating the market and has a fertile field to conquer, it is just that it will not be able to pursue that field devoid of competition as it has over the past 3 years. This should dictate an adjustment to the highly optimistic aura attached to the multiples used in forecasting economic results.

    The graph below illustrates the importance the iPhone represents to Apple’s franchise. Believe it or not, this graph actually understates the importance of the iPhone to Apple for while it brings in 45% of the revenues, it is responsible for about 70% of the profits. Apple has become too reliant on one product, although that reliance was borne from the fabulous success of said product. While Apple will probably derive some much needed revenue diversification from iPad sales, the iPad will face the same hurdles that the iPhone is coming up against – and that is competition from Android-based devices and potentially even Windows Mobile 7 8 (albeit this is an admittedly much more speculative statement).

    Breaking the argument down even further, you see how the iPod and the iPhone have literally transformed this company. While I am sure it will continue to be fantastic company with cool products, I doubt very seriously that it will be able to grow in the future as it has in during the last 7 years.

    The saving grace is that the smart phone and portable computing market will grow quite quickly, allowing companies with dwindling market share to still capture increasing revenues. The ugly reality is that those revenues will have to be burdened with increasing R&D, marketing and distribution costs since the amount of competition will probably scale faster than the market itself. That, my friends, is a very good thing for you and I, the consumer!

    All paying subscribers are welcome to download the mini-model which shows Apple’s earnings sensitivity to margin compression through competition. This is the very crux of determining the extent of Apple’s success or lack thereof, in the near to medium term. Click here to download (File Icon Apple iPhone Profit Margin Scenario Analysis Model), and click here to subscribe.

    … Apple said that while iPhone sales fell off last quarter, the holiday quarter will be its best yet. First-quarter per- share earnings will be about $9.30 on sales of about $37 billion, Apple said in the statement.

    That surpassed analysts’ projections, suggesting that iPhone sales are bouncing back with the release of the iPhone 4S, which set a record with debut-weekend sales of 4 million.

    “In our wildest dreams, we couldn’t have gotten off to as great a start as we did with the iPhone 4S,” Cook said on the call. The drop in demand for iPhones in the second half of last quarter was “substantial,” said Cook.

    This may very well be the case. I don’t doubt it, but it also doesn’t negate the generally stagnating growth trend – see Google’s Android Now Leads In Market Share, Growth Rate and Potential Buyer Preference. Apple released a new product on two new carriers, which at best matches (and that’s at best, I believe it falls far short) the Android flaghip device from 6 months ago! This much wider distribution network coupled with the iPhone popularity is bound to boost sales, but the popularity of Android (now the number 1 OS, globally and domestically, with the highest growth rate, to boot) make it unliekly Apple can regain the growth crown through marketing alone. It is now quickly becoming common knowledge that high end Android phones such as the Samsumg Galaxy S II series handily outperform anything from Apple thus far. As a result, the sales are becoming more fad generated and less technology/usability driven. We all know what happens to very fad, don’t we? Apple will have to invest heavily into the tech, and that ain’t free nor is it a guarantee for success. Hence the margin compression thesis. Look to my writings from last summer to determine the common sense reasons why Apple is at risk despite the lovefest that the media, the sell side of Wall Street and the equity markets have for it: . After nearly a year of showing nearly incontrovertible evidence that Apple has seen its heyday, the mainstream media is catching on.

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record
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