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Samsung and Apple, the world's top two phone manufacturers are locked in a court battle that's threatening their supplier-client relationship.  (Source: Into Mobile/AP)

Ultimately Samsung's device business -- whose revenue grew 500 percent last quarter -- is more valuable to it then its fast-growing (but not THAT fast growing) supplier business.
Analysts suggests Apple's customers may hardly notice the difference, even if they're paying more

Even as Samsung Electronics Comp., Ltd.'s (SEO 005930) legal woes [1][2][3][4][5] regarding Apple, Inc.'s (AAPL) campaign of lawsuits and trade court complaints continue, it faces a perhaps more serious crisis in the form of an eroding supply relationship with its legal rival.  Samsung currently "has its cake and eats it too", enjoying a position in that it's the world's second largest phone manufacturer, and at the same time drawing a great deal of revenue from the world's largest phone manufacturer, Apple, whom it supplies NAND flash memory.  But that comfortable situation for Samsung could be coming to an end.

I. Apple Expected to Dump Samsung

Nho Geun-chang, an analyst at HMC Investment Securities tells Reuters in an interview, "Samsung's tablet business will be most affected and its chip business will also take a hit as Apple moves to diversify away from Samsung to the likes of Toshiba. For Samsung, (the) biggest concern is reduced order from Apple. Without Apple's big backing, it would be difficult for Samsung to boost its chip market share sharply."

Mr. Geun-chang suggests that while the chips from rival suppliers will likely be slightly inferior in reliability, power performance, and other metrics, and may increase device costs, Apple's unquestioningly loyal customer will hardly notice the difference.  He comments, "Apple is leveraging the fact that it's got alternative suppliers. They may offer inferior or more expensive components but it's something consumers barely notice and something Apple can successfully use to pressure Samsung."

II. Device Business is More Lucrative for Samsung

The battle against Apple may prove painful, given the slow death of its lucrative supply contract, but it's one that Samsung must commit to, according to Mr. Geun-Chang.

Samsung's supplier contracts to Apple in calendar Q1 2011 constituted 5.8 percent of its revenue, up from 4 percent ($5.7B USD) a year prior.  But its devices business is too valuable to sacrifice even for the lucrative supply contract -- device sales will soon constitute over half of the company's revenue, according to analysts.  States Mr. Geun-chang, "[T]aking passive steps for fear of losing its biggest customer will slow down strong growth momentum at its telecoms business, which Samsung doesn't want to see as the business is set to become the biggest earnings generator this year and make up for weakening chip profits. It'll be a costly battle for Samsung."

Some say the lawsuit campaign could hurt Apple more than Samsung.  Aside from possible quality and price issues with a supplier switch, Apple may be creating the perception that Samsung is the best of the competition.  States Choi Do-youn, an analyst at LIG Investment & Securities, "These legal battles are raising perception among consumers that Samsung is the only one capable of competing against Apple."

There's some truth in that belief.  Samsung is by far the top Android phone manufacturer and holds a huge lead in tablet sales over other Android manufacturers.  In the tablet sector it's the only company to be currently giving serious chase to Apple, selling 7.5 million tablets in H1 2011, compared with Apple's 14 million.

On the smart phone side Samsung's diversified approach is paying even greater dividends.  The company's broad lineup, which includes the best-selling Galaxy family of smart phones
, posted 500 percent growth in Q2 2011, compared to an impressive, but lesser 142 percent growth by Apple.  Some expect Samsung to dethrone Apple's brief reign atop global smart phone sales (by manufacturer) when the Q3 2011 numbers come out next month.

Samsung and Apple are now suing each other in at least 23 lawsuits or trade complaints in 10 different countries.  One key trade complaint will be Apple's request to ban sales of Samsung's tablets and smart phones, via an import ban, which the U.S. International Trade Commission
 will consider [docket record] next month.  In anticipation of that hearing, Verizon Communications, Inc. (VZ) has filed a friend of the court brief on behalf of Samsung, saying an import ban would create economic harm to U.S. customers and lead to job loss. 

Some are holding out hope that the pair will settle their dispute outside court, similar to
 Apple and Finland's Nokia Oyj. (HEL:NOK1V).  Comments HSBC analyst Daniel Kim, "The most likely scenario is an out-of-court settlement, after a long-drawn IP battle... As in the case of the Nokia-Apple dispute, this issue too is likely to be settled out of the court, after a long drawn legal dispute."

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How will Apple sell this?
By AwesomeDuck on 9/27/2011 10:18:20 AM , Rating: 3
I wonder how Apple will play this one in terms of advertising. Or if they'll even acknowledge it. One thing they do deserve credit for is their advertising department. I will enjoy a hearty chuckle when this finally happens.

