What Happens to Samsung Now?

By winning its patent infraction lawsuit against Samsung, Apple has "won," nearly every observer likely would say. Though it remains unclear precisely what could happen, there is another hearing scheduled for Sept. 20, 2012, on whether there should be a U.S.ban on sales of all 25 Samsung products that infringe Apple patents. 

Those devices include the Galaxy line and the Galaxy Tab, as well as 23 other devices. 

Since Samsung is the second most profitable manufacturer of smart phones, that would be a big problem. Few think that is the most likely outcome, though. The $1.05 billion damage award, if it stays at that level after certain appeals, will transfer a chunk of cash to Apple.

But Apple has lots of cash. The longer term outcome is some licensing royalty stream paid by Samsung to Apple, which will raise Samsung's manufacturing cost. Samsung also will have to create some work around processes. 

In all likelihood, the patent verdict also means other Android manufacturers will wind up paying royalties to Apple, as well. That will have the effect of raising manufacturing costs for all competing Android devices. 

Some believe the decision only highlights the broken nature of the current patent system that allows the patenting of operations and processes that should not be patented, but leave that aside, for the moment. 

Some optimists might argue that the long term damage to Samsung is containable, if Samsung can avoid draconian bans on importation of its products. Consider the lawsuit, the damage payment and future royalties as an alternative to Samsung having purchased all those patents directly. 

Consider that Microsoft paid $8 billion to buy Skype, and become a player in VoIP and messaging. It's hard to say right now how much the future licensing royalties might be. But consider the alternative: Samsung might alternatively have had to create a global, branded operating system, user interface and form factor of its own. 

Android, and the software and hardware tweaks it now will likely have to make, still will allow Samsung and other smart phone manufacturers to compete at far lower costs than would otherwise have been the case. Consider all the money spent on the Palm OS, Symbian or RIM OS. 

That is probably small consolation to Samsung. The tragedy would be if Apple's patent winnings were to somehow destroy Samsung's smart phone business at a time when Samsung has been able to win consumer allegiance, while making a profit, at levels no other supplier has achieved so far. 

Apple Wins Big in Patent Infringement Lawsuit Against Samsung

A U.S. jury has found that  Samsung acted willfully to infringe at least three of Apple's patents; found the  Apple patents valid and awarded Apple $1.051 billion in damages. 

The jury found the Galaxy tablet did not, however, infringe any Apple patents.

The jury also found that Apple did not infringe Samsung wireless standards or features patents

Separately, a South Korean court has ruled that Apple and Samsung violated each other's patents, has prohibited the companies from selling the infringing devices in South Korea, and has awarded both companies fairly insignificant damages, the Wall Street Journal says.

The three-judge panel in the Seoul Central District Court also ruled that there was "no possibility" that smart phone buyers could confuse devices from the companies.

Full details still are being released, and we must expect perhaps years of subsequent litigation, but Apple seems to have a big victory against its most potent competitor in the smart phone business.

What Happens in a Competitive Market When the "High Cost" Supplier Loses Lots of Customers?

The thing about leverage is that it works both ways. What helps accelerate business results on the way up also accelerates a decline. Dell, for example, benefited for a long time by using a "build to order" strategy that limited cash tied up in inventory and also created cash "float" when its retail customers paid Dell before Dell paid its suppliers. 

While the company was growing fast, Dell was getting paid to make products faster than it is paying to make them. All that goes in reverse when sales slow. Now Dell is seeing the process in reverse. Lower retail sales mean less cash is coming in the front door, while supplier payments for older and larger orders are going out the back door. 

You might argue a similar process is at work in the fixed network telecom business. Incumbent telcos are losing customers, market share and gross revenue to cable companies and competitive suppliers including competitive local exchange carriers, for example. 

And that means fixed costs are spread over a smaller base of customers. You know what that means: incumbents will have to find new services to sell, or must raise prices on the remaining customers to cover the overhead. 

The process is most clear in the voice business, where telcos once had 90 percent or higher share of consumer and small business voice accounts, and now have perhaps 60 percent to 40 percent. All other things being equal, that means the sunk costs and overhead supporting the voice network have to be spread over a smaller base of customers. 

The other problem is that nobody ever argues that incumbent telcos are the "low cost providers" in any market. Since, in a competitive market, over the long term, the low cost provider generally wins, that poses another layer of trouble. Not only are fixed costs going to become a problem, but incumbent telcos also face institutional barriers to reducing those costs. 

Mobile, cable and CLEC contestants, for example, generally operate with non-union work forces and generally have leaner work force structures (fewer employees per $100,000 of revenue)  as well. 

Thus begins a vicious cycle. Telcos raise prices to cover overhead. Higher prices drive customers off the network. That means overhead per remaining customer gets higher. So prices have to be increased, which causes more customers to flee, and so on. To be sure, all other things are not equal. Telcos are creating new products to replace lost revenue. 

But you see the problem: large fixed costs are a real problem for any business that starts to shrink. 

High fixed costs are a potentially devastating problem for competitors who start with the disadvantage of the highest cost structure in a market, with the heaviest regulatory burdens and price controls. 

For Banks and Payment Processors, the Task is "Avoiding Zero"

In the start-up business, there is an aphorism that suggests the most important thing for a start-up team is to "avoid zero," a way of warning teams that, no matter what, the first objective is not so much to execute fully on the original plan, but avoid wiping out the investment by failing completely.

