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Apple on a high in court and stores, but may need to change upgrade cycle

Apple and Samsung are expected to broaden their battlefield soon, both in terms of patent suits and actual products. Apple could launch a small iPad this fall and then a second new iPhone in the spring, according to some reports, while Samsung is preparing the next Galaxy, the S IV, for early 2013. For now, of course, Samsung will find it hard to score profile points against the iPhone 5 launch, which is already shaping up to be the biggest ever for Apple ‘ but at the cost of increased subsidy bills for its carriers.

In the patent war, both firms are trying to draw their rivals’ latest, and most lucrative, devices into the fray. As well as preparing an appeal against the $1.05bn judgement against it in a California federal court, Samsung is filing to extend its own US cases against Apple to the new iPhone 5. Apple, for its part, expects to extend its suit to include the Samsung Galaxy Note 10.1 and the latest version of Android, Jelly Bean. The companies revealed their plans in a joint case management conference statement filed with the US District Court for the Northern District of California, San Jose Division.

Meanwhile, Apple is reportedly looking to treble the damages it was awarded pleading that Samsung was found guilty of ‘wilful infringement’ of five of the six patents at stake, which opens the way to an increase in penalties. Its confidence will have been boosted by further US reversals for its enemy. This week, an ITC (International Trade Commission) judge rejected the Korean vendor’s claims against Apple in four cases, saying the iPhone maker did not infringe four of the patents at issue, and declining to rule on another four. Samsung had been seeking injunctions against the iPod Touch and iPad. The decisions are subject to review by the full ITC panel but represent further bad news for Samsung, which also failed to overturn a temporary injunction against its Galaxy Tab 10.1 in the San Jose court.

The Korean giant has had better fortunes in similar cases in other countries, leading to speculation that it is at a disadvantage in courts in Apple’s home country. ‘Apple at the ITC is bulletproof,’ Rodney Sweetland, a lawyer at Duane Morris, told Bloomberg. ‘Nobody can get any traction against them there. The lesson is, if you want to get relief against Apple, it’s going to have to be in a foreign forum where it doesn’t have the clout or the cachet it has at the ITC or the northern district of California.’

Apple has won in ITC cases brought against it by HTC and Motorola Mobility, and has been the victor in a suit it filed at the agency against HTC ‘ but lost a similar case against fellow US vendor Motorola. Apple also has its own ITC complaint pending against Samsung, with the judge’s preliminary findings due on October 19.

In other IPR war news, Apple won an injunction last week against Motorola Mobility, in a German court in Munich. The case concerned Apple’s ‘rubber band’ patent, though the court did not specify damages or the models affected. The patent, EP2126678, concerns scrolling lists, translating, rotating and scaling electronic documents on touchscreen displays. It is known as the rubber band patent for the way the display springs back once a user has scrolled to the bottom of a document on a device like a smartphone. Motorola has a chance to hit back, with the ITC confirming it will investigate a complaint against Apple brought by the Google unit last month. The claim relate to the iPhone, iPad, iPod and Mac, though details are scarce ‘ the Commission just says in its statement that it will look into “certain wireless communication devices, portable music and data processing devices, computers, and components thereof’, accused of violating some of Motorola’s vast store of patents.

In a post on his FOSS Patents blog, IPR analyst Florian Mueller wrote: ‘Google undoubtedly hopes that Motorola Mobility’s lawsuits against Apple may at some point lead to a situation in which Apple may back down and tolerate unfettered infringement of its rights by Google and its device maker partners.’ However, he ‘very much doubts’ that this will be the outcome. Motorola has already lost a separate ITC case recently ‘ the agency ruled that Apple had not violated three of the firm’s patents, and sent a fourth back to the judge to be reassessed.

Whatever its fortunes in court, Apple is assured of a bumper quarter for the new iPhone 5, notwithstanding rows over underperforming Maps, and echoes of ‘antennagate’ with the revelation that the device will not support simultaneous voice and data on the CDMA model. Despite such glitches, and a generally conservative feature set, pre-orders mounted up ahead of US launches.

Apple’s share price touched a record $700 on Monday as it reported that iPhone 5 pre-orders had reached two million in the first 24 hours ‘ double the rate of the iPhone 4S last year. The share price recovered from a slight dip following last week’s iPhone 5 launch, which was greeted by wild enthusiasm among fans, but criticisms in the mobile community that the device was not as radical as it needed to be for the fast changing and increasingly competitive smartphone market. Those warnings may still impact Apple’s performance, and its ability to fend off Samsung, over the course of the whole year, but for the initial shipment period, it has proved once again that its user base are swayed by powerful brand and design, and the familiar user experience, rather than by cutting edge functionality.

