​The battle between Epic Games (pvt) and Apple (AAPL) over 3rd party payment restrictions for applications in the Apple store continue to play out with Epic filing an appeal last week to overturn the September 2021 ruling that declared that Apple was ‘not a monopoly’, lessening the impact of Epic’s initial claims.  That said, Apple has made some adjustments to it’s draconian policies concerning the use of ‘alternative’ payment methods on the app store, allowing some apps to provide sign-up links that are outside of the Apple App Store.  Previously not only were Apple App Store application developers forbidden from selling subscriptions directly or outside of the AAS in-app purchasing system, but had to give 30% of that subscription revenue to Apple, unless the user signs up for longer than 1 year, when the fee drops to 15%.
While Apple’s minor concession to what is a mounting tirade against such limiting policies, other countries have taken askance at the light being shed on same and have taken up the cause.  Japan’s Fair Trade Commission forced Apple to allow some applications in the store to direct users to their own websites to sign up for subscriptions, while South Korea passed legislation that banned all application store operators from forcing developers to use in-store payment processing, with Apple having submitted plans to comply with the new law earlier this month.
But just before Christmas last year the Netherlands Authority for Consumers and Markets published an order requiring Apple to “adjust the unreasonable conditions in its App Store that apply to dating-app providers”, as Dutch dating app providers are currently unable to choose a payment system.  The ACM went further in that the required Apple to adjust the system within 60 days or it would be fined €5m per week, up to a maximum of €50m, and while the Dutch authority chose to focus on dating apps, as they are most dependent on reaching a large audience (both Android and iPhone users), they are ‘forced’ to comply with Apple’s rules in order to reach the most potential users.
Apple did make some attempts to comply with the ruling while noting that they were being obligated to make such changes, although they have implemented nothing more than a form that allowed developers to express interest in using an alternative payment system, which does not seem to have assuaged the wrath of the ACM, especially as Apple only provides for a choice between in-house or external payment systems and not both as the law directs.  In order to compel Apple to comply with the letter of the new law, the ACM has imposed that €5m/week fine on the company, which it is appealing under the concept that the decisions ‘could compromise the user experience, and create new threats to user privacy and data security.”  Tim Sweeney, Epic Games’ CEO, a rather biased participant in the controversy, indicates that Apple’s plan for the Netherlands is to force Dutch dating applications to withdraw from the App Store and make users install a new ‘Dutch-only’ version that offers the mandated options, while still collecting a ‘tax’ on payments made through subscriptions processes through dating app websites.
All in, headline grabbing fines and rulings are continuing to focus attention of Apple’s App Store policies, which have gone under the radar for years.  We would expect other countries to take up the cause, especially when governments want to publicize their ‘consumer orientation’, and we also expect Apple will make some concessions but will fight the trend both in court and in the press when necessary, but we expect the end result is that Apple will have to concede and give developers the opportunity to process subscription payments in-house, likely still collecting its yearly fee (for listing) and a share of in-app purchases, so one might believe that all developers would want to take advantage of the new trend.  Likely not so, as many small developers do not have or cannot afford to have the capability for in-house payment processing and will be happy to let Apple do it for them, even at 30% as the exposure they get on the Apple App Store is considerably higher than those that might charge smaller fees.  Apps like Netflix (NFLX and Spotify (SPOT) have already made decisions as to whether they wanted to remain on the site under the old rules, but as the reins are loosened by Apple, either voluntarily or by mandate, things might change.

