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Apple Loses "iPhone" in Brazil

Zacks Equity Research

Reportedly, Apple Inc (AAPL) has lost its right to use the “iphone” trademark in Brazil. According to a recent ruling from Brazilian copyright regulator Inpi, the “iphone” trademark in Brazil belongs to Gradiente Eletronica SA. Apple has requested the regulator to review its decision.

Brazilian consumer electronics maker, Gradiente had filed its claim to use the “iphone” trademark way back in 2000. However, after a long delay, Gradiente finally received the approval in 2008, one year after Apple introduced its iconic smartphone.

As per the ruling, Gradiente needs to prove that it has used the trademark between Jan 2008 and Jan 2013, within the next 60 days. As per Brazilian law, a trademark granted for a certain brand must be developed within five years of gaining approval. IGB Electronica SA, an enterprise formed post restructuring of Gradiente launched its “iphone” branded smartphones in Dec 2012.

Apple is not new to trademark controversies. In February last year, 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. However, the delay in launching the iPad in China, one of its biggest markets, negatively affected its top-line growth.

In November last year, a Chinese court ordered Apple to pay 520,000 Yuan to the Encyclopedia of China Publishing House for copyright infringement. In December, Apple lost another copyright infringement lawsuit filed by a group of eight Chinese writers and two publishers, and was ordered to pay a fine of 1.03 million Yuan.

Although Apple can challenge the ruling in a Brazilian court, lawsuits of this type tend to linger for a long time, which will create an overhang on the stock. Moreover, any adverse outcome may result in a hefty penalty, which can hurt Apple’s profitability and dent its cash pile going forward.

Apple is focusing on improving its penetration in the emerging markets of Brazil and China as the North American and European smartphone markets get saturated. However, Google’s (GOOG) Android-based smartphones manufactured by handset makers Samsung, Motorola, LG, ZTE and Huawei hold the major market share in Brazil followed by Nokia (NOK).

In such a scenario, we believe that an out-of-court settlement is possible as any restriction on selling the iPhone in Brazil will hurt Apple’s top-line growth and market share going forward.

Apple is facing a number of headwinds in the near term. Its shares have plunged 26.0% over the last six months, primarily due to not-so-impressive first quarter results as well as due to increasing competition from Google’s Android based smartphones, Nokia’s resurgence through the Lumia series and Research In Motion’s (BBRY) recently released BlackBerry 10.

Currently, Apple has a Zacks Rank #3 (Hold).

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