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Why the Apple-Samsung verdict matters, even if Samsung appeals

Don't dismiss Apple's victory just because Samsung can appeal it. The long-term impact here is going to be striking.
By Joel Hruska
Apple vs. Mother Nature (The Blue Marble)

One of the most common responses we've seen from readers since news of the Apple-Samsung ruling broke on Friday boils down to "Who cares? Samsung will appeal it." That's both true and remarkably irrelevant when evaluating the potential effects of the verdict. Trials and appeals take months or even years; companies can't afford to wait for judicial instruction when it comes to planning roadmaps. With that in mind, we've put together a short list of the most significant potential impacts.

First, there's the effect on Samsung itself. Because the jury found the South Korean manufacturer guilty of deliberate infringement, Judge Koh has the right to triple the award and slap lawyer fees on top of it. That could come out to $3.2 - $3.5 billion. The judge could also issue an injunction against Samsung shipping infringing devices. Apple has been told to file a list of phones it wants to ban by today (August 27) and will hold a hearing on the matter on September 20. Banning device sales would potentially cripple Samsung's earnings and cause far more long-term damage than the initial $1B fee.

While this case dealt with older phones, Apple had already filed suit against Samsung over a number of newer devices. That case, scheduled for 2014, covers the Galaxy S II, Skyrocket, Epic 4G Touch, Galaxy Nexus, Illusion, Captivate Glide, Exhibit II 4G, Stratosphere, Transform Ultra, Admire, Conquer 4G, and Dart. The Galaxy Tab 7.0 Plus and Galaxy Tab 8.9 are also named. With a sweeping win here, Samsung has every reason in the world to settle the second case -- if Apple will let it.

Galaxy NexusApple's next court case includes all Samsung's recent hits like the Galaxy Nexus

There's also the matter of modifying future products to avoid infringing on Apple's patents. The verdict against the company was more damning than most analysts expected. If Samsung played its cards cautiously and began adjusting product designs months ago, the net effect should be small. If, however, it was banking on a victory, the upheaval could take months to sort out. Between the delays, potential injunctions, and the second follow up case, Samsung could lose tens of billions of dollars and critical market share.

Second, there's the impact on the wider Android handset market. Apple focused on Samsung because it viewed the South Korean company as the most egregious offender and the greatest threat. In the US, however, most patent litigation defenses focus on attacking the validity of the patents in question. Samsung utterly failed to overturn any of its rivals patents, which means no other company is likely to prevail, either.

This gives Apple a much stronger bargaining position and the company will likely use it. Say, for example, that Apple and mobile phone manufacturer XYZ were in the midst of an ongoing discussion regarding certain patents that Apple believed XYZ was infringing. On August 1st, XYZ might receive a license offer for said patents that worked out to $5 per device, per patent. After Friday, a new copy of that letter goes out, bumping the price to $8. Attached is a note that says: "This offer is only good until September 20. After September 20, we'll file a lawsuit. Any agreement reached after that date will have a minimum fee of $15 per device per patent. XYZ will also be responsible for all of our legal fees By signing this agreement, you agree to pay us the specified amount regardless of any judicial ruling in other cases."

Next page: Further impacts of the Apple-Samsung verdict...

Samsung was the only Android manufacturer in a real position to challenge Apple. Motorola Mobility may be owned by Google, but it's in the middle of restructuring and refocusing its own brands. HTC's profits have fallen for three quarters in a row, Nokia is flailing like a bleeding swimmer in a shiver of sharks. LG's sales are falling, Sony Mobile Communications is hemorrhaging money. ZTE and Huawei may be US players at some point in the future, but neither has a real presence in the US market.

Apple profit share - Q2 2011Apple's profit share in Q2 2012 hit 77%. This chart, however, gives you an idea just how bad things are.

Third, there's the radioactive fallout on Android itself. Some people have dismissed this point on the grounds that Apple didn't really go after Android and because Google has lots of money. (If this last seems a bit vague, you aren't alone). Google's funds, at least, are indisputable. Whether or not it's going to use those funds in ways that help the larger group of handset manufacturers is much less clear.

Samsung EpicSamsung was one of the only companies actually making any money on Android devices. This decision threatens that profitability and gives Apple a heavy stick it can use to beat even more money out of the other IDMs. With an estimated 77% of the entire smartphone market's profit share, one wonders why Apple feels the need. Is it fair to blame Android for Samsung's infringements? No. But the handset manufacturers currently drowning in the Android Sea aren't going to care. You can bet both RIM and Microsoft are going to redouble their efforts to attract vendor attention, particularly if Apple gears up to go after other Android handset manufacturers in a prominent way.

Does this mean Android is doomed and Samsung is going to exit the mobile business? Of course not. But Apple -- already by far the largest and richest company in the smartphone industry -- is now even more powerful than it was. It can create licensing terms that give the other beleaguered handset manufacturers little choice but to sign. This ruling may ultimately do nothing positive for Microsoft or Research in Motion, but it hurts Android in ways that can't be easily fixed. It may be the most common mobile OS, but it's increasingly the OS of companies that don't make any money.

Sure. Samsung can appeal. But no matter what the ruling, it's not going to undo the damage that's been done.

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