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Is smartphone market reaching saturation?

Samsung Electronics Comp., Ltd. (KSC:005930)) must know a thing or two now about how its archrival Apple, Inc. (AAPL) has been feeling.  Apple's stock recently slipped back under $400, in the midst of a stall in unit sales.  Overall Apple's shares remain down over 40 percent from their peak of $705 USD last September.

I. Profit Miss, Unit Sales Slowdown Hit Samsung Shares Hard

But the situation for Samsung isn't looking much better.  Samsung missed on profit expectations, according to a forecast of sales projections for the second calendar quarter of 2013 late this week.  Profit still set a record at 9.5T won ($8.3B USD), but that's less than the 10.2T won ($8.9B USD) 43 analysts polled by Thomson Reuters I/B/E/S hoped for, on average

Samsung remains the king of unit sales, but its profit margins and flagship smartphone sales weren't as strong as analysts were hoping for.

The misses drove Samsung into a nearly 4 percent drop in share prices amid an early Friday selloff.  That's on top of a 13 percent drop in June following analyst downgrades.

Samsung Galaxy S IV

News giant Yonhap, in Samsung's home country of South Korea, is reporting [Korean] that sales of Samsung's Galaxy S IV have hit 20 million.  That may sound impressive, but it shows a definite slowing for a phone that was already off to a more sluggish start then some expected.

Apple sold 5 million iPhone 5s in 3 days, but it took Samsung four weeks to reach 10 million sales.  Granted, the situation was a bit different -- the Galaxy S IV had perhaps more in common with the iPhone 4S, in that it was viewed by some fans as a disappointingly modest step forward, where as the Galaxy S III and iPhone 5 were viewed as larger leaps.  It should be noted that it did take the Galaxy S III seven weeks to reach 10 million sales, but that number is slightly misleading, given its slower global rollout.

Galaxy S 4
Sales of the Samsung GS IV, recently hit 20 million units globally. [Image Source: Yonhap]

It has taken Samsung nearly two months to move another 10 million units, marking nearly a 50 percent slowdown in monthly sales.  Overall sources expect Samsung to move 22 million smartphones in Q2 2013.

One crucial problem analysts believe face both Apple and Samsung is a slowdown of global smartphone sales growth.  BloombergReutersthe New York Times and the Wall Street Journal all warned of a growing market "saturation" on Friday.

II. Advertising Budget, Smartphone Profit Reliance Are Two Key Issues

And while that's certainly part of the issues surrounding Samsung, there's more too the investor concern than mere slowing sales, too.

In 2012 Samsung spent an estimated $4.3B USD globally on advertising its smartphone product -- the most of any company [according to AdAge], and four times the marketing spending of Apple.  The marketing is working, to an extent, but some analysts are concerned Samsung is overspending and getting diminishing returns on its investment.

HMC Investment Securities Comp., Ltd. (KSC:001500) analyst Nho Geun-Chang comments to Reuters, "I think Samsung spent more on marketing expenses than expected because of the launch of Galaxy S4 smartphone, which led the company's results to miss the market consensus."

Samsung hipsters
Some fear Samsung is spending too much on advertising.

Also concerning is Samsung's overdependence on its smartphone unit for profit.  Given the relative lacking profitability of Samsung's other units -- which include the mildly profitable semiconductor unit, along with other less profitable units such as appliances, televisions, and automotive -- Samsung received 74 percent of its profit from mobile phones.  That's more even than Apple, who receives 65 percent of its gross profit from the iPhone.

Again, there's more to this comparison than meets the eye -- Apple does have a much larger tablet sales volume driving much of its remaining profit, and Samsung still has a lot of room to grow in that market, where it's doing relatively well.  But the dependence on smartphones is certainly something to keep an eye on at Samsung -- and arguably at both companies -- as it leaves it (/them) vulnerable.

Jeff Kim, an analyst at Hyundai Securities Comp., Ltd. (KSC:003450), told Reuters, "One of the biggest risks for Samsung Electronics going forward is that 70 percent of total operating profit comes from mobile business. Diversification is key. Samsung needs to engage in active business transition until end-2014."

Korean Won
Some fear Samsung is relying too much on smartphones for profit.
[Image Source: 
SeongJoon Cho/Bloomberg]

Other analysts view this as more of a temporary situation, but remain concerned.  Jung Sang-jin, a fund manager at Samsung shareholder Dongbu Corp.'s (KSC:005960) subsidiary Dongbu Asset Management, comments, "Samsung's got diversified businesses. When one business lags, it's got others outperforming and propping up the overall profit.  The component business is widely expected to pick up the slack in the second half when smartphones slow, but now worries are also mounting that the component business' recovery could be short-lived."

Mr. Jung's biggest concern is that Samsung's new smartphones lack a "wow" factor.  He comments, "Is Samsung's smartphone story now over? Not quite yet. It's growth is indeed slowing due largely to disappointing sales of the S4.  Yet I think Samsung has some exciting stuff up its sleeves. The problem is no one is sure whether these products can really wow investors and consumers."

