Why Apple Is Worried About Samsung and Google

Apple (NASDAQ: AAPL  ) competitors Google  (NASDAQ: GOOG  )  and Samsung (NASDAQOTH: SSNLF  )  aggressively moved forward in 2013, while Apple's global market share for its iPhone dropped over 18% -- from 19.1% of the market in 2012 to 15.6% in 2013, according to Gartner. Samsung's share of smartphones increased a little -- from 30.3% to 31% -- as all smartphones with Android's OS climbed over 15% -- from 66.4% to 78.4% of the worldwide market.

Apple's worries came to light recently in a document that Samsung presented in its court battle with the iPhone maker. The document was an internal memo, which suggested that the Apple sales force was wringing its hands over its competitors' progress in hardware and Google's improvements in its Android OS.

What's driving smartphone sales?
The memo from an offsite sales meeting indicated that budget phones (under $300) and larger-screened phones (in the over-$300 segment) were driving sales growth and the iPhone was losing ground to its competitors. The traditional iPhone fits into neither category, as it has a smaller screen (for now) and a higher price tag. However, the lower-cost iPhone 5c did hit the shelves in fall of 2013. 

Google's Android winning the OS battle
In the U.S., Apple should be concerned that Android is building momentum again, while the Apple's iOS is tapering off after a strong push when the iPhone 5c and 5s were first released. Apple iOS's share of the market has dropped 5% over the last year, while Android has increased 3.9%. Android has 55% of U.S. sales share, while iOS has 38.5%. 

Aggressive marketing
The sales memo also included concerns about the "obscene" amounts of money Apple competitors, like Samsung, were spending to advertise Android devices. According to Reuters, Samsung shelled out $14 billion on advertising, while Apple spent a mere $1 billion in 2013. 

While Phil Schiller, Apple Senior VP, discounted much of the memo by saying it was not Apple policy, he did send an email in 2013 lamenting a Samsung Super Bowl ad. In his words, "these guys are feeling it (like an athlete that can't miss because they are in a zone), while we struggle to nail a compelling brief on iPhone." 

The iPhone: Apple's biggest revenue generator
However concerning the market share numbers are, Apple still sold over 150 million iPhones in FY 2013 and generated over 50% of its revenue from the device. By comparison, Apple's next biggest money maker, the iPad, produced only 20% of 2013 revenues, Macs made up 13% of sales, and the iPod (a media player) contributed 3%. 

Apple also generated record-breaking quarterly revenues of $57.6 billion in Q1 of 2014. Also, quarterly net profit reached $13.1 billion or $14.50 per diluted share for the quarter ending Dec. 28, 2013. This was a jump of nearly 5.7% over Q1 2013 revenues, but margins decreased from 38.6% to 37.9%, primarily due to declining prices on the iPhone 4 and 4s, as well as the availability of the lower-cost iPhone 5c. Again, the iPhone led the way with 51 million units sold for Q1 2014, a nearly 6.7% gain from a year ago. It was also responsible for over 56% of Apple's quarterly revenues. 

iPhone vs. Samsung and Android
By cross-referencing the market share trends with the percentage of Apple's revenue that comes from the iPhone, you can see why Apple might be worried about aggressive competition from Google's Android, as well as low-priced and big-screened Android devices from chief global competitor Samsung. Not to mention other competitors, like China-based Huawei (from 4.2% to 5.7%), Lenovo  (NASDAQOTH: LNVGY  ) (from 3.8% to 4.6%), and Korea-based LG (from 3.9% to 4.5%), which all cut into Apple's market share in 2013. 

Android revenues, which Google does not disclose, are a relatively small percentage of Google's $50 billion in annual revenues, but app revenue is set to become a bigger part of the story as researchers like Gartner expected Google's app revenue to hit $6.8 billion for 2103. Apple generated over $10 billion of app revenue in 2013. Obviously losing market share -- and revenues -- to any smartphone manufacturer or operating system is a cause for concern, but particularly when the share transfers to Samsung or Google. 

A Fool's pitch
While one internal memo is insufficient evidence for an investment decision, it does highlight some areas of concern for Apple going forward. How Apple handles these "worries" without Steve Jobs at the helm will be a telling indicator of how Apple will fare against tough, aggressive competition going forward. 

