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The Smartphone War: Apple vs Samsung

aakanksha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

By now, most of the world knows what an iPhone is — and they know it typically doesn’t come cheap.

That is the problem Apple (NASDAQ: AAPL) faces. It must decide whether to keep catering to the high end of the phone market, reaping fat profits from relatively fewer sales, or offer something cheaper to compete with lower-cost alternatives like Samsung’s phones.

Worries about low-cost competition weighed on Apple’s shares after reports that the company had reduced orders of screens for the iPhone 5, suggesting that demand for the phone could be weaker than expected. Apple shares have been performing so poorly since August that Nokia shares have actually beaten them by 157 percent. Within the past six months, we have seen shares of Apple peak around $700 per share in September and then fall steadily, losing about $200 per share in about four months.  Apple had expected to order 19 million displays for the iPhone 5 but cut the order to 11 million to 14 million. These numbers came from sources in the supply chain, the companies that make components for Apple products. The reduction in orders for screens could be related to excess inventory, or because consumer demand for the iPhone5 just was not as strong as Apple had predicted.

However, I believe there is plenty of room left for Apple to grow and China is a particularly important market. The iPhone is available there for China Unicom, a major wireless network. But Apple has yet to strike a deal with China’s bigger cellphone carrier, China Mobile, which has a whopping 600 million subscribers — about six times as many as AT&T. That is Apple’s opportunity for huge growth.

Apple’s strategy for growth  might be to go after more price-conscious consumers, because once they become customers, they are likely to keep buying other Apple products. Perhaps the key to that strategy might as well be a cheaper iPhone.

But even if Apple were to offer a less pricey iPhone, it is unlikely it would be dirt cheap. If it chose to play more aggressively in foreign markets, Apple would more likely introduce a midprice model that is cheaper than the newest iPhone but more expensive than the cheapest phones on the market. That would be similar to its approach with the iPad Mini, which is more expensive than the smaller tablets sold by Google and Amazon, but much cheaper than the full-size iPad.

The news of Apple’s cut in component orders came around the same time as rival Samsung Electronics announced that it sold more than 100 million of its Galaxy S smartphones. Samsung is by far the most important partner of Google’s (NASDAQ: GOOG) Android operating system. Not only does it dominate from a market share perspective, it's really the only Android OEM that is actually making lots of money. 

Apple Vs Samsung

Apple sold 220 million iPhones in the time it took Samsung to sell 100 million Galaxy S phones. Samsung Electronics said that global sales of its Galaxy S smartphones surpassed 100 million units since the first model in the series was released less than three years ago, in June 2010. That's 100 million units in about 31 months. That isn't bad, considering that Apple's iPhone took much longer for sales to hit the 100-million mark, which happened in March 2011, three-and-a-half years after the introduction of the smartphone in September 2007.

But it's not much use talking about different eras - in the world of smartphones, every quarter is a different decade. So, let's look at the same period June 2010 until December 2012.  Samsung says it's sold a 100 million Galaxy S series smartphones in that time. Apple iPhone sales, on the other hand, reached a record 219.84 million in the same period (between Q3 2010 and Q4 2012). Yes, that's more than double the devices sold during the same period. Period.

According to a Samsung statement, the original Galaxy S phone sold 25 million units, while the Galaxy S II, launched in April 2011, racked up sales of more than 40 million in almost a year, and the S III has reached the same volume in the eight months since coming on the market in May 2012.  Apple’s best quarterly sales for the iPhone came in Q1 2012, when the Cupertino-based tech giant sold more than 37 million units of the iPhone 4S, followed by the next quarter when sales topped 35 million. Q3 2012 sales dipped to just over 26 million, with eager fans choosing to wait for the rumored iPhone 5.  This latest device, launched in September 2012, has yet to see sales spike as the last quarter of 2012 saw iPhone sales almost stagnate at 26.91 million units, although some analysts put that down to supply issues, with the handset becoming available in over 100 countries only in December 2012.

Samsung says that 2012 was a watershed year for it, a year that saw it take a giant bite out of Apple as it carved out a dominant position in the global mobile computing market.  Still, the iPhone remains a dominant device in the smartphones market, with more than 271 million units sold since its launch in Q3 2007. Nevertheless, Samsung saw its share of the lucrative smartphone market surge to 31.3 percent in the third quarter of 2012, up from just 3.3 percent in late 2009. It is now ranked as the leader – above Apple – as it extended its lead over the Cupertino tech firm as the top maker of smartphones worldwide, which gave Samsung 28 percent of the market in 2012, up from 20 percent the previous year. Apple’s share rose to 20 percent in 2012 from 19 percent.

Samsung is ranked ahead of Apple in the smartphones sweepstakes because the South Korean giant doesn't bank on just one smartphone model, and follows a chaingun approach to launching new devices, unlike Apple, which has but one smartphone (the iPhone, of course) and launches one upgrade a year, in addition to the mini avatar it launched last year.

Samsung maintains its leadership position in the worldwide smartphone market with its growth fueled in large part by its broad, deep, and refreshed Android portfolio. In addition to its flagship model Galaxy S III, the company announced multiple mid-range and mass-market models, including a new Windows Phone, in Q3 2012.

What next?

The iPhone5 apparently has a strong influence on Samsung, as the Korean tech company announced plans for a titanium gray version of their flagship phone, the Galaxy S III. The new version comes with 16GB of internal storage, an Android 4.1.1 Jelly Bean operating system, 8 megapixel camera with LED flash, 4.8 AMOLED HD display, NFC capabilities, and a 1.5 GHz dual-core processor. The phone will sell for $279.99, after a mail-in rebate coupon for $50.00. Brian White (analyst for Topeka Capital Markets) predicts that Apple will release their next generation smartphone in six to eight different colors. That’s why they supposedly launched the fifth generation iPod Touch is many colors; they wanted to gauge the reactions of consumers before colorizing the next iPhone. Since it has proven to be successful, Apple will probably colorize the iPhone and the iPad next. He also predicts that Apple will introduce the iPhone in different sizes in order to appeal to all markets including the low-end markets. There has been some talk lately about Apple creating an iPhone Mini in hopes of securing a lead in the budget smartphone market. It’s been also predicted that the iPhone Mini could arrive as early as this summer.

To keep up with the competition, Samsung Electronics recently announced their plans to release a budget friendly smart phone called Samsung S Galaxy II Plus. This new phone is essentially an enhanced version of the original Galaxy II, with hyper glazed plastic construction, 4.3 inch Super AMOLED display, 1.2 GHz processor, and 8 megapixel back camera. It also comes in two color choices white or dark blue.

The smartphone battle between Apple and Samsung Electronics will continue to heat up as both companies continually release new smartphones and improve the ones they have on the market.

2013 could be a big year for smartphones!

 


Aakanksha19 has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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