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Core of Apple’s victory may be a bit hollow

Judging from the market's reaction to Apple Inc.'s courtroom victory over Samsung Electronics Co. Ltd., investors expect the dramatic patent verdict to have a big impact on both companies.

The reality may be quite different, though. While Apple's market capitalization swelled by billions after the decision, some analysts see its win as a relatively minor event that will leave little lasting impact on either firm.

Apple shares rose 1.9 per cent on Monday, to a record high of $675.68 (U.S.), following the verdict by a nine-member jury in California, which found that Samsung had violated a half-dozen Apple patents.

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Samsung shares went in the other direction, slumping 7.5 per cent in the wake of the court decision, which was announced after the market closed on Friday.

Put into market cap terms, Apple's value jumped more than $11-billion while Samsung's fell about $12-billion – giving the verdict a value of some $23-billion, at least according to investors.

However, Nicolas Gaudois and Steven Milunovich, analysts at UBS, argue that the ultimate impact on both companies is likely to be modest. The Samsung models most vulnerable to a court injunction in the United States were heading toward obsolescence anyway, which suggests that the early reaction from the stock market might be a touch hysterical.

The analysts are maintaining "buy" recommendations on both Apple and Samsung.

"By the time potential injunctions are implemented, note that most of those devices [mentioned in the patent dispute] would have reached the very tail end of their commercial life," the analysts said in a note.

To be sure, the verdict was a smashing PR victory for Apple.

The iPhone and iPad maker was awarded more than $1-billion in damages and Samsung could end up paying triple that amount because the jury found that there had been willful patent infringement by Samsung.

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On Monday, Apple asked the judge who presided over the trial to ban eight Samsung devices in the United States, which could potentially punch a hole in Samsung's U.S. revenue.

However, the UBS analysts argue that the impact of any injunction against the devices is likely to be less than first impressions would suggest.

Samsung has already launched its new Galaxy S3 smartphone, which was not part of the patent dispute. In addition, the analysts believe the firm will unveil a new Galaxy Note smartphone in the fourth quarter, and they expect the company to completely refresh its lineup of lower-end phones in the third quarter.

While the new Samsung devices are vulnerable because of the court verdict, the UBS analysts believe that Apple would have to file additional lawsuits to seek an injunction on them, which would take time.

"The delay implied in reaching an outcome may actually defeat the usefulness of such actions for Apple," they said.

In the meantime, they urge investors to keep the damage to Samsung in perspective. In terms of units sold, the U.S. market accounts for only about 12 per cent of the South Korean giant's total mobile phone sales and about 19 per cent of its smartphone sales.

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Even if the all the infringing handsets mentioned in the legal dispute are banned from sale in the United States, Samsung would quickly shake off the damage.

Its smartphone shipments would fall 20 per cent by the fourth quarter of 2012. That would equate to a mere 1 to 2 per cent of its operating profit.

Even the worst-case scenario – which the analysts see as unlikely – doesn't look too bad. If Apple gets an injunction on other Samsung devices, the hit to Samsung's operating earnings would rise to about 10 per cent.

But just as they see limited downside to Samsung, the UBS analysts also see little upside for Apple. The main battle for the two companies is between the latest iPhone model and Samsung's injunction-free Galaxy S3.

And if iPhone sales take off because of this verdict? Samsung is the biggest supplier of components to the iPhone in terms of value – so Samsung stands to benefit either way.

Yes, there are longer-term implications here. Competitors to Apple's iPhone might move away from designing smartphones that look and feel like Apple products. But is this really such good news for Apple?

"If the patents are properly granted, I think [cases like this are] always good for competition," said Kevin Rivette, managing partner at 3LP Advisors in Palo Alto, an intellectual property brokerage and strategy firm. "New interfaces will come out of this and things we hadn't even thought about."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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