RE: How will Apple sell this?
By Omega215D on 9/27/2011 10:32:57 AM , Rating: 4
"we'll charge you more for less because it's an iPhone. If you don't have an iPhone... well, you don't have an iPhone"

I'm sure it'll still be eaten up by millions of Apple conscious morons out there.

RE: How will Apple sell this?
By kittypuncher on 9/27/2011 10:46:26 AM , Rating: 5
They won't have to sell it. Technically, as far as their marketing is concerned, their chips are "Apple" chips. Anyone with two brain cells to rub together knows they're Samsung. But Apple's marketing and mantra is "we use Apple technology and Apple chips".
As long as Toshiba (or who ever the replacement is) allows them to brand the chips as Apple, they won't have to do a d@mn thing. All technical shortcomings will be a "feature", or simply ignored.
The laugh would be if Toshiba said "yea, we'll sell you crap chips for a whole lot of money, but they must have the Toshiba name on them; no apple markings".

RE: How will Apple sell this?
By Mitch101 on 9/27/11, Rating: 0
RE: How will Apple sell this?
By messyunkempt on 9/27/2011 12:33:04 PM , Rating: 3
Much as im all up for a bit of apple bashing, it does state quite clearly in the linked article that apple products arent manufactured in that location.

RE: How will Apple sell this?
By Mitch101 on 9/27/2011 1:21:24 PM , Rating: 3
Humor Button is available for Apple users.

RE: How will Apple sell this?
By Manch on 9/27/2011 6:09:18 PM , Rating: 2
Back when Apple was fighting against the clones, they released a new version of there software that would only work with there "special IC which cost a couple hundred dollars.

There was nothing special about it. It was a cheap less than $20 part you could get at radio shack. They literally wiped the manufacturers stamp off, bent the pins around 180 degrees effectively reordering the pin layout and relabeled them and called them a brand new chip. It didnt take long for people to figure out all they had to do was buy the radio shack version and flip it lol. The designers of the NEC clone (nicknamed the medfly) figured it out and launched one of the most successful clones ever.

So now that Apple is robbing, suing and everything else, like they did before, I think it's going to bite them in the @$$ just like before.

And no I dont think theyb acctually do that to the chips in their next device, but I wouldnt put it passed them trying to pass off the systems as the same. They arent the only company that has ever tried that crap and wont be the last.

RE: How will Apple sell this?
By mircea on 9/27/2011 3:47:32 PM , Rating: 2
1 week after iPhone 5 is out and 2 million people moved or bought again all their apps they had on iPhone 4, an announcement will come praising their new product:

"We like to inform our customers that in 2 months time they are able to upgrade to the new revolutionary iPhone 5 SB (strictly bull).
It will offer new connectivity enhancements (other chips on the board) with chips that allow for real-time processing and analysis (lag of the slower chips) if the user is 'Doing it right' whatever he is is doing on the device.
For these enhancements and (maybe)other all you need to do is buy the new iPhone 5 SB at just 125% of the price of our old iPhone 5."

RE: How will Apple sell this?
By bug77 on 9/27/11, Rating: 0
RE: How will Apple sell this?
By MrBlastman on 9/27/2011 12:36:33 PM , Rating: 5
A weak and feeble Steve stood in front of the crowd. His weathered look was partially offset by his sharp, crisp turtleneck and rugged jeans. He lifted the mic up to his lips less gingerly than usual and finally spoke, "Look at these chips. Look at their form."

Steve paused, finally his lips resumed pursing in a measured but rhythmic manner, "Look at how they are shaped. Look at the curves, see how they flow from one circuit to the next?"

Steve then grinned, "They even fit perfectly into the phone. It is a perfect match, like a caterpillar and a cocoon."

The crowd hung on the edge of their seats.

"You're going to like these new chips. Our phone was made for them," Steve said, grinning. He turned to walk off the stage but then stopped and slowly turned his gaze back to the audience.

"Oh, and one last thing," Steve said as the crowd let out a shriek of anticipation, "They are even going to be available in white!"

*the crowd gasps*

That's all it will take. No excuses. Just pure, unfiltered Jobsian hype. A little white paint wouldn't hurt, either.

RE: How will Apple sell this?
By Nakecat on 9/27/2011 11:34:41 AM , Rating: 2
I think apple replaces their advertising department with lawyers. Free Press / Advertising everyday just by suing.

RE: How will Apple sell this?
By bruce24 on 9/28/2011 1:01:42 AM , Rating: 2
Sell what? That some analysts said:

"They may offer inferior or more expensive components but it's something consumers barely notice and something Apple can successfully use to pressure Samsung."

He does't even say will. For all we or this guy knows, the componets could be more reliable.

“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads

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