That Empty Feeling: For Samsung and Apple, Ruling the Mobile World Isn’t Enough

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Although competition will intensify as original equipment manufacturers (OEMs), such as Finnish-based Nokia (NOK) and Blackberry (BBRY), launch new products, South Korean electronics giant Samsung and Apple remain favorably positioned to capitalize on the continued growth in demand for smartphones in 2013.

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Smartphones represent the fastest-growing segment of the cellphone market and will account for more than half of all wireless handset shipments this year, driven by consumer preference for data-centric applications. Research firm Gartner predicts that smartphone sales will grow 47% to almost 1 billion units, with total handset phone sales (including feature phones) climbing 8.5% year-on-year to about 1.9 billion units.

In 2012, Samsung and Apple remained the dominant OEMs in the smartphone market, with the two companies accounting for 29% and 20%, respectively, of global shipments, up from 20% and 19% in 2011, according to IHS iSupply.

Operating income at Samsung rose 86% year-on-year to $26.94 billion, driven by surging demand for the popular Galaxy line of smartphones and tablets: In 2012, Samsung sold 384.6 million mobile phones, of which 53.5 percent (up from 28 percent in 2011) were smartphone sales.

Looking ahead, some analysts have expressed concerns that the world’s largest maker of mobile phones, televisions and computer memory chips could become too dependent on mobile sales. In 2012, handsets and tablets accounted for 66.9% of the $26.7 billion in operating profitability, up from 51.9% (of $14.39 billion) in 2011. “The high-end smartphone market has largely become saturated, while the fast Chinese growth in the lower segment will make it difficult for anyone to see strong profit growth there,” noted Kim Hyung Sik, a Seoul-based analyst with Taurus Investment Securities.

Samsung management admitted on its recent earnings call that demand for smartphones in developed countries is expected to decelerate. Additionally, in emerging markets, such as Africa and China, where demand remains robust, the company is fighting vendors offering potential customers affordable smartphones priced as little as $100 (due to component price erosion).

However, Samsung's resources and ability to build a broad market reach is an advantage that no other competitor can easily match, opines Anshul Gupta, principal research analyst at Gartner. “The Galaxy name is synonymous for Android phones in consumers' mind share,” said Gupta. With a commanding 42.5 percent share of the Android market globally, the company can leverage user confidence with the Google (GOOG) operating system and quickly bring to market dozens of new smartphone models that address all segments of the market, from the high end to the low end.

Introducing new mid- to low-end smartphones that displace ordinary-feature phones will also improve Samsung’s smartphone business’ average selling price, as well as operating profit margins, according to analysts at Crédit Suisse (CS).

Like Samsung, Apple is becoming increasingly dependent on its mobile segment to drive top-line sales. In the first fiscal quarter of 2013 (ended December 29, 2012), net sales of iPhones and iPads totaled $30.7 billion and $10.7 billion, respectively, and accounted for 56% and 20% of aggregate sales (up from 52% and 19% in the prior year).

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Unlike Samsung, however, Apple’s business model hasn’t historically been founded on a diversified market approach – one that targets all consumer segments – particularly in the US. As of December 2012, Apple ranked as the top domestic smartphone vendor, with a market share of 36.3%, according to analytics provider comScore.

Analysts are becoming increasingly concerned that brand acceptance here at home for its mobile iOS platform will not translate well globally, given cost-conscious consumers in emerging markets, from Nairobi to New Dehi, can ill-afford the premium-priced iPhones offerings. Mirroring such worries, word has already leaked that Foxconn, Apple’s iPhone assembler, has frozen hiring at factories in China, allegedly due to disappointing orders and sales for the iPhone 5.

Still, with more than $39.8 billion in cash and short-term investments on its balance sheet and signs that global consumers are willing to plunk monies down for “cheaper” iPhone handsets – worldwide 4Q:12 market share rose 180 basis points to 9.2% -- Apple management has both time and opportunities to attract mobile users away from Microsoft (MSFT) Windows or Android-based platforms to the iOS ecosystem (increasing the likelihood of incremental revenue gains from iTunes/AppStore and other branded products like MacBook Air or iPads).

Whereas Samsung and Apple’s successes have been built on “fast follower” strategies for design and manufacturing, Nokia and Blackberry have witnessed parallel declines in profitability and subscriber growth in the smartphone space due to problems and delays in transitioning to new operating platforms: In 2012, global shipments of Nokia smartphones declined 53.6% to 39.3 million units, mostly due to customers shunning its legacy (obsolete) Symbian OS; similarly, a Gartner survey of the smartphone operating system market showed that the share of handsets powered by Blackberry operating systems declined from 8.8% in the 4Q:11 to 3.5% in December 2012.

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In a rapidly changing technological landscape, where pricing parity is even blurring the distinction between low-end smartphones and feature phones, Nokia is pinning turnaround hopes on its new Windows 7-based Lumia (and low-end Asha series). Blackberry is looking to its app-rich Z10 smartphone (with the new BB 10 OS) to recapture its lost ground. Given a mobile environment increasingly dominated by the Samsung/Apple duopoly, the survival of both OEMs will depend on whether or not they can impress global consumers with their handsets’ overall value proposition by actually delivering on promised new “user experiences.”

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com.


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