Samsung Vs. Apple: Comparing Business Models (AAPL, SSNLF)

It is fair to say there is no love lost between Apple, Inc. (NASDAQ: AAPL) and Samsung Electronics Co. Ltd. (NASDAQ: SSNLF). They are in a worldwide corporate battle that started in 2010 when Samsung, then an Apple supplier, released a very iPhone-like product through its Galaxy lineup. Steve Jobs, Apple's late CEO, was furious and went on the offensive; Samsung, in turn, dug in its heels.

It made sense that Samsung would try to incorporate elements of the Apple business model, especially after the American technology giant passed Exxon Mobil Corporation as the world's most valuable company in 2011. Ask either company, however, and you are likely to hear there is too much emulation going on.

Consider the almost unprecedented legal wars taking place between Samsung and Apple, which span four continents and billions of dollars in awarded damages. Or the aggressive, political election-style marketing campaigns that are reminiscent of the Ford versus Chevy attack ads.

From a business model perspective, the two companies are constantly converging and modifying, although stark contrasts remain. Samsung has been a global force longer and has its hands in more industries. Apple's rise has been comparatively meteoric and focused.

In March 2014, someone leaked a Samsung strategy document from 2012 in which the Korean-based tech company blankly stated "Beating Apple is #1 Priority (everything must be context of beating Apple)." It is a telling example of the animosity between the world's two largest smartphone producers, who are clearly modifying their respective business strategies with each other in mind.

Samsung operates like many other Asian producers, such as NEC Corporation or Sony Corporation, with an emphasis on vertical integration and a flood of products. Samsung is present in dozens of markets, including flat panels, sensors, LED lights, batteries, gaming systems, cameras, TVs, appliances, cellphone carriers, tablets, smartphones and even medical electronics.

Before turning its sights to Apple, Samsung competed with, and in many cases bested, Japanese technology companies in the 1980s and 1990s. The company spends a fortune on research and development (R&D) and capital expenditures (CapEx). This pays off in the mid- and low-end markets, but the high-end products keep running into the juggernaut that is Apple.

Samsung relies on vertical integration as a chief competitive advantage. While Apple still imports billions of dollars' worth of components from its rival every year, Samsung is beholden to nobody. It is not a magical formula, Nokia was almost as integrated before being steamrolled by Apple and Samsung, but Samsung controls some logistical certainty in a way that Apple does not.

Declining profit margins in 2014 and 2015, however, forced some introspective analysis within Samsung's executive team. Chairman Lee Kun-hee saw his company's global share of smartphone sales drop from 35% in 2013 to 24% by early 2015, and his son, Lee Jae-yong, reportedly wants to respond through mergers and acquisitions (M&As) and partnerships. This would be a historic shift in focus, likely signaling a departure from self-funded R&D and into outsourced innovation, not unlike Apple.

From its target marketing, research and product design, Apple is a much more focused company than Samsung. It is also a much more profitable company. Apple succeeds on design and integration, and no small degree of risk. All of Apple's products include programs that work very well with each other, but not with any of competitors' products, which makes it easy for customers to keep buying Apple and difficult to switch to someone else. Nearly three-quarters of Apple's revenue comes from the iPhone lineup, making the firm single product-dependent.

Able to suppress R&D costs by outsourcing hardware component production and assembly, Apple's CapEx look radically different from Samsung's. This inflates margins and boosts AAPL stock, and is one of the chief reasons Apple can grow at astounding clips.

Apple does not race to be first; it lets other companies spend time on R&D and early market development before swooping in and improving everything. Consider the iPod, the first breakthrough product during Jobs' second stint as CEO, which came out years after the Sony Walkman. Not content to just throw out an imitator product, Apple worked diligently with record labels and created a small, sleek-looking replacement. There are similar stories with the smartphone and tablet markets, each considered pillars of Apple innovation but neither of which the company invented.

The most acerbic interactions between Samsung and Apple take place in intellectual property rights court, where Apple has repeatedly reached into its bag of litigation tricks to assail Samsung for patent infringement. Lawsuits are a common strategy from Apple, which is one of the most legally aggressive firms in the world, but the focus on Samsung is particularly repetitive and intense.

The first salvo was fired in 2011 when Apple, already entangled with Motorola at the time, went after Samsung for its design of tablets and smartphones. The first claim came in April, and by August 2011, there were 19 ongoing Apple versus Samsung cases in nine separate countries. The count reached more than four dozen by mid-2012, with each company claiming billions of dollars in damages. Each firm won multiple decisions against the other between 2012 and 2015, often in conflicting rulings from German, Japanese, South Korean, American, French, Italian, Dutch, British and Australian courts.

Amusingly, the rapid nature of technological advancement often leaves the comparatively dinosaur-like legal system in the dust. For example, Apple won an initial ruling in 2012 that targeted more than a dozen Samsung phones, but the appeals and countersuit process dragged out until 2014, when virtually every single target model was out of production. For this reason, the real damage is not on the production line, but rather in the mountain of legal costs incurred by Samsung and Apple around the world.

There are still some production or distribution victories. In August 2011, for instance, a court in Germany issued an EU-wide injunction on the Samsung Galaxy Tab 10.1 device for violation of an Apple interface patent. Samsung fought back and had the injunction reduced to only German markets, but it was still a victory for Apple. A similar injunction was successful in Australia.