Samsung Feeling the Squeeze from the Low End and, Soon, the High End

As Bloomberg reported yesterday, Samsung released their earnings report for the quarter, and it was bad news all around for their mobile division.

Sales fell for the mobile division, and income did, too: income was down a whopping 30%. This was due to competition at the low end from Chinese manufacturers, as well as a Galaxy S5 launch that didn’t feature much innovation beyond a waterproof design, something Sony pioneered with the Xperia Z.

One quarter’s results doesn’t a trend make. So what does Samsung have to look forward to in the next couple quarters?

Having a “fast follower” strategy means that Samsung’s innovation relies in copying the innovation leaders as fast as possible. Other than that, there is no real innovation. This is fine for commodity hardware (using the fastest ARM processors from 3rd parties, using the biggest screens, etc.), but doesn’t work when your main competitor designs its own ARM chips (Apple’s A4, A5, A6, A7, and reported new A8) with unique features like 64-bit CPU, M7 motion coprocessor, and Secure Enclave that stores fingerprint information.

It also doesn’t work when the one remaining hardware feature you do have–very large screens–finally gets implemented by your main competitor, Apple. Apple’s rumored larger iPhone 6 models–a 4.7″ and 5.5″ model, reportedly–are due next month, and may give Android users the final push they need to move to iOS: larger screens.

(There are reasons it took Apple so long to move to larger screens, and it’s all about usability and developers. If there’s interest, I’ll go into that in another post.)

The end result? Samsung’s sales and profits are already being hit by commodity Chinese phones. The second punch comes in the latter part of this year, when iPhones are available in huge quantities in larger screen sizes.

Samsung has nowhere to hide. Unless it figures out how to innovate–perhaps in software–it has clearly peaked, and will no longer be a driver for Android growth. We haven’t seen the end of iOS growth, and I see it growing considerably in the next 2 years.

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