LG Display (LPL) reported what we would call mixed results for 4Q, with sales of 8.88t won ($7.36b US), up 22% q/q and 18% y/y, while operating profit of 476b won ($398m) was down 10% q/q and down 30% y/y, far from consensus of 588b won, although the company indicated that aside from one-off costs relating to profit sharing incentives for management and employees, the report would have been in-line with consensus, which had already reflected the considerable decline seen in LCD TV panel prices.  Operating margin was 5%, while net profit was 180b won, down 61% q/q and down 71% y/y.  For the year sales were up 23% and the operating margin was ~7%.
As most panel producers continued to shift panel production from TV panels to IT panels, LG Display did the same as seen below, and saw shipments (on an area basis) increase by 12% q/q and 8% y/y while total capacity declined by 2.5% q/q  although up 7.45% y/y as OLED TV production capacity expanded in 2021,  while 4Q operating profit came in below consensus, LG Display has been profitable on a net income basis for the last six quarters and while the overall TV market saw a decline of 10% in 2021, OLED TV set sales (LG Display is the sole panel supplier) grew 60% y/y, reaching more than a 30% share of the premium TV market in 4Q, which also grew ~30%.  The OLED TV panel business became profitable during the 2nd half of 2021.  CAPEX was 3.2t won ($2.675b US) in 2021 but will increase in 2022 as the company expands its small and medium OLED production capacity, as we have described in earlier notes.
1Q 2022 guidance was for area shipments to decline mid to high single digits while ASP (m2 basis) are expected to decline by mid to high teens q/q, as mobile sees its seasonally weakest quarter and broad guidance for for panel shipments, which came in below full-year targets in 2021 are for an increase of ~20% in 2022.  The company indicated that January sales were similar to the 4th quarter rate.  Some color on IT panel price expectations leads one to believe the company expects IT panel prices to decline, not quite a radically as TV panel prices did last year, but more oriented toward low-end IT products, with consumer demand declining as COVID-19 eases, and a corresponding increase in B2B demand.  On a more general basis, LPL expects overall panel demand to remain flat in 2022 with the shift away from TV panel production toward IT panel production creating continued pressure on IT panel prices, although they are quick to point out that the company is oriented toward premium IT products which will see stability in 2022.
During Q&A it was asked if the company could clarify whether Samsung is going to purchase OLED panels from the company, and while they gave no comment specifically, they did indicate that their target of 10m OLED panels for 2022 was based on existing customers, leaving one to believe that negotiations have yet to be completed and if eventually completed, would be incremental to the company’s growth forecast for OLED TV panels.  When quiried about the Samsung QD/OLED product that got press at CES, the company echoed its mantra about welcoming an additional OLED participant as it would help to promote OLED overall, but gave no comment on any quality comparisons between the two technologies given that the Samsung QD/OLED product remains unreleased.
LG Display’s OLED TV panel business is capped by capacity, with yield and cost improvements the way in which it hopes to gain  top line growth, however the company did indicate that it would also be expanding its OLED IT business, which carries higher margins than TV  OLED TV panels.  Much of that growth will come from the expansion program mentioned above, which will become a contributor in 2024, but we expect at least some shift from large panel OLED TV panel production to at least some higher margin gaming monitors and/or laptop OLED panels.
All in, 4Q, excluding profit participation was a good quarter, although dividend and bonuses are a part of doing business and should be considered legitimate expenses.  1Q will be weak, and while the company expects that weakness to be perhaps ‘less than seasonal’ we are a bit less optimistic as IT panel concentration remains high as panel price declines shift to that category.  It is incumbent for LG Display to make decisions about how they plan to expand or contract their LCD TV panel business and whether they will expand their OLED TV panel capacity along with their already approved small panel expansion plans, but we expect such decisions will not come until mid-year, as the outlook for panel production heading into 2022 is opaque, however the company’s LCD panel business could become a burden if IT panel prices continue to fall and building OUT additional OLED TV capacity could take at last a year from onset.  Time’s a wastin’.

​In September 2021 the Biden administration, concerned that the semiconductor shortage had the potential to extend into 2022 and beyond, petitioned the Department of Commerce to request information from the semiconductor supply chain in order to understand where the bottlenecks and other issues might be causing supply problems, with the intent of creating a better semiconductor supply strategy for the US.  The DOC received over 150 responses from almost every major semiconductor producer along with response from many semiconductor industrial consumers.  Here’s a summary of what they found:

• Average semiconductor demand was ~17% higher in 2021 than it was in 2019 although buyers saw little change in what they were able to receive from suppliers.
• Median semiconductor inventory[1] has fallen from ~40 days in 2019 to less than 5 days in 2021.
• The primary bottleneck appears to be wafer production capacity, followed by material, assembly, test, and packaging, with certain semiconductor application specific products (legacy logic, analog semis, and opto-electrical semiconductors) in very short supply.
• Specific production node products at 40nm, 90nm, and 180nm, along with broader issues at other mid and higher nodes, seem to be lacking, with no mention of capacity issues at smaller node geometries.

