Apple Inc (
AAPL
)
recently lost a copyright infringement lawsuit filed by a group
of eight Chinese writers and two publishers, according to news
agency Reuters and Associated Press ("AP"). The Beijing No. 2
Intermediate People's Court found Apple guilty of violating
Chinese copyright laws and has ordered the company to pay a fine
of 1.03 million Yuan, according to AP (1.00 million Yuan as per
Reuters).
Earlier this year the group filed a lawsuit against Apple
alleging that its App store has sold a number of apps that
contained unlicensed version of their books. As per Reuters, the
authors demanded approximately 10 Yuan in damages, while AP
quoted the amount to 12 million Yuan.
According to AP, the Beijing court has awarded 605,000 Yuan to
one publisher and 21,500 Yuan to the other publisher. Of the
authors, Mr. Han Ailian has been awarded the biggest compensation
of 186,000 Yuan. Although Apple said that it takes the copyright
infringement claims seriously, it declined to comment on whether
it will appeal against the judgement or not.
Currently, China is the world's largest Internet market with
approximately 538 million users at the end of June 2012. Of these
more than 72% are mobile Internet users. However, piracy is a
significant problem that costs billion of dollars to companies
and government interventions have been of minimal effect till
date. We also note that there is significant lack of clarity in
Chinese intellectual property laws, which have for long been
accused of bias in favor of domestic companies.
Although China continues to remain the most focused growth
region for Apple, the company has faced significant legal worries
in 2012. In February, Apple was sued by Proview Technologies for
the "iPad" trademark, which prevented it from launching iPad in
China. Apple eventually settled the lawsuit for $60.0 million in
July 2012.
Apple has also faced significant criticism due to
relationships with its Chinese suppliers and accused of
ill-treating its workers and endangering the environment. To
clarify its own position with respect to these misdeeds, Apple
published a list of suppliers, which received the maximum amount
of its spending in January this year. Apple also announced that
it will give access to Fair Labor Association auditors to
facilities in its supply chain and allow them to publish their
findings.
In such a scenario, this is the second time Apple lost a
copyright infringement case in China. In November this year, a
court ordered Apple to pay 520,000 Yuan to the Encyclopedia of
China Publishing House for copyright infringement. Although
Apple's policy involves strict scrutiny of its third party apps
for any copyright violation, we believe that these lapses will
hurt its popularity in China. Moreover, the company can face
significant government regulations going forward.
We continue to believe that Apple's ability to innovate and
grow in China, where the market is more cost sensitive, will
determine the company's fortunes over the long term. We expect
Apple to continue to forge partnerships with local telecom
providers in order to increase its penetration in the
Asia-Pacific region going forward. The partnerships will help it
to provide devices compatible with local 3G and 4G networks,
thereby boosting its subscriber base going forward. This will
also provide it a significant competitive edge over Samsung and
Google (
GOOG
)
over the long term.
We maintain our Neutral recommendation over the long term
(6-12 months). Currently, Apple has a Zacks #3 Rank (Hold).
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