III. Tough Competition, but Promising Products

Will Samsung bounce back?

It's hard to say.  The company did release a trio of higher margin Galaxy S IV variants, each with slightly cut down hardware, but unique features.  One is the only smartphone with an optical zoom (the Galaxy S IV Zoom), another packs a rugged water-proof display (the Galaxy S IV Active), while a third has a smaller 4.3-inch form factor (the Galaxy S IV Mini).  If these sell well, it should drive up profit.

The Galaxy S IV Zoom

But the impending threat of the iPhone 5S looms on the horizon.  And HTC Corp.'s (TPE:2498One smartphone -- which received better reviews than the Galaxy S IV, on average -- also remains a surprisingly feisty challenger.  Then there's the Chinese -- Huawei Technologies Comp. (SHE:002502) with its upcoming Ascend P6The Lenovo Group, Ltd. (HKG:0992) with its Padfone/Fone Pad jumbo smartphones, and  ZTE Corp. (SHE:000063) with its Grand S, which launched earlier this year.  Lastly, there are wild cards like the recovering Nokia Oyj. (HEX:NOK1V) who is turning heads with the Lumia 1020 -- which packs perhaps the best camera in the smartphone industry.
HTC BlinkFeed
The HTC One

In short, Samsung remains king of the smartphone market in unit sales, and near Apple at the top in terms of profit, but threats from both within and without are shaking up share prices, amid its slowing growth.

Sources: Samsung, Yonhap, Reuters

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RE: still?
By maevinj on 7/5/2013 3:41:11 PM , Rating: 5
I normally wouldn't stick up for Jason, but this is actually a good article. Samsung and Apple are direct competitors facing very similar situations, so comparing both companies problems to each other helps to develop the story.

RE: still?
By Shadowself on 7/5/13, Rating: -1
RE: still?
By retrospooty on 7/5/2013 4:46:12 PM , Rating: 2
You and XTI both stand to dial down the paranoia a few notches... Either that or you need to just embrace it and get measured for Tinfoil hats.

RE: still?
By Shadowself on 7/5/13, Rating: 0
RE: still?
By retrospooty on 7/5/2013 5:07:25 PM , Rating: 2
I am not really seeing any Anti Apple sentiment or "jabs" in the article above... Just mentioning #'s. ?

RE: still?
By Moto7451 on 7/5/2013 10:17:12 PM , Rating: 2
It's the weird attempts to maneuver around the slightly bad results Samsung had by creating some weird Apple/Samsung dichotomy. I.e. Samsung made 74% of its profits from phones and the rest of their units are relatively weak, which some analysts aren't happy with... but hey look Apple makes 68% of their profits from phones so it must be ok.

At least thats how it sounds to me.

Really, one quarter tells you nothing about a company and analysts and investors don't seem to work on the same plane of reality as the rest of the (far more rational) human race. Samsung will be fine unless they have multiple successive bad quarters... and even then... look at AMD. They've been second fiddle to Intel and turning out bad numbers for years but they're still around.

The whole reason this particular article exists is because people have decided to assign themselves a brand in either Apple or Samsung (or X brand) and it's become personal. I love Apple devices, but not so much that I was willing to keep paying AT&T $110/month for poor service (honestly my distaste for AT&T & Verizon's business practices goes beyond any fanboi-isms I might possess haha). Hence why I have an Android phone and a $55/month Unlimited prepaid plan (I did this a good year and a half before Apple devices hit prepaid phone companies).

RE: still?
By mckinney on 7/5/2013 6:44:31 PM , Rating: 2
I think the first two posts are more realistic for Jasons blogging. If you read his blog on the Nokia 1020

he is more persistent to compare the camera to the Iphone 5, but not the S4 which has more pixels )and a sensor of comparable size to the IP5). The blogs subheading reads

Sensor is an estimated 5x the size of the iPhone 5's

Jason is only blogging to his clients preferences. He used to write more favorable Apple blogs but was getting his a$$ handed to him by the readers.

If one wants to read Jasons more Pro-Apple writing (from 9 mo ago), go to:

Funny, his profile says the following:

I pride myself on delivering concise, comprehensive, thought-provoking coverage with a fun spirit. I operate under the guiding principle that you should write in a way that you would want to read as a reader. I also always try to keep an open mind on all topics and will happily enter discussions with my readers. Outside my journalistic endeavors I enjoy doing graphic design for iOS applications, backpacking, running, and exploring the multitude of music the world has to offer.

He must have a different personality that likes to write for two different sites, as doesn't write "Apple Favorable" content at DT.

Personally, I think he is a "closet Apple Fan"

RE: still?
By Uncle on 7/6/2013 12:11:35 AM , Rating: 2
Things are just going to get better. As soon as the marketing team has figured out how to sell us on a six month old phone as being a piece of Sh*t. As of now my new phone still takes a few nano seconds to dial and my texting hasn't improved either. So until they improve those two items, I'll be sticking with this phone for awhile yet.

"We shipped it on Saturday. Then on Sunday, we rested." -- Steve Jobs on the iPad launch

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