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Samsung Profits Fall 60%

Samsung Profits Fall 60%
by Paul McLellan on 10-07-2014 at 11:32 am

 Samsung’s profits fell to $3.8B which is 60% down on where they were a year ago. They said this is primarily due to a shortfall in smartphone sales. Samsung’s problem is not that it competes with Apple, their phones seem close enough that the Galaxy line has been doing very well in places like the US. It’s problem is that a lot of its market share in in China where it has to compete with Xiaomi (the market leader even though you’ve probably never even seen a Xiaomi phone), Lenovo, Huawei and others.

The Android operating system is great in some ways for smartphone makers. Apple spends billions on developing iOS. Samsung and others just get Android for free. Google is spending the billions on development, recouping it (or not, who knows?) through search advertising, which despite its broad product portfolio is the only place it makes real money. But it is an Achilles’ heel too, since it means that a Samsung smartphone just isn’t well differentiated. Samsung has been working on their own operating system, Tizen, that I expected they would aggressively use to set them apart from all their Android rivals but every month it seems to slip and get less significant. The first Samsung Gear watch used Tizen but now it is Android, for example. I guessed wrongly that Samsung was big enough that they could use their muscle to establish a third ecosystem of applications around Tizen but now I don’t believe that is going to happen.

Also read: Intel Invades China Mobile Market!

But here is something that is even more amazing to think about. Maybe Samsung will be driven from the smartphone market completely. Look at what happened to Palm. Blackberry. Nokia. Motorola. As Ernest Hemingway said, when asked how he went bankrupt, “Gradually, and then suddenly.” Could it really happen to Samsung too? First their sales fall, their profits go away, their competition gets stronger. The carriers desert them for cheaper suppliers. I don’t know the latest numbers for Q3 yet, since the quarter is not over (well it is, but nothing much has been announced) but here was my lookback on Q2 earlier this summer. Samsung is still #1 but then at one point so were both Motorola and then Nokia.

What about Apple? Its newest phone is underwhelming, adding features that its competition has had for years. But they are an aspirational brand and they are so wildly profitable that they can do well even on declining and not all that large market share. They are currently #2 (behind Samsung). Someone in a comment on one of my blogs said that eventually they would be forced out of the market, just look at PCs. So I looked up the numbers. Apparently the Mac product line makes 40% of all the profit in the PC market, despite relatively puny market share. But they certainly have the hipster demographic, just walk into any coffee shop. It is just in corporate where they are weak, outside the graphic design department. Most internet development is done on Mac, music, graphics and so on.

Xiaomi is certainly one company to watch. They only sell in a handful of countries. They release their phones in batches and only sell them online but they sell out in a few minutes. They are the #1 brand in China already by unit volume. They sell their phones for pretty much cost, with the plan to make it up on services that they have not yet launched. So they could yet crash and burn since they are making a loss on each phone but making it up in volume, as the old joke goes.

But back to Samsung. The explosive growth phase of high end smartphones is over. The growth is in the low end, where Samsung do have product. The challenge, though, is that it is hard to replace high-end smartphones. After a house and a car, a TV and a top-of-the-line smartphone are probably the most expensive possessions. Even if Samsung is successful in the internet of things (IoT) it is not clear it will generate anything like the same revenue or the same semiconductor demand. I have always said the same thing about Intel in mobile: they can’t afford to be successful in mobile, it would crater their margins. Samsung is in a similar place.

More articles by Paul McLellan…

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