(AAPL) Apple Sues Samsung in South Korea

Apple Inc. (AAPL) recently filed a lawsuit in South Korea against Samsung Electronics Co. Ltd., alleging infringement of several patents, as reported by news agencies Reuters and Bloomberg.

The latest lawsuit counters Samsung’s patent infringement claims against Apple. Samsung filed a number of lawsuits in South Korea, Japan and Germany in April 2011.

The legal tussle started over Samsung’s Galaxy line of tablet and smartphone products, which Apple claimed to have been copied from its popular iPad tablet and iPhone 3 smartphone.

Apple filed lawsuits against Samsung in April 2011, claiming infringement of seven patents related to the Galaxy devices’ mechanism of interpreting user gestures, including selecting, scrolling, pinching and zooming. Apple also alleged that Samsung copied three patents on the design, including the flat black face of the iPhone and iPad. The suit also covers the Epic 4G, and the Nexus S products.

At the end of first quarter of 2011, Apple was Samsung’s biggest customer, mainly by virtue of the semiconductors it purchased, according to Samsung’s quarterly report.

However, in the recent past, their relationship has deteriorated due to increasing competition. Samsung is one of the fastest growing smartphone makers based on strong growth of Google Inc.’s (GOOG) android operating system and has emerged as Apple’s strongest competitor in the tablet market. Apple released its iconic iPad 2 in March 2011. Simultaneously, Samsung unveiled an upgraded version of its Galaxy Tab in the same month.

Samsung offers Galaxy Tab in two versions, Galaxy TAB 10.1 and Galaxy Tab 8.9. Both the versions use the android operating system. The Galaxy Tab 8.9 is thinner than iPad and also weighs less (470 gram versus 595 grams). Galaxy Tab features a front camera measuring 2.0 mega pixels, compared to iPad 2’s 0.3 mega pixel VGA camera.

On a pricing basis, the Galaxy Tab 8.9 is more pocket-friendly compared to iPad 2, whereas the Galaxy Tab 10.1 price range is similar to Apple’s iPad. However, iPad 2’s app count remains the key differentiator between the two tablets. The scale and diversity of Apple’s app universe—425,000, roughly twice as many as Android’s—is a big reason that consumers have purchased more than 200 million (cumulatively) iPads, iPhones, and iPod touches, thereby making it a major source of revenue for Apple in recent times.

Nonetheless, Apple is facing tremendous competition in the tablet and smartphone market from a number of companies including Samsung, Motorola, HTC and LG, which are all powered by the android operating system. Android being open source has helped Apple’s competitors create differentiated devices based on the free source code.

Apple’s iPad is also pitted against several new entrants, such as the Motorola Xoom, HTC Flyer, Research In Motion PlayBook, Hewlett Packard TouchPad, Dell Streak, Cisco Cius, Toshiba SmartPad and Acer Iconia in the tablet market.


Apple remains heavily dependent on iPhone sales (50% of second quarter sales) and we believe the company will undertake every possible step to safeguard its dominant position in the smartphone and tablet market, including further lawsuits against major competitors such as Samsung. However, the outcome remains uncertain, which may remain an overhang on the stock going forward.

However, Apple remains entangled in a number of lawsuits against Nokia Corp. (NOK), HTC, and Eastman Kodak (EK). Apple is also battling Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) over the use of the name “app store.” More importantly, Apple has received unfavorable verdicts in a couple of cases at the International Trade Commission (ITC). As ITC has the authority to prevent import of products that infringe U.S patents, the lawsuits could dent Apple’s sizeable cash balance. It may have to pay a hefty fine or a recurring license fee, which will hurt its profitability going forward.

We remain Neutral on Apple over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the short term.

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