Two months ago, when we commented on Apple's pyrrhic courtroom victory in which it managed to halt sales of older generation Samsung smartphones - a "victory" which would backfire with Samsung phone sales soaring, while AAPL results missed, forcing the company to accelerate its product launch cadence to a ridiculous 3 months with news that the iPhone 5s is already in the works a month after the launch of the iphone 5 - we said [3]"The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company." Naturally, the hyperbolic all out response would mean an immediate nuclear war of attrition between the two electronics giants. Instead Samsung would be even better served to show Apple who is boss in quantized increments. Today, it has done just that, forcing Apple to swallow a 20% price increase on hundreds of millions of Samsung application processors used in iPads and iPhones. "Apple first disapproved it, but finding no replacement supplier, it accepted the (increase.)" Game, set, match Samsung.
From Marketwatch [4]:
Samsung Electronics , the world's largest technology firm by revenue, raised the price of mobile processor supplied to Apple Inc. AAPL -0.25% by 20% recently, Chosun Ilbo reported Monday, citing a person familiar with negotiations between the two tech giants.
"Samsung Electronics recently asked Apple for a significant price raise in (the mobile processor known as) application processor," the person was quoted as saying in the report. "Apple first disapproved it, but finding no replacement supplier, it accepted the (increase.)"
The two firms have started to reflect the new supply price recently, the report added, citing the same person.
According to the report, Apple buys all APs used for production of iPhone and iPad from Samsung Electronics with the volume estimated to be 130 million units last year and more than 200 million units this year.
Samsung Electronics has a long-term contract to supply APs to Apple until 2014, the report added.
Two things will come out this development:
i) Apple profit margins, as in go down materially; and
ii) Samsung leverage, as in surge.
Because Apple flexed its muscles in US-based courts, and won as was largely expected, in the process ushering "Patents Wars 2: The Asian Empire Strikes Back - Are The Tables About To Turn On Apple [3]?" (they did), and also letting Samsung understand that a little mutual game theory defection may be useful to teach its unruly client a few lessons.
What is for now unknown, but is certainly the biggest risk factor for the world's biggest company by market cap, is how other supply chain verticals will take this retreat by Apple: if recent dramatic events in South African labor relations are any indication, expect every other Apple product supplier to attempt to squeeze incremental profitability out of their own existing relationships with the behemoth which will have no choice but to yield to a coordinated attempt at extracting concessions, now that the balance of power has shifted dramatically in the favor of the suppliers.
One thing is certain: Samsung has nothing to fear in terms of future legal escalation from Apple now or any point in the future.