The Mobile Wars: 2015-2020 (Part 2)

For the second part of these series of posts, the focus will be on Apple’s biggest competitor (at the moment), Samsung.

Samsung

Unique among the plethora of Android vendors, Samsung has actually beaten Apple in terms of smartphone market share in many countries around the world. Its tablet market share is climbing, albeit slowly and in some countries and regions, Samsung’s tablets already out-sell Apple’s iPads.

But it is also a truism that when you’re at the top, the only way to go is down. Plus, you will constantly looking over your shoulder at what your competitors are up to. While Samsung is sitting pretty, if a little precariously, at the top at this moment, it could easily fall over the precipice in the next few years if its competitors get their act together.

Today, Samsung still sees Apple as its main competitor. Witness the ads that come out of the US market and elsewhere and it is clear which brand they are targeting, even if it isn’t spelt out clearly. By being so focused on Apple, however, Samsung risks being blindsided by other Android vendors, especially those coming out of China.

Strategically, Samsung’s most glaring weakness is that their mobile division has no significant revenue stream other than those derived from the sale of their handsets. Yes, Samsung does have its own app store on their devices and Samsung also has KNOX, a new security platform it is trying to use to convince businesses to switch to using Samsung Android devices rather than Blackberry or Apple. It is interesting to note, though, that Samsung has not trumpeted its revenues from either of these, suggesting they are insignificant in the context of the entire division’s revenues. Contrast this with Apple’s iTunes, which rakes in tons of money for the fruity firm on top of the (high) margins they make from their device sales.

Without these additional revenue streams, Samsung’s margins face high downside risk. Indeed, the latest quarterly financial reports have already shown a significant drop. A consequence of depending on someone else’s ecosystem and saturated smartphone markets in the developed world.

While revenues and margins can be increased via sales in emerging markets, where smartphone demand remains strong and continues to grow at a brisk pace, this particular segment faces increasing threats from the brands coming out of China and, in some cases, local brands as well.

And herein lies another strategic danger for Samsung. As an established MNC, its overheads are higher than those of smaller, more nimble competitors. So even if everything else is the same, higher overheads will mean higher unit costs of its low-end smartphones and therefore higher prices for consumers. While its brand perception and acceptance will insulate it somewhat, it will be increasingly tough for Samsung to increase its market share in emerging markets if the division and company continues doing business the way they are doing now. (On a side note, I can still remember the time when I was competing with Nokia, it was a hard fight and Samsung only started winning because we outflanked Nokia with touch-screen feature phones and smartphones).

Furthermore, Samsung’s well-known broad portfolio of devices, while helping it grown tremendously in the past, has become a drag on profits instead. Samsung’s senior executives have admitted as much recently and aim to reduce their portfolio so as to increase their margins. Anyone who even knows anything about manufacturing will tell you the same thing, the longer your production lines produce the same thing, the more efficient they get (up to a point). But keep switching production on those lines, and efficiency drops, sometimes dramatically. And from the recent announcements, Samsung appears to be grappling with this very issue right now.  Will it work? Only to a certain extent as I have a nagging suspicion that their staff overheads are unsustainably high.

To sum up, Samsung is leading the pack, but its position looks increasingly untenable. It will not be easy to knock this behemoth off its perch as the market leader does enjoy a certain incumbency effect. However, the warning signs are already there and the next 5 years will look increasingly challenging for this company as the Chinese manufacturers get their act together.

More to come in subsequent posts as I look into Sony, HTC and LG, followed by the Chinese brands.

Winston

"Open your eyes, the world is not what it seems"

Disclaimers:

1. Opinions expressed are my own.

2. This is not an academic work so I won't be posting sources. In any case, my comments are based on my own observations and experience, mixed in with the news that's being reported. Conclusions are my own (as far as I know).

3. This post is not 'sponsored' in any way, no money or gifts changed hands for this posting. If a post is 'sponsored', I will clearly state so at the beginning.

The Mobile Wars: 2015-2020 (Part 1)

The end of 2014 is near and the product launch cycles for the major mobile manufacturers have ended. The biggest launches in recent months, Apple's iPhone 6 and iPhone 6 Plus, as well as Samsung's Note 4 and Note 4 Edge, have already reached plenty of markets around the world.

While Apple and Samsung continue to dominate profits and market share, the questions that everybody is always asking are: (a) how long can Apple and Samsung sustain their positions at the top of the market? and (b) What will be the fate of the second-tier players like Huawei, Lenovo, Xiaomi, HTC, Sony and LG? The following is my take on what might happen in the next 5 years in the mobile space. There will necessarily be a lot of assumptions and conjecture, as with all opinions of such nature. And I will try to spell them out clearly so that you, the reader, can assess for yourself whether they make sense or not.

Apple

Apple will continue to sit pretty and generate the lions' share of profits for the next few years. The logic is simple: unique amongst all the smartphone vendors fighting for a slice of the pie, Apple owns its own ecosystem, from the platform to iTunes (music, movies, books, apps). Barring a major disaster (the U2 album and the iCloud hack do not count since there has been no lasting financial or PR impact), Apple will continue to mint money here and make its products as sticky as always. Furthermore, its practice of not discounting consistently means it will generate a higher margin than its competitors as each iteration of iPhone and iPad moves through its lifecycle. Additionally, as production runs continue, it is usually the case that the production cost per unit of iPhone and iPad will get lower (to a point). I would speculate that Apple might possibly generate higher per unit margin in the second and third quarter of a particular model's sales cycle.

Where market share is concerned, Apple continues to hold its own (and sometimes, it even increases) market share in the USA, its worldwide market share is trending down.

This last point must be especially troubling for Apple as the emerging markets are where the smartphone markets are growing. While Apple has demonstrated that it continues to hold a large and significant percentage of the population in developed markets in its thrall, it has struggled in markets where median income ranges from a couple of hundred to a thousand US dollars a month. With household incomes at that level, it is hardly surprising that people in these markets can't and won't spend a month's income (or more!) on an iPhone or iPad. The alternative for them? A cheap Android handset that retails for USD150.

Even so, there might be a silver lining for Apple in emerging markets, namely through the trade in used handsets. To date, I have not seen any attempt to discover how many used handsets are being traded around the world. Yet, personal experience tells me there is a large and lively trade for such devices in countries where people cannot afford the most expensive products. But while these provide consumers in emerging markets the means to get a hold of Apple products, the danger for Apple is that there isn't a means to monetize these transactions. Furthermore, while Apple can track (and earn) from transactions through iTunes even for used handsets, it is more likely that such handsets are jailbroken and therefore bypass Apple's own ecosystem altogether.

To sum up (ceteris paribus), Apple's ownership of its ecosystem, together with its loyal following in developed markets, will stand it in good stead to remain a key player in the smartphone and tablet market in the next 5 years. Beyond that, as emerging markets develop and incomes grow, the question remains whether Apple will be a key player, or simply a sideshow.

And of course, it goes without saying, there could be another player coming along with the next 5 years that provides starry-eyed consumers with something that's out of this world. In which case, all bets are off.

More to come in subsequent posts.

- WG

"Open your eyes, the world is not what it seems"

Disclaimers: 
1. Opinions expressed are my own.
2. This is not an academic work and neither am I a journalist so I won't be posting sources. In any case, my comments are based on my own observations and experience, mixed in with the news that's being reported. Conclusions are my own (as far as I know).
3. This post is not 'sponsored' in any way, no money or gifts changed hands for this posting. If a post is 'sponsored', I will clearly state so at the beginning. Feel free to comment if you disagree with anything I've said