‘Clearly it’s a blow-out,’ Brian White, an analyst at Topeka Capital Markets, told Bloomberg. He had forecast sales of 1.3m to 1.5m in the first 24 hours and up to 12m by the end of the month.
‘iPhone 5 pre-orders have shattered the previous record held by the iPhone 4S and the customer response to the iPhone 5 has been phenomenal,’ said Apple’s SVP of global marketing, Phil Schiller, in a statement.

The vendor could sell 50m of its new handsets in the quarter from October to December, said another analyst, Mike Walkley of Canaccord Genuity, while pundits at IHS think the launch will drive Apple’s smartphone shipments for the whole of 2012 up by 60% compared to 2011, reaching 149m units. The firm makes the reasonably safe prediction that the fourth quarter this year will be Apple’s biggest iPhone quarter ever.

IHS’s Daniel Gleeson is more positive than many counterparts about the innovation included in the new handset, writing: ‘Unlike last year’s release of the iPhone 4S, this year’s iPhone 5 announcement comes as a significant departure from previous models. The addition of a new, larger screen is a fundamental change in product design.’

Strong performance from the iPhone 5 will be the tipping point for some carriers to kick off their LTE roll-outs; as well as for rivals like Samsung to step up their own marketing campaigns, so a general acceleration of mobile innovation can be expected. All that spells welcome Q4 revival for components makers, advertising agencies and apps suppliers, but one group which will see mixed results from the product are the operators. In the short term at least, the Apple device comes with heavy subsidy bills and the knock-on effect on profits.

On Friday, analysts at Stifel Nicolaus downgraded AT&T and Verizon because of this issue. Christopher King wrote in his downgrade note for clients that there were fears that the two carriers were overvalued and would see lower margins because of the likely success of the iPhone 5. In particular, since the handset would go on sale earlier than expected, during the third quarter, it would impact profits for the whole second half of the year.

In an earlier client note he had written: ‘Given our assumption of approximately $425 in carrier subsidies per handset, we believe the US carrier market could be on the hook for more than $10bn over the last three and a half months of the year alone, entirely due to the new iPhone launch.’

Perhaps in response to this factor, but also because of the scale of pre-orders, the two main US cellcos pushed back shipment dates to September 28, while those ordering in advance on line must wait 14-21 days for delivery.

In other parts of the world, some operators (those with the right LTE frequency bands, at least) are seeing the golden opportunity to launch both 4G services and the new Apple handset simultaneously for maximum marketing impact. Japan’s second and third cellcos, KDDI and Softbank Mobile, will both launch LTE this Friday, on the same day they kick off iPhone 5 sales. They are playing catch-up with larger rival NTT DoCoMo in 4G services, and that cellco is widely expected to launch its own iPhone for the first time soon, with Apple including its unusual LTE band, 2.1GHz, in the international GSM model of its smartphone. Softbank was the only iPhone carrier for the third three generations but was joined by KDDI last year when Apple added CDMA, but DoCoMo has only offered the iPad to date.

Softbank, which does have a 4G offering running on TD-LTE technology, courtesy of its acquisition of key Willcom assets, says it will cover all Japanese cities by the end of this year with its more mainstream FD-LTE network, promising peak speeds of 75Mbps or 37.5Mbps depending on location. KDDI aims to top that with 75Mbps theoretical rates, with an upgrade to 112.5Mbps next year. However, its coverage targets are more conservative, applying only to major cities this year but accelerating in Q113 ‘ 96% of the population will be in reach by next April, the carrier says.

Meanwhile, T-Mobile USA remains excluded from the iPhone family until it completes its complex refarming process, moving 3G out of the quirky AWS band and supporting LTE there, which will put it in line with Apple’s chosen 4G frequencies. CTO Neville Ray said recently that the operator will have a ‘material footprint’ of HSPA+ in iPhone friendly bands by year end. iPhone users can already access HSPA+ in New York City, Las Vegas and Seattle.

Other customers remain confined to running unlocked Apple devices on 2G, but despite this drawback, TMo is reported to be launching a nanoSIM card from October, which will enable it to activate unlocked iPhone 5s, which feature the new smaller SIM card format, on its network.

