A year ago it would have been unthinkable that both Apple and Samsung, which were close to becoming a duopoly in smartphones, would both be losing their magic already, particularly with investors. First Apple was beset by market fears of a slowdown in demand for its key iDevices, and now Samsung has apparently confirmed analyst concerns by predicting slower profit growth than last year. The Apple faithful claim a radical new iPhone will appear this fall and will move into any space left by Samsung weaknesses, but there are some signs that the second tier players may, in reality, be the ones to benefit. With Google reported to be planning to spend as much as $500m on launching and promoting the upcoming Moto X; Nokia gaining carrier interest in its biggest Lumia launch to date; and share gains at Sony, HTC and Huawei, there are hopes that the smartphone space will become rather more varied when the holiday season starts this year.
The Korean giant Samsung confirmed recent jitters about its smartphone growth, issuing a profits forecast which was weaker than analysts had expected. In its usual preliminary results statement, it said it expected its second quarter operating profit to be KRW9.5 trillion ($8.3bn). That would be up 47% on the year-ago figure, but that would be slower than a 54% rise in the same quarter in 2012. And the markets were looking for a figure around KRW10.1 trillion, even accounting for recent worries about slowing sales and price wars in the smartphone business. Samsung also said sales for the quarter would be about KRW57 trillion, up 20% year-on-year.
The statement prompted a further decline in Samsung’s shares, which have been under pressure in recent weeks ‘ they fell by an additional 3% on the profit warning, on top of a 15% decline over the past month. Analysts are particularly concerned at the high marketing costs associated with the Galaxy line, which are eating into operating profits.
There is rising sentiment that Samsung’s runaway success in smartphones has peaked and it will be squeezed by lower cost Chinese vendors, and even by a series of launches from Apple later in the year. However, the Korean firm has proven ability to pull rabbits out of hats in terms of device design; it has a broad range of products and target bases combined with tight supply chain control; and there is no guarantee that Apple will recover from its own doldrums this year.
Samsung did not provide an estimate of its second quarter net profit or provide reasons for its guidance. The company’s financial results are scheduled for release at the end of July. The mobile business accounted for 74% of the company’s total operating profit in the first quarter and it achieved 33% share of the smartphone market.
If Apple fails to deliver the dramatic iPhone upgrade it needs in October, there will be real opportunities for LG, Sony, HTC, Huawei, ZTE and Nokia to grab a little of the huge share held by the big two. All these companies are readying interesting and attractive high end handsets for launch in time for the holidays, or even over the summer. However, while they may be drumming up carrier commitments and positive buzz on the blogs, there is no guarantee that they will be able to turn increased shipments into profits. The pattern over the past couple of years has been for Samsung and Apple, with their economies of scale; negotiating power with operators and suppliers; and premium brands, to take out more than 90% of the total profits of the sector. With so many credible candidates battling to take the number three spot, and narrow the gulf with the big two, there is sure to be price cutting and margin erosion.
This dilemma was seen in HTC’s recent second quarter results. Although the Taiwanese vendor is showing signs of recapturing some market share points in the Android battle, this is not yet showing through in its results. It reported an 83% drop in Q2 profits, missing expectations which were already weak. Its net profit was NT$1.25bn ($41.6m), down from the year-ago figure of NT$7.4bn, though up on the first quarter of 2013, which suffered from delays in the flagship smartphone, the HTC One. Revenue fell by 22% year-on-year to NT$70.7bn from NT$91.04bn a year earlier, in line with earlier guidance.
This is despite the fact that the HTC one has been making progress, In April and May, the key months for the flagship handset, figures from Counterpoint Research indicate that it enabled its supplier to move up the rankings and overtake Lenovo. The top 10 brands in terms of May sales saw HTC in eighth position, up from tenth in Q412, though the One does not feature in the top 10 models. This is just one of a variety of indicators of modest though encouraging improvements for HTC.
However, the concern is that this is as good as it gets, and the One sales may already have peaked in Q2, though a ‘mini’ version is reportedly on its way to boost sales in the midmarket. And if the One has had its best quarter, it was not enough to reverse HTC’s profit decline. Peter Liao, an analyst of Nomura Securities, wrote: “HTC may have new products in Q3, but competition from Apple and other Chinese brands is fierce. It’ll be hard to keep the growth.”
According to Counterpoint, the smartphone market saw a slowdown in retail sales in key markets like Europe and Japan, in April and May, though shipments into the channel increased, possibly signifying inventory build-up ahead. In unit sales terms, Samsung was the leader, ahead of Apple, but there were some changes in the next tier of vendors. LG and Huawei held onto third and fourth places, but Sony leapfrogged ZTE to take fifth place. The latter fell back into seventh, while Nokia was in sixth. HTC gained on Lenovo to end up in eighth, while the top 10 was rounded out by Coolpad.
Sony’s Xperia Z is now selling a million units a month worldwide and has helped Sony regain the top spot in its native Japan for the first time, overtaking Apple and Sharp, while HTC One was strongest in Europe.
The Chinese brands have suffered from intensifying competition from smaller local brands ‘ like Coolpad, Hisense and TCL – in their home market, on which they remain over-reliant. Samsung is the worry for them in terms of overall expansion as it is launching a range of midmarket models over the summer, targeted at the Chinese market and also at the sweet spots for Huawei and ZTE in other countries.
There is also the threat from Nokia’s Asha ‘smart featurephone’ in these segments. Though not technically a smartphone, the Asha 311 offers a rich web experience on a low cost handset, and came in eighth in Counterpoint’s league table of bestselling models in May ‘ the only device in the top 10 which did not come from Samsung or Apple. The Galaxy S4 topped the list, followed by the 16Gbytes iPhone 5.
And then, of course, there is BlackBerry. Its own make-or-break launch of the BB10 platform, with the BlackBerry Z and Q devices, is yet to deliver the results backers hoped for. Yet another set of disappointing results earlier this month reignited speculation about break-up or takeover, and this week CEO Thorsten Heins begged the shareholders’ meeting to give his turnaround plan time to work. After the results announcement, BlackBerry executives were talking about non-device assets such as BlackBerry Enterprise Server ‘ as they should have done all along, rather than belatedly trying to score a magic comeback at the device platform end. And Heins has put another of the firm’s earlier fallback options, the licensing of BB10, firmly back on the table, apparently failing to notice that there are several new mobile operating systems emerging ‘ such as Firefox OS and Ubuntu Mobile ‘ which are modern and cloud-oriented, like BB10, and also free.
A more viable option for BlackBerry is to return to the roots of QNX, the acquisition whose software underpins BB10, and target the in-car market as well as other ‘connected life’ platforms beyond the handset. Heins said at the meeting: ‘Don’t think just narrowly in terms of licensing. It could go into cars, so think broad.’ More prosaically, Heins is also looking for additional cost and job cuts, having already axed 5,000 positions. The new program is ominously dubbed Polaris, though Heins insisted it is about ‘really trimming and slimming the organization. It’s not like X thousand people have to go.’
Partnerships and or an acquisition, perhaps centered on the enterprise space, are also clearly in Heins’ mind and those of investors. ‘BlackBerry is still in the early phases of our transition,’ he said. ‘This isn’t just the launch of a new product but a whole new platform.’