Apple Inc.’s U.S. fortress is under attack.
The iPhone maker suffered two body blows in its most lucrative market this week, both from chief rival Samsung Electronics Co. Ltd. The first came when the International Trade Commission sided with Samsung in an important ruling that could result in an import ban on some older iPhones and iPads in the United States. The ITC ruled that Apple had infringed on a Samsung patent related to cellular communications. The ban is likely to affect all iPhone models older than the iPhone 4S, and all cellular-enabled iPads older than the newest model.
The day after the ITC ruling, Canaccord Genuity analyst Michael Walkley released a report indicating that, in May, Samsung leapfrogged Apple to gain the top share of the U.S. smartphone market – the first time that has happened since the release of the iPhone 5 last September. The shift puts more pressure on Apple to please investors and customers with a new iPhone and an updated version of its mobile operating system later this year.
The ITC ruling concerns a so-called “standard-essential” patent held by Samsung. Such patents are applied to technology that is vital to a given industry – in this case, cellular devices. Companies that obtain standard-essential patents usually promise to license them to all other parties under “reasonable” terms – something Apple and Samsung failed to do. For years, the technology industry has been split on whether companies should be allowed to seek import bans and other such remedies in the cases of standard-essential patent violations. Companies such as Apple and Microsoft Corp. have argued these patents should never be grounds for a sales ban, whereas Samsung and others argue the opposite. By ruling in favour of Samsung, the ITC agreed.
Apple declined to comment on the ITC decision, but indicated it plans to appeal in U.S. federal court. The only other way the ITC ruling can be overturned is by presidential veto, which is rare.
The decision negatively affects one of America’s most successful companies, and follows a move by President Barack Obama to reform patent rules and limit the scope of abusive patent litigation. “He would act consistently if he vetoed this because a few hours before this decision, the White House announced these reform measures,” said Florian Mueller, a patent expert who has been following the case for years.
“On the other hand, South Korea is a major political ally in that part of the world. There are political implications.”
If it stands, the ITC import ban comes into effect within 60 days. It will likely include only older-model iPhones and iPads. Increasingly, these are the low-cost models Apple is using to target more price-conscious consumers. “These are, right now, Apple’s lowest-cost offerings. Volumes are low, margins are low – Apple is not making a lot of money from these products,” Mr. Mueller said.
But Apple’s higher-end products are also starting to suffer from headwinds, such as Samsung’s surging popularity among U.S. consumers and its increasing market share. Much of that company’s recent success, he said, is likely a result of the strengthening brand recognition of Samsung’s Galaxy line of products.
“Our May store surveys indicated Samsung surpassed Apple for top U.S. smartphone share driven by very strong sales of the Galaxy S4 at all U.S. carriers and steady sales of lowered priced Galaxy S III and Note II models,” Mr. Walkley said.
“We believe dominant sales of the S4 versus other Android smartphones was driven by Samsung’s extremely strong Galaxy consumer brand and well-executed marketing campaign, as our surveys indicated store representatives often recommended the HTC One ahead of the Galaxy S4.”
The ITC setback and increasing competition leaves Apple with much to prove over the next few months. It is expected to showcase a number of improvements to its software at its annual developer conference next week, including a new version of the iOS operating system. Later in the year, Apple is expected to refresh its iPhone and iPad lines, which generate a majority of the company’s revenue stream.
RBC Capital Markets analyst Amit Daryanani believes Apple may also introduce a lower-cost “iPhone Mini,” and may even launch a new product, such as a watch or TV-based device. Such a product could help energize Apple’s stock price, which is down more than $250 (U.S.) from its 52-week high of $705, reached in September of last year.
“In our view, this continues to be the main drag on the company’s stock as investors are eagerly awaiting new products and innovation from the tech giant,” Mr. Daryanani said.