None of these findings are surprising to anyone in the semiconductor or CE business, and while the report goes on the describe the increase in semiconductor capacity utilization and the more rapid expansion of capital spending for capacity across the industry, offset by COVID-19 related disruptions, the report ‘conclusion’ favors ‘increased transparency’ throughout the semiconductor supply chain, with the requisite circles and arrows, charts and infographics to show how the industry works, but no new plan for making it work better than it has been.  The actual conclusions, are so tenuous as to be almost meaningless, focusing on monitoring and more information gathering, and finally promoting the domestic semiconductor production plan (CHIPS for America) and passage of the Biden $52b US Innovation & Competition Act, akin to senatorial ‘fact-finding missions’, where politicians show up to gather facts about social conflicts or disasters and gain TV time or social media attention with little actually accomplished.
While we expect the information gathering was well intentioned, organizations like SEMI and the SIA, along with a bit of research, could have likely pinpointed the same weak spots across the semiconductor supply chain, but the real problem with government sponsored bean-counting is that it takes forever to reach a meaningful conclusion and even longer to implement a solution, should one be available.  The semiconductor supply chain is global and in most cases is governed by private industry (China the exception), and as such it moves quickly toward any venue that will produce profits, far faster than any government, so government semiconductor spending mandates are always going to be behind both the technology and the market itself. 
It is our belief that rather than trying to protect and rapidly rebuild the US semiconductor business to make it self-sufficient, we should be seeding the parts of the US semiconductor industry that the US dominates and using that expertise to lock in the foreign semiconductor capacity we need.  The US dominates the EDA market and is on the forefront in terms of new silicon process innovation.  By partnering with foundries who need those innovations the US can gain the quid pro quo capacity it needs when demand is strong while growing its own capacity on a more normalized basis, rather than trying to capture growth cycles that tend to be similar to how long it takes for new capacity expansion. Stop wasting time and taxpayer money collecting facts that are obvious, and spend the money on semiconductor innovation where the risk is high but the reward is greater and carries considerable leverage. JOHO
“We’re going to capitalize on this new information to engage industry on node-specific problem-solving in the coming weeks, and we will continue the Early Alert System to monitor and take action related to pandemic-related disruptions to the supply chain.”


[1] Inventory levels for 25 intermediate/end users of semiconductors measured in days of supply.  2021 data is as of September 2021.  Based on the 160 products with inventory data identified by respondents that ‘present the greatest challenge for your organization to acquire’.

​In our 12/2921 note, and again yesterday, we mentioned the COVID-19 lockdown in Xian, China that had affected Samsung’s (005930.KS) NAND Flash production line in that city, contributing to a less than expected decline in recent NAND prices.  While the Samsung line continued to operate, with limited personnel movement and material logistic limitations, the line has been operating at less than full utilization.  As of last night, Samsung has returned the fab to pre-lockdown production levels as the lockdown is lifted.  With the Xian plant estimated to represent ~42.5% of Samsung’s NAND production and Samsung holding a ~34% NAND market share, the Xian lines are quite important to both Samsung and the global NAND market covering 14.45% of total global NAND revenue.