In more established businesses under attack by disruptive competitors, the task is somewhat similarly to "avoid zero" in the sense of the underlying revenue model withering to "near zero" levels. 

That might not be a huge concern for most in the payment processing business, but the danger of downward pressure is obvious. And most observers would agree the pressure will have some effect. 

One of the most logical competitive positioning statements a company can offer a merchant is "lower transaction fees." And even though many would argue there is precious little wiggle room on that score, some contestants already are offering to attack the payment transaction fees in a major way. 

LevelUp, for example, is trying to beat competitors by jumping straight to a zero-percent charge for processing a transaction.

Though it used to charge businesses two percent per transaction, LevelUp has decided to "eat" the transaction fee, LevelUp still will have to pay its partner payment networks their customary fees. So how is LevelUp looking to modify its revenue model?

Basically, instead of charging for transactions, LevelUp will instead try to create revenue through special campaigns operated on behalf of its merchants. For instance, a local retailer could offer $2 off a $10 item for anyone using LevelUp. The customer would pay $8, and LevelUp would take 35 cents per dollar from the campaign. 

That proposition isn't riskless, either. But if successful, LevelUp would start to create pressure within the ecosystem for lower transaction fees, at the very least. 

FCC Approves Verizon Purchase of Cable AWS Spectrum

The U.S. Federal Communications Commission has approved a modified plan for transferring spectrum from a consortium of cable operators to Verizon, and though not strictly related, a set of agency agreements whereby the cable companies and Verizon can resell each other’s services.

The approval also clears the way for spectrum transfers to T-Mobile USA and and an exchange of spectrum between Leap Wireless and Verizon as well.

The decision was expected, once the cable companies and Verizon agreed to limit the terms of the agency agreements and any systems developed between the cable operators and Verizon as a result of their collaboration for a limited number of years.

Verizon will purchase spectrum in the Advanced Wireless Services band from Comcast, Time Warner Cable, Cox Communications and Bright House Networks, while selling some of its spectrum to competitors T-Mobile USA and Leap Wireless.

The FCC's approval forbids Verizon from reselling cable products and services where Verizon FiOS service already exists, principally. The U.S. Department of Justice earlier had demanded those same concessions as part of its clearance of the deal on antitrust grounds.

FCC to Study New Definitions for "Broadband"

The FCC now is preparing to consider a wide range of standards and definitions for broadband that likely will change the "speed" definitions, perhaps adding quality and pricing metrics for the first time, as well as standards for mobile and satellite broadband.

There is little question that the U.S. broadband situation is “rapidly evolving,” as the Federal Communications Commission notes. Also, the 2010 National Broadband Plan recommended that the Commission “review and reset” its benchmarks every few years. 

In 2010, the Commission raised the minimum speed threshold for broadband to a 4 Mbps downstream, 1 Mbps upstream service. And it appears likely the FCC will do so again by the time of its next report in 2013.

The FCC now wants to consider raising the speeds used to define the minimum levels for “broadband,” adding latency and usage cap benchmarks, at least for fixed terrestrial broadband service.

But the Commission also logically now wants input on whether to add specific benchmarks for satellite and mobile broadband, which have become more important, for purposes of analysis, over time.

The FCC also might assess bandwidth based on the number of users in a household, the number of devices or apps expected to be used in homes.

Where streaming high definition TV, video conferencing, or online gaming, 6 to 15 Mbps could be required as a minimum, the Commission seems to suggest.

The 2010 National Broadband Plan recommended that the Commission set a goal of 100
million U.S. homes having affordable access to actual download speeds of at least 100 Mbps and actual upload speeds of at least 50 Mbps by 2020. The FCC wants imput on whether the Commission should identify multiple speed tiers  to assess the country’s progress.

The FCC might also consider whether “affordability” goals should be added, as well, including such criteria as service prices.

In the technical realm, the Commission is looking at whether latency should be considered as an additional threshold for broadband, possibly adopting a 100-millisecond latency threshold for fixed services.

If mobile broadband data is collected, the FCC also will have to decide what speed benchmarks make sense, as well as setting latency requirements for mobile broadband.

The FCC even wants to include Wi-Fi hotspots in its analysis, including private in-home or in-building networks as well as public hotspots, in assessing mobile broadband deployment and availability. All of the changes, if adopted, would create a more complete and nuanced view of the actual status of broadband deployment, if arguably a bit more subjective as well.

Percentage of Tablets Sold with Native 3G/4G Capability Declines 12%

In the second quarter of 2012, the majority of tablet shipments were Wi-Fi-only. In the second quarter of 2012, less than 27 percent of new shipments included a mobile broadband (3G/4G) modem module, down 12 percent from the second quarter of 2012, ABI Research says.

In the April to June quarter of 2012, tablet shipments reached nearly 25 million units,  with total shipments growing 36 percent quarter-over-quarter and 77 percent year-over-year.

Apple iPad shipments represented nearly 69 percent of worldwide volumes, ABI Research says. Samsung had 8.1 percent and ASUS shipped four percent, while RIM shipped one percent.

Worldwide shipments of media tablets are expected to exceed 100 million units in 2012.