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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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The next BIG thing... is the problem
By ComputerJuice on 7/5/2013 4:12:52 PM , Rating: 3
The trend of making HUGE phones is the only reason I'm not buying. I do not want a 5.6 inch tablet in my pocket. If there was a high performance phone with a 3-4 inch screen I pony up the cash right now. Sadly apple is actually beginning to look good to me just because the iphone has decent, although unremarkable, specs and a small-ish high-rez screen.




RE: The next BIG thing... is the problem
By Shadowself on 7/5/2013 4:50:01 PM , Rating: 3
I agree. The screen size and the fact that I want a higher end phone is why I'm considering an iPhone 5S. I'll have to see what the final specs are, but if it is truly an evolved iPhone 5 in essentially the same physical format then I might jump ship and buy one. I'll have to see what actually shows up before I decide.

I like to be able to drop the phone into my shirt/suit jacket pocket while seated during a meeting and NOT have to fish the phone out of, or place it into, my pants pocket. For me it's a phone first, computer a distant second, and a music player an extremely distant third. It's not a game console. Thus an ~ 4" phone is fine. But that's just me.


RE: The next BIG thing... is the problem
By Moto7451 on 7/5/2013 10:24:49 PM , Rating: 2
There are some nice smaller screened devices on Android as well. I'm a fan of the 3.5"-4" screen size and have an LG Motion 4G on MetroPCS. If you're on a GSM carrier, there's also the Galaxy S3/4 Mini line which doesn't seem to get much coverage. On my next upgrade, if I don't switch back to the iPhone, I'll probably go for one of those.

Knowing Apple they'll likely just iterate the 5's design. I'm more excited about the rumored "low cost" plastic devices since I'm on a prepaid carrier and like stupidly loud phone colors (a character defect, I know).


RE: The next BIG thing... is the problem
By testerguy on 7/6/2013 1:50:56 AM , Rating: 1
quote:
There are some nice smaller screened devices on Android as well. I'm a fan of the 3.5"-4" screen size and have an LG Motion 4G on MetroPCS. If you're on a GSM carrier, there's also the Galaxy S3/4 Mini line which doesn't seem to get much coverage


Strongly, strongly disagree. The Galaxy S3/S4 Mini's are horrible, horrible phones, as is the LG Motion. IMO.


By Moto7451 on 7/7/2013 4:50:14 PM , Rating: 2
Reasoning? The S4 Min has the same/better specs than the full size S3. I can't see how that qualifies as being horrible.


RE: The next BIG thing... is the problem
By CaedenV on 7/5/2013 5:39:03 PM , Rating: 2
I don't think you will need to worry much on that front. Up until now smartphones have been marketed pretty much only to men. Everything on the high end has been focused around a 4.5-5" display that packs as high of a resolution as humanly possible to look at. You then need a CPU and GPU that is as big as possible to drive that display, and then a battery big enough to keep everything turned on as long as possible. At the end of the day high end phones are merely high end in order to drive the large oversized displays. If they could put smaller hardware behind bigger screens they probably would for the sake of profit margins.

But now we have a few things happening:
-LiOn batteries have some neat new tech coming down the pipe which will allow for drastically smaller batteries that can drive the same hardware. This will allow for smaller phones to have bigger processors because you can run all day on a battery 1/2 the size of the ones we are using now.
-Intel is ratcheting up it's war on ARM and is finally beginning to offer some viable x86 alternatives to manufacturers. This is forcing ARM to make drastically more efficient (and more importantly; more capable) processors to keep their dominance in the field. This will result in much CPU and GPUs that require less die space, less cooling, and less power, which will fit in much smaller devices.
-Manufacturers are finally beginning to focus on making displays take up a larger percentage of the phone's front rather than only making phones thinner. This is important because a phone like my Lumia 920 has plenty of space to cram a 4.7" 1080p display in there if you can replace the empty bezel areas with screen space. Small phones are also very guilty of this issue of wasted space. True 'next gen' cell phones will focus on minimizing blank space on the front so that you may have a 4.5" display, but cram it into what would have previously been a 4" device, or a 4" screen in what you would normally think of as a 3.5" device, so that you get the benefits of a big high resolution screen, but without the fat package.
-But the biggest force of all to consider are women. As previously stated, men are the ones that smartphones are targeted to. Almost every adult male (and most of the kids as well) that I know who are remotely interested in having a smartphone already have one. However, only a little more than half of the women that I know have one, and most of them only have one because their husband's got one for them. They can easily afford to have smartphones, so that means that at least 1/2 of them don't want what is being offered, and few of the ones who have one have a phone they would have picked for themselves.
We picked up a pair of Lumia 920s when we finally got our first smart phones. I absolutely love mine, while my wife is not sold on it. She likes the OS and features... it is merely too big. Something the size of a Lumia 620, but with the camera and style of the 920 would be her dream phone right now, but as of right now that is simply not physically possible.

Still, I would bet you have a 2 year wait before you get true flagship 3.5-4" devices outside of Apple. But they will come in time.


By Xplorer4x4 on 7/7/2013 5:31:32 PM , Rating: 2
Most women I know have a smartphone. I would say most have iPhones but it seems like they are coming around to Android very slowly. One woman I know was turned off by what I believe was the pre-ICS UI. She swears she will never go Android but surprisingly her and my girlfriend both want the larger display of my Razr HD Maxx compared to their iPhone 5.Neither are tech oriented like us.