There are lots of folk who believe that using NFTs to buy art is a way to develop a valuable asset portfolio and just as many who believe it’s a scam, but just a little understanding of the process and some nuances makes for a better decision making process when trying to evaluate or understand the world of NFT art.  Before you become the new Picasso of the digital world, you will need a digital wallet, a software or service based application that stores transactional information and potentially identification that allows the user to buy or sell both physical and digital assets.  Such software can reside on a smartphone or any digital device including a server, and could be thought of as a either a ‘bank account’ (with no bank attached) or a retail account (with no retailer attached).  “Hot” wallets, which are on-line, are used to make quick transactions, while “Cold” wallets are more for storing assets and are not connected to the internet and are therefore more secure.
Once you have a wallet, you need to put something in it in order to pay “Gas”, the fees that are charged for listing your artwork and for executing some of the transactions.  In order to fund those fees you will likely need to put Ethereum, a common cryptocurrency in your wallet.  The Ethereum blockchain keeps track of all Ethereum transactions in a manner that does not put any specific information on a particular server or device, but distributes parts of the transaction data and history across hundreds or thousands of servers.  You will need to use either other digital currency or ‘real’ currency from your bank account to purchase Ethereum for your wallet, usually through an intermediary like Coinbase (COIN), and Ethereum itself changes in value as do other currencies, so the value of your wallet will vary even before you become an artist.
Next you need to connect to an NFT platform, essentially a place where your art is available to others to look at and purchase.  When you “mint” your art on such a site, like Opensea (pvt), they will charge “Gas” of between 2% and 3% of the transaction value.  As part of the process your artwork must be verified (POW – Proof-of-Work) that entails much blockchain processing but will (hopefully) verify you as the rightful creator and owner of the digital asset.  Once uploaded and verified you can decide if you just want to leave the item open, sort of an Ebay (EBAY) “Buy-it-Now” or create an auction, and then it is up to the art world to decide whether there is value in your work. 
Of course you will have to ‘advertise’ in order to get noticed and that means lots of time on social media creating an image of you as the latest and greatest digital image creator, and while you are publicizing yourself you also have to deal with the rapid changes in the value of cryptocurrencies that could influence the value of your artwork, but such is life in the digital art (or music) world and participants either accept the heavy responsibilities of being a digital artist or go back to the 9 to 5.  We won’t go into the ethics or legalities of the NFT art world or make a value judgement on those who profess to have made millions buying and selling digital art, but we reinforce one thing and that is to pay attention to “Gas” as the multitude of fees involved in the process can erode profits for sellers and raise costs for buyers, while fee collectors smile after every transaction.

According to a report by the European Court of Auditors, an independent external auditor that checks that funding from EU taxpayers are collected, used correctly, and achieve ‘value for money’, who answers to the European Parliament and Council, the EU is and has been facing delays in the deployment of 5G networks, both from a lack of government sponsorship and security issues.  Based on a 2017 study the report shows that the introduction of 5G across four key industrial sectors (automotive, health, transport, and energy) could generate revenue as much as €113b/yr. ($127.5b US), while creating 2.3m jobs for EU members and a 2021 addendum report estimated that 5G could add up to €1t ($1.13t US) to the European GDP between 2021 and 2025.
That said, the report does indicate that such deployments carry risks, such as privacy issues, threats to national security, supply chain dependencies, and cyberattacks, as 5G is more dependent on software than previous communication systems.  Citing studies that have shown the potential impact of cyber crimes could be as high as €5t, or ~6% of global GDP, such fears pushed the EU toward the 2019 Network & Information System Cooperation Group’s initiatives to prevent ‘hostile state actors’ from ‘privileged access’, applying pressure to a vendor, or by invoking legal requirements.  With few hard (legally binding) and many soft (non-binding communication) laws, the EU built a framework for controlling cybersecurity.  Of course the ‘hostile state actors’ mentioned above refer to China and more specifically Huawei (pvt) and ZTE (000063.CH), both of whom were and remain the object of continuing US campaigns relating to the security of their telecommunication equipment.
The report also indicates that the cost of 5G deployment across all EU member states through 2025 is estimated to be between €281b and €391b, with the bulk of such investments being made by EU member nations themselves.  Between 2014 and 2020 5G development was supported with €4b, coming from both the EU budget and the European Investment Bank, which has provided loans of €2.5b for nine 5G projects in 5 member states., along with the Recovery & Resilience Facility, which will add another €724b in grants and loans for such future projects.  With all of this available capital one might expect the EU to be a leader in 5G rollouts however the report goes on to point out that under the 2016 EU 5G Action Plan member states were to have launched early 5G networks by the end of 2018, full commercial 5G services in at least one major city by the end of 2020, and uninterrupted 5G coverage in urban areas and main transport paths by 2025, adding (last year) that all populated areas should be covered by 2030.
By the end of 2020 23 of the 27 member states had achieved the goal of 5G access in at least one major city and by the end of 2021 that number had increased to 25 of the 27, however a recent study cited in the report indicated that only 11 member states are expected to meet the ‘uninterrupted coverage’ goal by 2025, and that 5G coverage (including both EU and non-EU countries) in Europe will reach only 35% in 2025, while the US is expected to reach 51% by that date, with no definition for quality of service.  The report indicates that a lack of clarity as to what ‘fully commercial’ services might mean, citing the difference between Luxembourg City, where 5G is available on only a few streets to Helsinki, where almost the whole territory is covered, is a stumbling block that continues to limit actual deployments, but on an overall basis the report goes further as to which members might be able to meet plan goals and who might not.

