Samsung beats Apple in smartphones, but the race ain't over yet

Samsung has beaten Apple [AAPL] in the smartphone business, raising its share of the segment even while the iPhone maker sees its share decline. However, now Samsung is number one, has the open season for criticism moved away from Apple to focus on the South Korean firm? Not yet, but perhaps it should.

[ABOVE: Apple's latest iPhone ad focuses on the device's status as the world's most-used camera.]

Samsung's ascension

Samsung announced a net profit of $6.4 billion in the first quarter of 2013, 42 percent higher than the same time last year, though 6 percent down on the previous quarter. Its mobile division raked in seven percent more profit than in the previous quarter, due to "sound sales" of its Galaxy S III and Galaxy Note II devices.

Since it gained ascendancy in the smartphone business Apple has faced intense scrutiny: working practises, carrier deals, the nature of the OS, battery life, Apple's apps, its commitment to the environment, even the nature of its executive team have been called into question.

Such scrutiny has been justified, at least in part, by its leadership position, the argument being that a company at the head of an industry should in some way be a poster child for good corporate behaviour. With power comes responsibility.

Has this changed? Not yet, though one can be in no doubt that if sufficient investigative resources were dedicated to examining the Samsung conglomerate, there would be stories to be told. Samsung's just too big to be completely without sin -- there's been plenty of criticism of its working practises, for example, while more recently it has been found to have engaged in a dirty tricks campaign against competitors.

Transparency, please

Perhaps it is also time Samsung openly discussed unit sales. It has nothing to hide, after all, and the confusion between units shipped to retail and units sold to end-users has confounded industry watchers since the firm entered the space.

At present we compare Apple's disclosed unit sales with estimated Samsung sales, comparing actual with estimates delivers an occluded picture of what's going on. The new market leader surely owes every industry watcher better transparency -- if only to make it possible to separate sales of the company's top-tier (iPhone class) devices from the rest, delivering a clearer picture of the state of play between the relevant Samsung products and the iPhone.

With power comes responsibility, after all.

I somehow doubt Samsung will address these matters. The family owned Korean conglomerate appears resistant to the whims of the more liberal US media.

Compare this to Apple -- at least under CEO, Tim Cook, the US firm seems more prepared to listen and respond to its critics, even to the extent of taking steps to improve working conditions and issuing very public apologies when it errs. Most tellingly, despite criticism that it is too secretive it is prepared to disclose actual sales numbers, unlike Samsung.

It is ironic that the firm that leads the so-called 'open' Android device market is far more secretive than its US competitor.

Even Samsung expects tough times

Despite all these reservations, Samsung's achieved remarkable results. It seems to have been able to exploit litigation between the two firms in order to recreate itself as the anti-Apple, and millions seem prepared to lap up every new Galaxy release, no matter how poorly-reviewed the gadget might be.

The Galaxy S4 will soon be available in the US, and while Samsung has aggressive sales targets for the device (and a track record of claiming to achieve these targets, albeit without releasing actual unit sales numbers within its financial reports) the company is warning investors to expect flat growth in the segment in the coming quarter.

"As more mid- to low-end mobile devices enter the market and new premium products are rolled out, the race for market share will intensify." Robert Yi, senior vice-president and head of investor relations, said: "Although market uncertainties from the European crisis and the slow global economic recovery are still lingering, we expect to increase R&D spending for strengthening our competitiveness ahead of planned new product launches."

There's another reason Samsung is predicting flat growth across its business sectors in the current quarter: Apple.

At present Samsung makes a few billion dollars every quarter manufacturing components for its smartphone foe, primarily displays and Apple-designed processors. This is expected to change as Apple migrates manufacture of these parts to others, such as TSMC.

This is likely to impact Samsung's display manufacturing business, though the company attributed this to seasonally soft demand. These moves have also impacted its memory and will manufacture its processor supply business. Apple reportedly spent $11 billion on Samsung-made components in 2012, or just over $2.5 billion per quarter. It will be interesting to see just how much this impacts Samsung's results in the next few quarters, as the company attempts to source new business to compensate for the shortfall.

Apple's response

Another reason it might be too early to declare Samsung a victor in this race: the anticipated iPhone, iPhone mini and iWatch devices Apple's expected to begin to introduce later this year.

The latter two devices will be made available in different price segments to Apple's existing smartphone, and will likely contribute additional volatility to the competitive landscape in which Samsung now operates. A cheap but good iPhone mini may offer stiff competition against Samsung's mid-range devices, while the iWatch could (at least theoretically) attack the upper end of the low end of the business.

In the event Apple's purported new products successfully achieve traction, then it seems inevitable iOS market share will climb, and in doing so will apply further pressure to Samsung's future results.

There's one more take away to be made in this comparison between the two firms -- smartphones have become essential to the future of both.

Separate mobile device profits from Samsung's revenues and it seems abundantly clear that its other business segments aren't growing. "Demand for consumer electronics products in emerging markets stemmed further sales losses but weak seasonality and a sluggish economy took their toll on Samsung’s sales of TVs and home appliances," the company said.

Apple meanwhile achieves over 70 percent of its profits from smartphone sales.

The two horsemen

What does this mean? It means both firms have little choice but to put everything they have into developing their positions within the smartphone segment. Failure to do so would severely impact their business.

That's good news for consumers, who can look forward to a growing array of devices and eventual decline in device price. It is however very bad news for competitors who now battle for position within an industry now dominated by the two brands, a dominance which appears increasingly essential to the future business performance of both.

The conclusion? Buoyed by new product launches, Apple seems likely to wrest some market share gains toward the latter quarter of this year, prompting Samsung to warn that "the race for market share will intensify."

With this in mind it seems likely Apple will remain subject to intense scrutiny as it seeks to regain its lost leadership position. However, Samsung's industry importance continues to grow, so it must anticipate increased scrutiny concerning its business practises.

Competing firms outside of the Apple/Samsung matrix face a bleaker future. It seems far more probable that we will see some choose to exit the difficult sector, while others may merge or otherwise consolidate operations in order to improve their market position.

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Copyright © 2013 IDG Communications, Inc.

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