RE: The next BIG thing... is the problem
By TakinYourPoints on 7/7/2013 10:03:34 PM , Rating: 2
Size is a problem. Despite what internet forums and huge advertising would try and have people believe, large smartphones are a niche. The flagship GS3 and GS4 make up only a small fraction of Samsung's total smartphone sales. Most of what they sell are small low-end devices. The old iPhone 4S still outsells both the GS3 and GS4, and the iPhone 5 is selling even faster than the 4S.

There are lots of stats out there going over OS usage (internet traffic, mobile ads, app purchases, etc), but here are some more specific usage statistics based on form factor: http://blog.flurry.com/bid/95652/Size-Matters-for-...

http://blog.flurry.com/Portals/41620/images/SizeMa...

The dominant form factor is 3.5"-4.9" at over 70% while 5"+ smartphones make up only 3% of active users. Perhaps Samsung would do better by improving and better advertising products like the S4 Mini. They'd have a hard time giving them the same specs as the GS4 since flagship Android devices require a huge battery (hence the large chassis and giant screens), but there has to be a better compromise than the hobbled device that the Mini is at the moment.

Offering flagship performance in both GS4 size and S4 Mini size would only be good for them.


RE: The next BIG thing... is the problem
By retrospooty on 7/8/2013 7:34:22 AM , Rating: 2
You are gonna have to update your old "Android only outsells IOS on the low end" soapbox rant as well. I know its hard for you to keep up with the times and keep up with things while way up there on your imaginary pulpit ;)

http://www.androidauthority.com/apple-premium-mark...


RE: The next BIG thing... is the problem
By TakinYourPoints on 7/8/2013 4:54:01 PM , Rating: 2
If you look at actual sales and not shipments then the numbers are very different.

The fact that the best selling GS3 and GS4 are still outsold by the iPhone (both new and old) by wide margins is more important than only noting shipments shipments.

The GS4 took over twice as long as the iPhone 5 to sell (not ship, sell ) 20 million units, and again the old iPhone 4S continues to keep pace and outsell each individual model.

To be specific, Apple sold 20 million iPhone 5 in 3 weeks. It took over 8 weeks for the GS4 to do the same. Day by day: http://www.trustedreviews.com/news/iphone-5-sells-...

quote:
"According to ISI Group Analyst Brian Marshall, “over the first 25 days of iPhone 5 availability, Apple shipped 805,000 units per day. In contrast, Samsung shipped less than half of that — about 333,000 Galaxy S4 units — per day.”


This explains the continued difference in internet traffic and mobile ad revenue between smartphone operating systems. If the high end Android smartphone share was larger then the numbers would be quite different, rather than being only a third of iOS despite there being about 5x as many Android devices out there. Bring tablet share into the mix and the difference is even higher.

And yes, there are obviously other high end Android devices out there, but the GS3 and GS4 dominate that segment so much that HTC/LG/Moto's share almost amounts to a rounding error.

You guys quote shipped numbers a lot. Its really weird. The only charts and figures I bring in have to do with actual sales and practical usage metrics.


RE: The next BIG thing... is the problem
By retrospooty on 7/8/2013 5:08:30 PM , Rating: 2
Meh... I dont really care who outships who, and certainly not in a "3 week slice" or "race to 20 million" picture... I was just jabbing you on your rant. I think of it only in a way of how many phones are out there and therefore how many users are affected by things going on with it... Anyhow what that chart shows is a rapidly changing dynamic.

The other thing I meant to reply on but got sidetracked was this "The dominant form factor is 3.5"-4.9" at over 70% while 5"+ smartphones make up only 3% of active users. "

Its an odd way to slice it since 5 inch phone really just got started. Other than the Note there werent any at all until the DNA/Butterfly late last year. For the vast majority of the past year+ most high end Androids were 4.65-4.8 inches. To say 3.5 to 4.9 inch screens are 70% of the market is sort of like saying cars are the most popular automobiles. Just within the past few months the standard high end device on Android hit 5 inches. Next year we will see how that went.


By TakinYourPoints on 7/8/2013 7:55:07 PM , Rating: 2
The thing is that those numbers extend through the lives of those devices, not just the initial launch. During the first quarter of this year the old iPhone 4S was still outselling the GS3.

quote:
Anyhow what that chart shows is a rapidly changing dynamic.


That chart shows an analyst pulling invented and unverified shipment claims (Samsung and Amazon don't give official shipment numbers either) that have absolutely nothing to do with units sold to customers. The same thing happened with tablet shipment numbers last year, and here we are in 2013 with reports of tablets sitting unsold in warehouses and being sold at clearance while the iPad has almost 85% usage share.

High end Andoid smartphones selling consistently half as much as their Apple counterparts does not result in what your chart shows. Over a long period of time the gap actually continues to widen. Even I thought that we'd have greater internet traffic and mobile ad revenue from Android, but the gap persists despite Android selling more than ever.

Again, it comes down to the high end being a niche. The GS3 and GS4 makes up under a quarter of Samsung's total sales and under half of Apple's.

I don't care either way, I'd just like to see better sources in these discussions. Lots of people seem to avoid usage metrics and official sales figures because it doesn't back up their personal bias.


By tallcool1 on 7/8/2013 11:53:37 AM , Rating: 2
I don't want to have to try and stuff a phablet in my pocket. I prefer the smaller screens like what the iPhone4S has. Performance and screen size is more than adaquate for making phone calls, texting, photos and some apps.

On another note, when I had to choose between a Samsung or Apple phone, both phones are made overseas, but at least one is designed by an american company headquartered in the USA. So I went with Apple.


"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs














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