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Behind Apple's record sales are signs of desperation

Hailstorm of lawsuits hints at vulnerability

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As we went to press with this story, Apple had just reported its first quarter results and Nokia was about to. For both arch-rivals, the quarter will not be indicative of longer term trends. For Apple, there has been disruption to its supply chain, while Nokia's future will be hard to judge until it launches its new WP7 devices.

Until then, Nokia remains in a state of limbo, and its quarter will reflect that in no uncertain terms. Nokia may be suffering the downward swing of the handset pendulum at the moment, but Apple itself is hovering precariously at the top of the curve. Its own fears that it could start to slide downwards are only reinforced by its hailstorm of legal actions against its challengers, which have even now extended to its key supplier Samsung. And as Google's own results indicated the company has only just begun in the mobile market, there is a bigger cloud on Apple's horizon – whether the cloud itself will be its undoing in mobile.

Apple's quarter

Apple's quarter beat records as usual, but did not convince that the firm is more than a one-trick pony in mobile. It is a pretty pedigree pony to be sure, with the iPhone booming on increased US distribution, thanks to Verizon, and international reach. The handset sold 18.65m units in the quarter, up 113 per cent on the year-ago period. However, Apple – like all of its rivals – needs to expand beyond the smartphone segment as even the high end starts to commoditise, a process that the large Android ecosystem is better equipped to handle. And the iPad, though dominant in the nascent tablet category, is not yet proving that the category itself is a winner, or will be more than a niche form factor in the wave of new, cloud-focused products that will appear over the next few years.

The iPad sold 4.69m tablets, fewer than the 6.1m predicted by analysts or the 7.3m of the holiday quarter. It remains to be seen whether this is a short-term supply issue or an indicator of limited demand for the form factor. CFO Peter Oppenheimer said Apple sold "every iPad 2 we could make", suggesting Apple is experiencing parts shortages, though Apple officially said the earthquake was not having a "material impact" and that it was ramping up iPad 2 production. "The iPad has the mother of all backlogs," said acting CEO Tim Cook.

Overall, Apple's revenue rose 83 per cent year-on-year to $24.67bn, though the figure was 8 per cent lower than the holiday quarter of 2010. Net profit leapt by 95 per cent to $5.99bn or $6.40 a share, which was flat on Q410. Gross margin slipped slightly, from 41.7 per cent a year ago to 41.4 per cent. Analyst consensus forecasts had looked for revenues of $23.34bn and earnings of $5.36 a share. A strong sign for Apple was that international sales were up to 59 per cent of the total, addressing its historic over-reliance on north America in the mobile business.

But for the current quarter, Apple forecast profit and sales below analysts' predictions, at $5.03 a share on revenues of $23bn, (though it traditionally issues conservative guidance). Gross margin will be down to 38 per cent this quarter, the firm said.

Apple sues Samsung

The note of caution surrounding even these strong results is clear, and an even stronger signal of Apple's new vulnerability is heard in its frantic round of litigation. Samsung is the latest iPhone challenger to feel the heat, despite the close relationship between the two firms; the Korean vendor supplies memory, processors and touchscreens to Apple, which is its second biggest customer. However, Apple has filed suit alleging that the Galaxy handsets and tablets infringe iPhone/iPad patents and their trademarked appearance.

In targeting the rise of Android, Apple is picking off the vendors whose products are eating most seriously into its installed base and the mystique of its mobile platform. Samsung joins HTC and Motorola, though the iPhone maker is yet to attack Google itself. Apple also has a complex series of tit-for-tat lawsuits ongoing with Nokia, covering a wide range of patents.

The actions indicate Apple's increasing sense of vulnerability and its determination to slow down the progress of Android, and perhaps stop Nokia in its smartphone tracks altogether. Each lawsuit focuses on slightly different areas, with the Samsung actions concentrating on patents that relate to the use of hand gestures on the touchscreens. They also allege copying of the colors and rectangular shape of the Apple products. The complaint, filed on 15 April in federal court in Oakland, California, says the Galaxy products were deliberately designed to copy Apple's gadgets.

Specifically, it cites seven patents related to the way the devices understand gestures, including selecting, scrolling, pinching and zooming, plus three patents on the design, including the flat black face. Samsung also is accused of copying onscreen icons and trademarks for certain icons, including green boxes with phones or a sunflower for photos. Apple also claims the packaging is copied.

"Instead of pursuing independent product development, Samsung has chosen to slavishly copy Apple's innovative technology, distinctive user interfaces, and elegant and distinctive product and packaging design, in violation of Apple's valuable intellectual property rights," the complaint reads.

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