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Judge calls out Apple on its ubiquitous design claims

Apple, Inc. (AAPL) has fallen behind top Android smartphone manufacturer Samsung Electronics Comp., Ltd. (KS:005930) in global sales.  Analysts say it could face a similar fate in the tablet market by 2014 or 2015.  Apple insists that Android is only beating it in sales because it "stole" its intellectual property.  

Unable to stop the Android juggernaut on the market, it has taken the top Android smartphone manufacturers to court [1][2][3][4] [5][6][7][8] [9][10][11], trying to prove they infringed on its often ubiquitous patents, which included claims of inventing multi-touch and the swipe unlock.  The Android manufacturers have fought back: Samsung and Apple have over 80 smartphone-related suits and counter-suits to date in courts around the world, since the start of the war.

I. Samsung Can Continue to Sell its Products

Late Friday in the U.S., a judge in Northern District Californian federal courtJudge Lucy H. Koh, dealt a major setback to Apple's international campaign against Samsung.  Following earlier statements where she said she would "likely" deny Apple's request for preliminary injunction, she made it final -- no injunction for Apple.

An injunction could have allowed Apple to ban the sale of all Samsung smartphones in the U.S., as well as imports, without Apple having to work through the full standard due process procedure.   Instead, the Galaxy line of smartphones and tablets and other popular models like the Infuse 4G and Droid Charge will continue to be available to holiday shoppers.

Samsung spokersperson Jason Kim told Reuters in an email, "This ruling confirms our long-held view that Apple's arguments lack merit."

Apple's spokesperson Kristin Huguet disappointedly parrotted her company's previous statement: "[Samsung] blatant copying (Apple) is wrong."

The full PDF of the ruling is available here.

II. Samsung Likely Infringes Apple's Technology, But Not Its Design

While Judge Koh didn't necessarily dismiss the merits of Apple's lone technology patent in the case -- U.S. Patent No. 7,469,381, which covers a menu bounce animation -- she raised serious concerns about what she viewed as Apple's attempts to position itself as the lone manufacture of functional tablets and smartphones.

She comments that "a size that can be handheld, a screen that encompasses a large portion of the front face of the smartphone, and a speaker on the upper portion of the front face of the product" are functional characteristics, not aesthetic ones and thus should not be protected by Apple's design patents.

Apple asserts that it owns the exclusive rights internationally to produce "minimalist" (that term being the summary of Apple's more verbose claim by a judge in Germany) tablets -- thin, rectangular touch-screen driven tablets with few face buttons.  Thus far Germany has been the only nation to buy such a claim.

Judge Koh's comments call into question whether Apple will be able to successfully prove that Samsung is infringing its design patents -- U.S. Design Patent No. D618,677D593,087, and D504,889 -- given the compelling differences that exist between Samsung and Apple's product lines once you look past basic form factor.

As for the technology claim, Judge Koh ruled that the menu animation wasn't enough to cause "irreparable harm" to Apple, necessitating a sales ban.  She comments, "It is not clear that an injunction on Samsung's accused devices would prevent Apple from being irreparably harmed."

She did however indicate that Samsung likely infringed on the patent by including a similar animation in its distribution of the Android operatings system.  She wrote, "Apple has established a likelihood of success on the merits at trial."

Apple must now wait until July 30, 2012 to wrap up that case, though.

III. Legal Situation Grows Dire For Apple

Things are looking bad internationally for Apple's legal campaign against Android.  So far its only victories have been relatively inconsequential ones, with one exception.

A victory in Australian court, in which a single judge granted a preliminary injunction banning Samsung tablet sales was overturned by a three judge panel earlier this week.  While an appeal from Apple puts Samsung's sales down under on ice until Dec. 9, it seems unlikely that Apple will be able to sway the three judge panel, given how critical they were of the idea of a preliminary injunction.  Assuming Samsung's triumph is preserved, it will be able hit the market just in time for the final leg of holiday sales.

Elsewhere, in the Netherlands Samsung has escaped a sales ban by modifying its phones' Android distribution to remove the aforementioned "bounce" animation.  It looks likely that a similar loss, modification, and market reinstatement will occur for Samsung in the U.S.  Such a process does little to help Apple as it offers virtually no sales delay for Samsung and no serious damage to the quality of Samsung's product.