But amid all the pre-order excitement, mobile watchers are already looking ahead to the ‘iPhone 6’ and Samsung ‘Galaxy S IV’, anticipating reduced upgrade cycles from both vendors. The hot rumor is that Apple will step up its game by shortening the upgrade cycle and perhaps launching two smartphones a year. That would hit back against the market share gains which Samsung derives from its broad product range, and its ability to have a bighitting launch every quarter. None of them may approach an Apple launch in sheer numbers, but Samsung’s shipments and market share remain more constant through the year ‘ becoming an important factor now that the Korean firm can top Apple’s smartphone lead during a ‘non-iPhone’ quarter.

Various reports are circulating, most with rather vague credentials, whipping up speculation about the next iPhone ‘ that it will debut in the spring and will sport the ‘killer features, such as NFC, wireless charging and biometric security, which were conspicuously absent from the iPhone 5. An article in Money Morning asked: ‘What if Apple has decided to modify its upgrade cycle to two iPhones a year instead of just one?’ to avoid sales slumps when the market is awaiting a new model.

There are also many reports that Samsung will release the latest Galaxy smartphone, the S IV, as early as February. That would see it unveiled at the Mobile World Congress show, according to Korea Times, and ship a few weeks later. According to the report, citing supply chain sources, the new model will have a 5-inch display and quad-core processor, both upgrades provided by Samsung companies. A first quarter launch would see the upgrade cycle for Galaxy S shortened to nine months ‘ Samsung has usually unveiled ‘interleaved’ devices, rather than the flagship S handsets, at MWC, focusing on ranges like the Galaxy Note.

Apple stabilizes iPhone supply chain:

The redesign of the iPhone 5 has not led to many changes in Apple’s supply chain, according to a report from Nomura Equities Research. Despite the tensions between Apple and Samsung, the Korean vendor is still making the application processor, now upgraded to the A6.

Apple has made little secret of its desire to reduce reliance on Samsung and has been bringing rival foundry TSMC into the mix. However, there is no sign of the Taiwanese giant making the A6, though it does manufacture the basebands, connectivity, audio codec and power management chips, according to Nomura foundry analyst Patrick Liao, largely because of its existing relationships with Qualcomm and other component suppliers.

Qualcomm is still providing the baseband ‘ no surprise, since it is the only provider currently capable of supporting all the iPhone’s air interface and frequency combinations along with LTE. And Broadcom remains in place as the supplier of connectivity chips for Wi-Fi and so on.

Skyworks, Triquint and Avago are all listed by Nomura as suppliers of RF power amplifiers, as they are for the iPhone 4S. And the memory providers remain the same too – Samsung, SK Hynix, Toshiba and Elpida, though there are indications that Apple is trying to shift the bulk of purchasing away from Samsung.. Three suppliers of quartz crystal devices were also retained from the previous generation – TXC, Epson and NDK.

There are some changes in the vendor list however, notably in the LCD, where Toshiba Mobile Display has been added along with Sharp and LG Display. Sharp has reported problems with getting to volume with the new, larger iPhone screen, sparking fears of product delays or shortages, but on Thursday announced it was now up to speed. As for the manufacturing of the device, Hon Hai is now the only contract maker, whereas it previously shared the deal with Pegatron.

Nomura’s breakdown adds that the image sensor suppliers are Sony (for the main 8-megapixel sensors) and Omnivision (for the 1.2-mp front facing camera) ‘ also unchanged. Largan and Genius are listed as suppliers of the camera lenses but are joined by newcomer Kantatsu of Japan. NXP and AAC Technologies retain their roles as suppliers of audio speaker drivers while Knowles and AAC stay in place as providers of the MEMS microphones. Texas Instruments will supply the touchscreen sensor and STMicro is also a MEMS vendor.

The stability of the supplier list, compared to earlier iPhone upgrades, shows the platform maturing and Apple gaining confidence in its ability to drive its vendors’ roadmaps, the more the iPhone gains scale. It also reflects some consolidation in the industry and the fact that few companies are capable of providing components in the numbers Apple requires.

Another analyst firm, TechInsight, has carried out preliminary dissection of the new iPhone and estimates that its bill of materials totals $167.50 for the 16Gbytes model, about $35 higher than the comparable iPhone 4S.

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