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In Samsung-Apple tablet fight Korean firm's chipmaking business risks collateral damage

People compare the performance of Apple's iPad and Samsung's Galaxy Tab tablet.

Thomas Peter/Reuters

An intensifying legal battle between Samsung Electronics Co and Apple Inc is expected to crimp growth at one of the fastest growing businesses of the Korean company, while threatening to worsen business ties with the firm's largest customer.

The two technology firms have been locked in an acrimonious global battle over smartphone and tablet patents since April, and Apple has successfully blocked Samsung from selling its latest tablets in Germany and some smartphone models in the Netherlands.

The iPhone and iPad maker has also forced its rival to indefinitely delay launching its new Galaxy tablets in Australia, where a court will give its ruling this week.

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Apple and Samsung are scrapping for top spot in the smartphone market, having overtaken the market leader for the past decade, Finland's Nokia, in the second quarter.

Another loss could dent Samsung's ambitious attempt to close the gap with Apple in the global tablet market. The Galaxy gadgets, powered by Google's Android operating system are seen as the biggest challengers to Apple's mobile devices.

Technology experts say Apple's intellectual property battle with Samsung Electronics is part of its broader strategy of using the courts to help cement the unassailable lead its iPad has in the tablet market.

Samsung still trails badly in tablet sales, where Apple racked up 14 million iPad sales in the first half, versus analysts' sales estimates of about 7.5 million Samsung tablet products for all of 2011.

Samsung is betting on its new tablets to close the gap with Apple and reach its target of increasing tablet sales by more than five folds this year.

Analysts said what may become a longer-term challenge for Samsung, is losing chip orders from Apple.

"Samsung's tablet business will be most affected and its chip business will also take a hit as Apple moves to diversify away from Samsung to the likes of Toshiba," said Nho Geun-chang, an analyst at HMC Investment Securities.

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"For Samsung, (the) biggest concern is reduced order from Apple. Without Apple's big backing, it would be difficult for Samsung to boost its chip market share sharply," said Nho at HMC.

"Apple is leveraging the fact that it's got alternative suppliers. They may offer inferior or more expensive components but it's something consumers barely notice and something Apple can successfully use to pressure Samsung."

The South Korean conglomerate supplied Apple with about $5.7-billion in components last year, some 4 per cent of Samsung's total sales.

Apple's portion grew to 5.8 per cent of Samsung's sales in the first quarter, driven by booming iPad and iPhone sales, which Samsung supplies chips for, along with Japan's Toshiba.

Samsung and Apple will square off in a more significant U.S. court hearing next month about an injunction case.

"But taking passive steps for fear of losing its biggest customer will slow down strong growth momentum at its telecoms business, which Samsung doesn't want to see as the business is set to become the biggest earnings generator this year and make up for weakening chip profits. It'll be a costly battle for Samsung."

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Samsung's smartphone business has been growing furiously, powered by its flagship Galaxy lineups. Some analysts expect Samsung to overtake Apple as the world's No.1 smartphone vendor and report record profits in July-September, as it has much broader lineups than the high-end focused Apple.

Samsung's smartphone sales soared more than 500 per cent in the second quarter, easily eclipsing Apple's 142 percent growth, though Apple sold about 1 million more units. Nokia sales fell 30 percent.

Samsung and Apple are suing each other in 9 countries over 20 cases. Apple first fired salvo in April by suing Samsung in a California court, saying the Galaxy lineup devices infringed on its mobile technology patents and design.

Samsung shot back with claims of its own.

Some analysts said Samsung's aggressive stance could help it gain some support from consumers.

"These legal battles are raising perception among consumers that Samsung is the only one capable of competing against Apple," said Choi Do-youn, an analyst at LIG Investment & Securities.

Despite the global court cases, both companies could end up settling the cases, HSBC said in a note.

"The most likely scenario is an out-of-court settlement, after a long-drawn IP battle... As in the case of the Nokia-Apple dispute, this issue too is likely to be settled out of the court, after a long drawn legal dispute," said HSBC analyst Daniel Kim.

In other news, Verizon Wireless, the biggest U.S. mobile provider, has taken a legal stand against Apple's request to prohibit the sale of some Samsung handsets in the United States.

"The requested injunction of certain Samsung products will harm Verizon Wireless and U.S. consumers," Verizon said in a court filing dated September 23.

"It also has the possibility of slowing the deployment of next-generation networks – such as Verizon Wireless's– contrary to the stated goals of the U.S. government," it said.

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