On Wednesday, Samsung’s stock jumped 8% after it announced surprisingly high profit guidance. It’s up 80% on a year prior, and beats analysts’ estimates. However, this happy jump isn’t down to its smartphone business — instead, it is its healthy chips business that has produced the boost.
Samsung’s smartphone business has historically been very strong. And, true, it’s still the number one handset manufacturer in the world today. But it’s in an unenviable place right now, squeezed on all sides. At the high-end, the iPhone 6 — and now the iPhone 6s — has hammered demand, while at the low-end it is being undercut by low-cost Android manufacturers.
Its newest flagship devices’ sales have been lacklustre, according to reports. But it didn’t have to be that way! By misjudging demand, the South Korean electronics company shot itself in the foot earlier this year — and now it’s throwing its one unique selling point away.
Samsung botched a comeback opportunity
Right now, the global smartphone market is booming. Global sales are predicted to jump by more than 10% this year. But, according to research firm Gartner, Samsung’s sales earlier this year have been declining.
Previously, Samsung held a unique and profitable niche. It offered high-end smartphones with glorious large screens. If you wanted a premium phone above a certain size, no matter how much you love Apple — tough. You’ll have to shell out for an Android device. But with the launch of the iPhone 6 and 6 Plus, back in 2014, everything changed.
Since then, sales have dropped — catastrophically so in China, one of the largest markets in the world. Between Q1 of 2014 and Q1 of 2015, its sales market share dropped by more than 50%.
In April, Samsung launched the Galaxy S6 and Galaxy S6 Edge. They are Samsung’s most premium devices — its iPhone killers. Samsung also found a new unique selling point (USP): The signature curved screen found in the S6 Edge.
But when it released its profits guidance for Q2 2015, it said the impact of the launch of the S6 “was quite marginal due to low smartphone shipments and an increase in marketing expenses for new product launches.”
The AP now reports that “handset shipments are believed by analysts to have gone up” in this last quarter, but that profits from its mobile division are nonetheless down, because the sales are coming from its less profitable lower-end and mid-tier smartphones.
So what happened? In part, it appears that Samsung managed to misjudge demand. According to a report in The Wall Street Journal in July, Samsung assumed demand for the devices would be around four to one in favour of the regular S6. But the more expensive S6 Edge has turned out to be much more popular, and demand is closer to one to one. The company was left scrambling, with excess inventory of S6 units and not nearly enough of the more expensive S6 Edge units to satisfy demand.
Blogger Ben Thompson wrote in his Daily Update email in July that this was “a pretty clear screw-up,” with Samsung failing to recognise what its customers were actually after. He went on:
[It] suggests they don’t understand just how starkly the smartphone market has bifurcated: the only people buying a high-end Android phone want the top-of-the-line, and that means the Edge. Anyone who is concerned about price isn’t going to save $US100 by buying a normal S6; they’re going to save $US500 and get a perfectly serviceable phone that runs the exact same software.
That supply outstrips demand is, on the face of it, a good thing for Samsung. It means people want the company’s phones! But it’s also an entirely avoidable problem. And with the launch of the iPhone 6s and its record-breaking sales, it has now got a lot harder for Samsung to persuade consumers that it still has the hottest new device around.
Shooting itself in the foot
It’s difficult to gauge how well Samsung would have done this year, had it managed to correctly predict demand for its S6 devices. But it’s clear the curved screen is pretty popular. Samsung has stumbled on to a good thing.
Now, here’s a quote from a Financial Times report on Samsung’s most recent profit guidance:
In July, Samsung told analysts it would sell curved screens to other smartphone makers, despite the fact that this had been seen as a key feature setting its new Galaxy S6 Edge phone apart from the competition.
Samsung had a unique selling point — its big-screened, high-end devices. Then it lost that, and struggled. It has successfully found a new one, curved screens, which resonate with customers — so well it can’t keep up with demand. And now it’s throwing it away!
Putting things in perspective
It’s important to remember: Samsung is much more than just smartphones. After all, its chip business is booming — the reason behind this 80% year-on-year profit jump. It also sells everything from washing machines to professional medical equipment. Even the complete and total annihilation of its smartphone business wouldn’t spell out the end of the company.
The Financial Times also notes that the company has said in market guidance that it plans to launch foldable smartphones until 2017 — something which truly would be a very unique selling point. But until then, there may be more tough times ahead.
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