​Only 14 of the 27 member states have included some of the EU objectives indicated above in their 5G national strategies and only 3 have included all of the objectives, but more to the point, of the three 5G bands that have been selected for 5G (low – 700MHz.; Mid – 3.6GHz.; High – 26GHz.) member states were supposed to make the low band spectrum available to carriers by 6/30/2020, with the mid and high bands by 12/31/2020.  However by the end of 2020 only 13 member states had assigned the low band, 17 states had assigned the mid band, and 4 states had assigned the high band, totaling less than 40% of the available bandwidth.  By the end of October last year that had only increased to 53%. 
In some cases, particularly for the high band, carrier demand was weak, but conflicts with spectrum use across borders of non-EU countries are a problem, as some of those countries use the 5G low band for TV broadcast, and negotiations for the release of that spectrum vary considerably from country to country.  But the issues relating to the 2019 China security threat are also an impediment to 5G rollouts.  While the idea of a uniform and broad 5G security directive across the EU was the objective of the 2019 plan, as Chinese 5G vendors became a ‘national security threat’, each country had their own take on the problem and implementation, which limits any coordinated effort across EU member states, some of whom had already decided on key vendors when the problem became a focal point. 
The report goes further citing interviews with representatives of member states who considered the criteria for vendor selection ‘open to interpretation’, with 11 of member states national regulatory authorities voicing similar concerns, and a number of EU countries have included Huawei in their 5G equipment purchasing plans.  As of the end of 2020 40% of network equipment vendors in EU states were non-EU sanctioned vendors and 60% of core 5G equipment was from non-EU vendors, while 64% of EU state 4G customers were using Chinese communication equipment and the cost to ‘rip and replace’ Chinese equipment purchased since 2016 has been estimated to be €3b.
All in the report did not paint the coordinated picture of 5G deployment across EU member states that some might have hoped for, with only some of that weakness attributed to COBID-19.  The report suggests that by the end of this year a common definition of 5G quality of service (speed & latency) should be developed, and all member states should include the original and updated 2016 goal plans in their 5G national strategies, while continuing to negotiate with non-members as to the allocation of spectrum.  But the real problem still seems to be security, and as none of the 5G member state rules are legally binding there seems to be no way to coordinate a uniform security plan, especially one that can come up with real replacement cost estimates and a way for those with imbedded Chinese equipment to be compensated for its replacement. 
While we in the US are concerned over the 5G spectrum conflicting with aircraft altimeters, private enterprise controls much of 5G’s rollout across the US, and while each state and city might have rules that modify those plans a bit, it seems to be nothing like the difficulties facing EU countries and their EU and non-EU neighbors and while the report’s suggestions are lucid and convincing, implementing them is really the problem. 

According to Trendforce, while NAND Flash prices are expected to drop in 1Q, they have revised their original forecasts upward.  Citing the lockdown of Samsung’s (005930.KS) and Micron’s (MU) lines in Xian, China due to a CVID-19 outbreak and strength from PCIe 3.0 products (PCI or Peripheral Component Interconnect Express, a motherboard interface for PCs, graphics cards, Wi-Fi boards, and disk drives), causing delivery times to extend.  In order to shorten those delivery times, customers are more willing to accept less of a price decline.  The same lockdown issues have pushed SSD customers to step up orders, while lower shipment levels of Intel’s (INTC) Alder Lake CPU, which supports PCIe 4.0, has shifted demand back to PCI3 3.0, lessening the decline in SSD prices.  The change across total NAND Flash pricing, while still down 5.5% (single point) for the quarter, represents a 26.6% increase in expected pricing.

