Have sluggish smartphone sales left Samsung singing the blues?

Sing the blues

The results are in and reveal that Samsung had a fairly torrid fourth quarter of 2014. Smartphone competition has kicked in, and in its most hotly contested market, the USA, iPhone sales battered Samsung in the last quarter of the year. In the mobile communications division, sales were down seven percent quarter-on-quarter, with mobile sales down a bigger nine percent on a massive turnover of US$31.3-billion in sales.

Traditionally the volume for Samsung has come from the low-end devices with the higher-end Galaxy range bringing in most of the profits. The mix in the USA is heavily weighted to higher end Galaxy phones, and any decline in sales will hit the bottom line hard. Samsung still shipped more actual devices in the fourth quarter than the other top four device manufacturers, according to IDC figures.

Samsung overall still had a very solid fourth quarter with US$7.7-billion in operating profit, only a 6% decline year-on-year. This decline was also due to two unusual items during the period, a US$741-million 20-year anniversary bonus for Chairman Lee Kun-hee’s “New Management” strategy, and a currency impact due to the strong Korean Won of a further US$649-million.

No one is doubting the ability of Samsung to deliver in the mobile industry. However, the signs are there that the heyday of rampant growth and profits may well be over. Smartphone penetration in developed markets is fast approaching saturation, with figures around the high 70% for most territories. The emerging markets present a little ray of hope. The challenge that all manufacturers will have with the few markets that are still growing is that of price and competition from the lower-cost Chinese manufacturers.

The African perspective

Africa is a perfect case in point. Even the leader on the continent, South Africa, has smartphone penetration in the low 30% range, and much of the rest of Africa in the low teens and below. There is no question, based on the analysis of all the various research houses, that this will increase exponentially in the next five years. But there are a number of key challenges that all manufacturers will face.

The average revenue per user, ARPU, in Africa is below US$1 per month and actual data usage and penetration is very low. The usage of data will increase but the affordability of, and cost of, such data will depend on a number of macro-economic factors outside of the control of mobile device manufacturers.

African economies are expected to grow strongly, way above many developed nations. This growth is however off a low base. Infrastructure challenges will impede the rollout of high-speed mobile data networks, leaving the focus on low-profit non-smart phones.

The challenge for Samsung, which has shown phenomenal growth in both high-end and lower-end smart devices, is that the mid-range is highly contested and all the massive marketing muscle that assisted Samsung in catching up to, and surpassing Apple in some markets, is less effective in the mid-range, where price and availability are deciding factors.

In line with its declining sales, Samsung has confirmed that it will spend less on mobile marketing. The Korean giant also advised that it expects Q1 2014 to be another tough quarter, with declines in both sales and profitability.

The marketing machine that so effectively spurred much of Samsung mobile success can wind down very quickly if sufficient funds are not made available. The gap will be filled by hungry competitors, notably Korea’s own LG Electronics, and its northern competitors from China, who already sense the blood in the mobile waters.

The mobile industry is notoriously ruthless, as Nokia, BlackBerry, and HTC can attest to. Today’s king can be tomorrow’s pauper. If Samsung reads the signs correctly, and in time, a big strategy shift is likely to occur. Remarks at CES already highlight some of the thinking. Devices are the mainstay of Samsung current strategy but expect a shift of focus to mobile services, ecosystem partners, and allied technologies, including wearables. The profit party may be over for high-end smartphones, but don’t count out a company with the resources of Samsung Electronics.

Image: Katong Kate (via Flckr)



Sign up to our newsletter to get the latest in digital insights. sign up

Welcome to Memeburn

Sign up to our newsletter to get the latest in digital insights.