The Next Big Threat to Apple

As big as Apple’s (Nasdaq: AAPL) conflict with Samsung was, there’s a much more massive war brewing in the courts that could drastically alter the U.S. smartphone landscape, and potentially devastate Apple.

Hello Moto
Two weeks ago, Motorola claimed that Apple infringed on seven of its patents, including phone and video players, email notification, and voice recognition software. If Apple is found guilty, any Apple products that use these patents -- including the iPhone, iPad, and iPod Touch -- would be banned from being imported from China into the U.S. 

While it may seem like no one will care that little ‘ole Motorola wants to try taking on big bad Apple, don’t forget that Motorola brings some hired muscle: Google (Nasdaq: GOOG  ) .  Last May, Google acquired Motorola Mobility, partly for its impressive assortment of over 17,000 patents.  Google needed this patent protection because its new Android system, while popular, was vulnerable to being accused of copying other systems.  It appears that Google has finally decided to use this impressive arsenal of inventions against Apple, so that the company can further its dominant presence in the smartphone market.

What’s the big deal?
What will happen to Apple if its three biggest products aren’t allowed to be sold in the U.S.?  According to the company’s most recent earnings report, of the more than $35 billion in net sales during Q3 2012, iPhones, iPads, and iPods accounted for 76% of Apple’s sales. 

Meanwhile, sales in the Americas accounted for 37% of Apple’s total net sales in Q3 2012. Sales grew 26% year over year in the Americas, and that growth was "primarily driven by increased demand for iPhone, and strong demand for the new iPad and iPad 2." 

Maybe it’s time to buy an Android
Clearly, this case could potentially have a huge impact on Apple.  But even if Apple were to lose, there are several courses the company could pursue in order to save its biggest products. 

The company could change its software a bit, redesigning it so that it doesn’t infringe on any of Motoro la’s patents; but this takes time, and may mean that Apple products won’t have the high quality that consumers are used to. Or Apple could move its production from China, and work around the import ban, which would mean abandoning the Foxconn factory there, and spending boatloads of money to start fresh somewhere else. 

But the most likely scenario, by far, is also the one we’re probably going to see play out between Samsung and Apple when the court hands down sentencing in September.  In order to keep its products on U.S. shelves, Apple could enter into licensing agreements with Motorola to allow the company to use its patented technology. 

This means that Apple would have to pay massive fees to Motorola, and for any other company, that alone could mean the death knell.  But Apple still has nearly $117 billion burning a hole in its pocket, all of which could be put towards paying any necessary fees. That massive piggy bank, as well as the company’s impressive margins-- (27% profit margin, 36% operating margin -- means that Apple wouldn’t sweat paying a fee here or there. 

Although paying for the license is the most likely outcome of an Apple loss, in a worst case scenario, Apple could lose its ability to sell its biggest products in the US.  As the company itself says, “the outcome of litigation is inherently uncertain.”  If you’re interested in the future of the biggest company in the U.S., keep an eye on this case. 

Despite all the risks to Apple’s future, it is still an incredibly profitable company.  Even at its current price, investors may want to think about buying into Apple, as the company continues to expand its product line, and the ecosystem surrounding it.  Check out our premium report on Apple by our top tech analyst to learn more about the opportunities in Apple’s future.  Or, if you’re interested in other companies that are changing the tech world forever, check out our special free report entitled 3 Stocks To Own For The New Industrial Revolution.

Motley Fool contributor Mark Reeth owns none of the stocks mentioned above, but he does own a Droid.  Follow him @ChristmasReeth.

The Motley Fool owns shares of Apple and Google, and Motley Fool newsletter services have recommended buying shares of Apple and Google, as well as creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.  We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 31, 2012, at 9:00 AM, jdmeck wrote:

    Would be a loss for Google as well. There would be a huge backlash against Google.

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