In our 10-28-21 note, we indicated that, among other countries, France took umbrage at Apple’s removal of chargers and earphones from the box when purchasing an iPhone.  The government of Brazil fined Apple for the change considering such devices as ‘defective’, and France cited the potential harmful effects of cell phone radiation on young children, forcing Apple to include headphones within the iPhone packaging.  Apple’s theory that most users already have chargers and headphones, leading the inclusion of same to product waste harmful to the environment, is a bit dubious, especially during a period when inflation is causing many components to become more expensive, and goes to the same but more subtle issue of how many consumer staple companies have reduced product weight/package to keep price consistent. (Example:  Sweet & low packets used to be 0.04 grams but are now 0.035g, a 12.5% reduction in weight).
That said, France has changed its mind toward Apple and has decided to overturn the law requiring headphone inclusion, now citing the same ‘waste’ issue that Apple’s lawyers had presented, and that the health argument is not enough to justify the additional waste, although it still requires that ‘compatible headphones are available for sale during the life of the product.’  According to Apple related sites in France the company has already sent a memo to carriers in France indicating that it will stop shipping iPhones with headphones after 1/24/21.  There is still the potential legislation in the EU that all smartphones must have a C-type port to connect to a charger, which would eliminate the necessity for a separate charger for Apple smartphones, but if it were that easy to reverse the headphone issue in France, the EU mandate might never see the light of day.

IPR Daily is a Chinese site that specializes in the rapidly changing world of intellectual property.  While there are many such sites that rank companies as to the number of IP application filings and grants that are generated each year across a variety of global and country IP registration sites, few break down those filings with as much detail.  In fact we have never seen filings broken down for the very specific classification of ‘VR’, however based on filings between January 1, 2020 and December 31, 2021 IPR Daily published a list of the top 100 VR IP filers during that two year period.  We note that in the case of IP filings, the number of filings is certainly secondary to the details contained in those filings, but we were curious as to which companies were active in the VR space, just from the numbers alone.
While Samsung Electronics has been relatively quiet as to its involvement in the VR space, having released the Samsung Odyssey+ headset back in October of 2018, they were the top filer, while Sony (SNE) an even older VR headset supplier, is readying its Playstation VR2 headset, announced all the way back in February of last year.  A few others have had VR hardware products released over the years, particularly Facebook Huawei (pvt) Microsoft (MSFT), and Google (GOOG), but there are others on the list that might be a bit more surprising, such as the Ping An Group, a Chinese insurance conglomerate, while the three top Chinese smartphone manufacturers all made the top 25.  Again, while filing numbers are not an indication as to products or technical capabilities and tend to favor the largest filers who have the largest legal staffs, it is interesting to see who has been filing in the VR space for the last two years. 

​Equipment bake-offs are a dangerous business, as the cost of developing and producing demos and then a working model of large display production equipment can be quite expensive, especially when it comes to a demanding customer such as Samsung Electronics.  Way back in July of 2020 we noted that Samsung (005930.KS) had been evaluating the ink-jet printing tools developed by Kateeva (pvt) and SEMES (009150.KS), a Samsung owned company that had been a supplier of display equipment to its parent, and had chosen SEMES as the provider of the IJP tools that it would be using to print quantum dot material under its new QD/OLED process.  This was a disruptive choice for Kateeva, pushing the company to fall back on its IJP encapsulation product development and focusing on Chinese panel producers who were expanding their OLED panel production.
Little was said concerning why Samsung made the choice, especially given that our information suggested that Kateeva’s tool had produced better results, but other factors prevailed, and while much of SEMES’s traditional display business was for sale, the IJP portion seemed to be headed for Samsung’s new QD/OLED fab, even as Kateeva’s price offer was said to be lower than SEMES’s.   As the QD/OLED fab has been sampling product for a few months, the SEMES tools continue to operate however problems seem to have occurred and there have been suggestions that SEMES is blaming the Samsung Advanced Institute of Technology, the company’s R&D development organization that was said to have been part of the software development process for the equipment’s poor performance.
It seems that Samsung is now going to use Kateeva’s IJP tools for the QD deposition process, placing an order with HB Solutions (297890.KS), who will provide additional software to the Kateeva product and will service the tools.  HB Solutions is said to be developing its own IJP tools but at least for now will be the provider of the order for Kateeva.  No indication was given as to whether the SEMES tools will remain or be fully replaced by the Kateeva IJP tools, which are typically used for OLED encapsulation and Samsung is considering expanding QD/OLED production if the acceptance of the new technology is strong enough.  Should Samsung Display decide to expand production of the QD/OLED process, the question would then be whether they would go with Kateeva tools for the new lines or begin another bakeoff.  If the current scenario proves correct, we would expect Kateeva would have a strong shot as a primary IJP supplier.