4 Reasons Samsung Smartphone Sales Are Collapsing
Samsung isn't doing well. The Korean giant released a profit warning on Tuesday morning and indicated that its smartphone business is not bolstering its business as it has in recent years. Apple Inc. (NASDAQ:AAPL) fans have been certain this day would come for years, and there were always clear dynamics pushing Samsung toward failure.
Samsung Ruined Its Own Brand
In recent years Samsung's smartphone strategy has been to create almost everything in order to get a piece of the market that works. The company has been doing the same thing in the tablet market. That tactic has worked reasonably well for the company, but its future cannot be built upon it.
People no longer know what they're getting with a Samsung product, and even the company's premium Galaxy brand has been monstrously diluted. Samsung, unlike Apple Inc. (NASDAQ:AAPL), has used up brand equity in order to push sales in the short term. The company has little to compete on other than price, and it's losing that race, too.
Chinese Smartphone Companies Are Dominating
This is the headline in much of the business press today, but it doesn't tell the whole story. Samsung has been performing very well in developing markets in recent years, but the rise of low-cost Chinese smartphone manufacturers is killing the firm's sales. Samsung is expecting its stocks of low and mid-range smartphones to increase in the current quarter because Chinese consumers are buying similar phones for a lower price.
Western Markets Are Saturated
Premium smartphones, of the Samsung Galaxy S5 and iPhone 5S ilk, have impressively driven up Samsung's gross profit margins. The number rose from about 32 percent in mid-2011, right around the release of the Galaxy S2. In the middle of 2013 it stood at about 40 percent, impressive even by Apple standards.
Now, however, the U.S. and European smartphone markets are almost completely saturated with smartphones. There is no room for the sale of new Samsung handsets, and the company is going to have to come up with a new way to increase its revenues. Smartphone sales will never again be the same for any company, and Samsung may never repeat those margin.
Android Competition Doesn't Really Work
There's not all that many ways to compete in the Android world these days. The extra software that companies like Samsung load their smartphones with is getting tiresome, the branding, as we've already seen, has been undermined, and the hardware is becoming less and less differentiated. Samsung has fallen back onto mass advertising as a way to beat competitors, but that may not save the company from eventual sales collapse.
Samsung has its own mobile operating system, known as Tizen, but it isn't ready for prime time, and perhaps it never will be. Competing for scraps with the likes of HTC and Motorola will eventually lead to a collapse in profit margins. Luckily for Samsung there's no reason the company musty concentrate on that fight.
Bonus: Samsung Isn't A Smartphone Company
There's still a lot of money to be made in the smartphone market. Even with today's profit warning Samsung expects to make a profit of about $7.12 billion in the April to June period. Samsung jumped into the smartphone market in order to get that premium while it was there. Now that profits are eroding, the company may be better off working on something else.
Samsung is impressively flexible and incredibly diverse. The company's future, unlike that of some rivals, is not locked into the race for smartphone dominance. The company will never leave the market, but as profits erode its focus will shift. A gold rush is just over, and Samsung benefited handsomely. Investors may be served by having faith in management's next big idea.
Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.