The lone sign of hope for Apple comes in Germany, Europe's third largest tablet market.  A German court ruled in a lawsuit solely dealing with Samsung's tablets that all of Samsung's tablets violated the design (not technology) patents held by Apple in the European Union.  This rulign was the polar opposite of the decision by a Netherlands court, which ruled, like the U.S. court, that Apple's design claims were too broad.

Samsung yielded to the German Judge's ruling, redesigning its product to have a different frame and repositioning its elements such as the speaker and buttons.  Apple however has filed a second suit against the new design, which should soon go on sale.  It reasserts that it should be the only company legally allowed to make a modern tablet (primarily touch driven, thin, rectangular), regardless of whether the modern tablet looks different from the iPad.  The German justice system has not yet decided whether or not to authorize Apple's request for a new preliminary injunction.

If Apple continues to lose or post inconsequential wins in the majority of its court cases the company may be forced to decide between financial success and continuing its personal legal vendetta against Android.  Late company co-founder and CEO Steve P. Jobs, described his final plan for his beloved company remarking, "I will spend every penny of Apple's $40 billion in the bank, to right this wrong. I'm going to destroy Android, because it's a stolen product." 

His successors could be forced to make the tough decision of whether to follow that plan -- whether to exhaust all of the company's fortune on trying to "out-sue" its Android rivals.

Sources: Ruling via The Verge, Reuters

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RE: Similar
By TakinYourPoints on 12/4/2011 4:32:14 PM , Rating: -1
So you're saying that Apple's current strategy that earns more gross revenue, net profit, and has faster growth than any other tech out there, even more than Microsoft which generates much higher profit margins, is flawed.


RE: Similar
By Helbore on 12/5/2011 5:56:30 AM , Rating: 5
There is a flaw with low volume-high profit margin strategies. Whilst they allow for large increases in profit from small increases in market share, they also result in large decreases in profit from small decreases in market share. This is less of a risk in the "large market share - small profit margin" model.

Further, Apple's strategy is heavily based on image. Design and style have always been key to their sales. But the problem with "the cool factor" is it is reliant on an inherently fickle market. What was "cool" previously is "so last year" today. IT is even more significant when comparing across the generations (kids don't find something cool if their parents like it).

These factors mean that Apple is always standing on that precipice of "losing its cool." It has to maintain that image constantly, as one generational failure would spell doom for them. All we need is for - say - the iPhone 5 to not be a success and it would be nearly impossible to recover from the loss of momentum.

One of the biggest killers of companies is sudden growth and expansion, followed by an inability to maintain profit margins. With a large market share, you can absorb minor fluctuations. But when you have a large profit margin, minor fluctuations drastically affect your bottom line. That, in turn, results in you not being able to support the company's increase size, so you are forced into lay-off and other downsizing exercises. Then your stock price decreases. Then you lose your ability to develop a competitive next-gen product, as you are now much smaller than your competitors. Then you lose more market share, forcing you to downsize again. Your investors lose confidence, stock prices crash and someone bigger buys you out.

It's happened to many companies in the past. It nearly happened to Apple in the past. They're using the same business model now that they did then. The current situation is eerily familiar to Microsoft vs. Apple in the 80s. Apple failed to successfully sue MS for "slavishly copying" their look and feel of MacOS. MS became the dominant player in the PC market. Apple nearly died in the 90s.

If history repeats itself (Apple loses its court cases against Android. Google eats up their market share as a result), then Apple could be back on the brink in ten years. This coming decade could be Apple's "next 90s."

And they won't be able to beg Steve Jobs to come back and sort out the mess again this time.

RE: Similar
By joos2000 on 12/5/2011 4:36:54 PM , Rating: 2
There is a flaw with low volume-high profit margin strategies. Whilst they allow for large increases in profit from small increases in market share, they also result in large decreases in profit from small decreases in market share. This is less of a risk in the "large market share - small profit margin" model.

Well, to draw parallels to the Auto industry which is not too dissimilar in how it works, you are wrong. In the GFC, it was the low margin, high volume manufacturers that suffered the most. The reason for this is, that to manufacture huge volumes, you need to tie up huge amounts of capital in equipment, land, employees, etc. Sp, GM and Toyota were some of the hardest hit while high profit, low to mid volume manufacturers such as Porsche and BMW was doing Ok.

