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Steve Jobs initiated the lawsuit against Samsung as part of a “thermo-nuclear” strategy to keep iPhone clones off the market, according to a long story in Reuters. But Tim Cook, then-lieutenant and now chief executive of Apple, never wanted to sue the South Korean electronics giant because it was a critical supplier.
Apple bought about $8 billion worth of parts from Samsung last year, the story says, even though it was locked in litigation that eventually won Apple a large settlement. Apple alleged that Samsung benefited immensely from the market insight it gained by being so tightly woven into Apple’s supply chain. The companies appear to be “frenemies” for life, where they compete on one front and cooperate in many other ways as customer and supplier. Apple’s operations chief, Jeff Williams, told Reuters last month that Samsung was an important partner and they had a strong relationship on the supply side.
There are some precedents for Cook’s concerns that Reuters didn’t mention. Back in the 1990s, various customers or suppliers of Intel considered suing the chip giant for antitrust violations. Alabama’s Intergraph sued Intel in 1997 for antitrust violations, saying that Intel threatened to choke off a supply of chips and product information if Intergraph followed through with a plan to enforce its patents against computer makers. Chief executive Jim Meadlock alleged that Intel executives . In 1999, Intel settled with the Federal Trade Commission by promising that it would no longer retaliate against companies that sued it. The lawsuit was eventually dismissed. But the much-weakened Intergraph exited the hardware business in 2000 and was eventually acquired. In other words, Intergraph spurred an important legal point with the FTC settlement, but it paid the price for going to war with its key supplier.
Of course, the difference here is that Apple probably has some alternatives to using Samsung as a supplier, whereas Intergraph was very dependent on Intel. Advanced Micro Devices provided alternative chips, but in those days, AMD wasn’t as competitive as it is today. Intel effectively had a monopoly. Today, it’s not clear whether Apple has to depend on Samsung for any single part. If it does, then Samsung has monopoly power and it would be subject to compliance with the FTC about retaliation.
Reuters said the relationship between Apple and Samsung dates back to 2005, when Apple needed a stable supplier of flash memory. Apple had tossed aside the hard drive in its small devices and needed big volumes of flash chips for the iPod shuffle, iPod nano, and the upcoming iPhone. Initially, Apple used Samsung application processors, but then it began designing its own ARM-based chips and took over full control of chip development. But Samsung still serves a key role as a foundry, or a contract manufacturer that takes the Apple chip designs and manufactures them.
By designing its own processors, Apple keeps a lot of the margin that would otherwise go to Samsung. But Samsung still rules flash memory and other key components, as it spends $21 billion a year on capital expenditures. Samsung declined to comment to Reuters, while Apple only made the terse comment about Samsung being important.
Apple’s lawsuit about Samsung’s copycat tactics illuminates the risks of being dependent on a supplier, and other systems companies in the electronics industry are likely to want alternatives to Samsung, which has a black eye for allegedly copycatting a key customer’s designs.