This is also the main reason why the new Apple is a lot less sensitive to market fluctuations than the old apple.

The old apple owned its own factories and assembly lines and where, as you say, very sensitive to market fluctuations.

The new apple, which has outsourced its manufacturing is a lot more robust. With one of the most efficient JIT processes in manufacturing, they only carry two days of stock which hugely reduces tied up capital and makes the organisation able to quickly adapt to market volumes.

So, if a product flops, it can redirect its focus to quickly change what isn't working, overcome a problem and adjust a lot faster than the old company could, that relies heavily on warehouses. This is shown how quickly 'Antenna-gate' or whatever you call it was resolved even though it required re design of the main frame of the iPhone. This would also work in its advantage if a design flops.

So, I reckon apple is far more robust to market fluctuations than Samsung or LG for example.

RE: Similar
By TakinYourPoints on 12/5/2011 7:29:29 PM , Rating: 2
Not only does Apple keep short inventory, they make so much more product than everyone else that they get better bulk prices on components. They also lay down cash for years beforehand, further reducing their component costs because they have a guarantee. In the case of larger high quality displays it is also how they corner the market on them. It is how they manage to sell superior hardware while maintaining excellent (for hardware) profit margins.

You're correct, their supply chain is a huge reason why they are as profitable as they are while having quality advantages that others can't match unless they increase their own prices, or reduce their own profit margins by eating into their price.

RE: Similar
By Helbore on 12/6/2011 8:05:05 AM , Rating: 2
The difference to the auto industry is that competing platforms aren't being sold by a single high-volume manufacturer. It is software platforms (easy to mass produce) being sold to lots of hardware manufacturers. A cross-platform OS can survive even the death of an entire OEM. A single-platform OS cannot.

Also, unlike the low share-high margin auto manufacturers, Apple isn't near-exclusively selling to rich people.

Apple's problem is they don't produce a large product line. What would they do if the iPhone 5 wasn't the "must-have" device of next year and instead an android handset took the crown? What if they failed to recover their "must-have" image after that - as once it goes, it can be hard to retrieve?

They cannot rely on the Mac line to keep the company afloat at its current size. They would be forced to scale back. That is where they would be at risk.

Of course, it's a non-issue if they can maintain/grow market share.

RE: Similar
By TakinYourPoints on 12/5/2011 7:20:21 PM , Rating: 2
This sounds like wishful thinking on your part. Your argument is assuming that litigation is the only thing keeping Apple afloat, when quality is really why they continue to sell so well.

Fact of the matter is that these devices all cost about the same, with the difference being that iOS runs on the fastest hardware and has the the best developer support and application ecosystem. It isn't about being "cool", the iPhone and iPad are objectively superior platforms, and in the case of the iPhone it is one in which the carriers and not the customer shoulder the price of the hardware. There is certainly room for multiple ecosystems, but to say that Android will be the single platform out there is asinine, not to mention scary as it really is trash compared to iOS or WP7.

We'll see what happens, but Apple is in such a strong position with their hardware and app ecosystem, all while providing a better value than other high end competing handsets. With Android you can pay as much as or more than an iPhone but you get slower hardware, a sluggish UI, and fewer apps/weaker developer support. You aren't even guaranteed OS updates even with the "reference" Nexus line.

Anyway, Apple has enough cash on hand to shrug off whatever missteps may happen. Hell, they showed significant growth during the worst financial crisis since the Great Depression, I think they'll be fine.

RE: Similar
By Helbore on 12/6/2011 7:52:18 AM , Rating: 2
This is pretty much what was said about Apple in the 80s, too. They were "objectively better." There was no way an "inferior platform" would end up dominating the market.

Look what happened, though.

BTW, why do you think it sounds like wishful thinking? Do you think I want Apple to go bankrupt, because I don't. Competition is good for the market, so I'd rather see many competing companies, than a single monopoly dominating everything.

"What would I do? I'd shut it down and give the money back to the shareholders." -- Michael Dell, after being asked what to do with Apple Computer in 1997

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