Right now Samsung and Google are winning the battle with Apple. However Apple is still performing well and has a pile of cash to weather some short-term losses. But to restore investor confidence and win the war over the next five years or so, Apple must create and invest in some trend-changing marketing, as well as newer, game-changing versions of the iPhone and iOS that evoke the same passion (and sales) from users, as other great Apple products did under Jobs. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2014, at 11:57 AM, JAVKO wrote:

    Samsung's aggressive marketing = buy one, get one free.

    Is that how you would make money?

  • Report this Comment On April 16, 2014, at 11:59 AM, GaryDMN wrote:

    I would think Google and Samsung are very worried about Apple. Samsung smartphones are under major pressure from above (Apple) and below (Chinese manufactures), while losing to Apple in the courts, for patent infringement. Google fears Apple's eco system, which is the strongest in the industry. Apple will boost their advertising share and may release a search engine, to directly compete with Google, while redefining search as we know it. Google is also awaiting future patent infringement lawsuits from Apple, along with several patent infringement lawsuits from other companies over their use of Open Source software. Google is aware that Apple has the strongest ecosystem, that was immune to the Open Source, OpenSSL bug that Google's Android propagated to the Android ecosystem, that is plagued with viruses and bugs.

  • Report this Comment On April 16, 2014, at 12:19 PM, st0815 wrote:

    I think this is actually good news for Apple - unlike some of their customers they seem to have a clear understanding of the competition and also a realistic view of their own problems.

  • Report this Comment On April 16, 2014, at 12:38 PM, Mathman6577 wrote:

    Competition (not duplication) is what drives companies, people, and countries to greater heights. Monopolies, robber barons/oligarchs, and socialist-driven economies have always failed. The Samsung foray into smartphones has actually resulted in Apple making more money. Their cash pile has grown exponentially, the dividend was reinstated and then increased, and shares were retired.

    I don't think Apple is worried about Samsung (it doesn't compete well in the same space) or Google (all of their hardware forays have been disappointing -- where is Motorola now? What happened to Nest?).

  • Report this Comment On April 16, 2014, at 2:19 PM, bobbydig wrote:

    It's obvious that Chris Brantley is similar to Samsung. Skewing the facts. The HUGE security with the new Galaxy 5s and the fact they needed to do a buy one get one free clearly shows that Samsung is in deep panic mode. Add Google's lack of any new and interesting product releases in YEARS, both companies are going nowhere.

    Let the skewed numbers from Samsung begin. LOL

    So glad Apple stays on course and does not lead with gimmicks.

  • Report this Comment On April 17, 2014, at 12:59 AM, vernr75 wrote:

    Yeah, Apple's worried. And as illustrated by the silly comments, Apple fans don't have a clue why Apple should be worried even though Apple clearly does behind closed doors. No surprise there. They see Apple selling 150 million phones last year, up a few million more from the year before. They see Apple still making huge record breaking profits year on year. They see Apple piling up money in offshore accounts. So they they cease all thought and analysis, conclude that all is well in the Apple world and resume bashing everyone who sees otherwise.

    But Apple's ecosystem has a colossal growth problem that's been staring you all in the face the whole time. You guys having been automatically assuming that Apple's success at selling phones is, by itself, a direct indicator of growth of the ecosystem. You couldn't be more wrong. Things have changed.

    The reason why the gap between Android phone usage and iPhone usage is growing at an increasing rate with each passing year is very simple but passes under everyone's radar because you were all busy looking only at raw sales data and never dug deeper. It isn't just the volume of Android handset sales that Apple has to worry about. Android handset sales growth is fueled mostly by first time smartphone buyers while iPhone sales growth is now fueled by a replacement cycle powered by established iPhone users in a few markets where iPhone replacement has been made 'cheap' using various tactics. Last year, four out of every five iPhones sold went to someone who was simply replacing an older iPhone.

    So Apple sold 150 million iPhones last year....but they sold 120 million of them to iPhone users! Even before I saw the figures for last year, I spotted an anomaly in the usage stats the year before. Apple would release an iPhone...the US media would go wild with the usual excessive iPhone hype...the camps and lines would form once again. Once again, iPhone would be declared the most loved and the best ever because so many were sold in a single weekend...and yet the usage stats showed the usual uninterrupted decline in global iPhone usage relative to Android during that whole time.

    There's only one explanation for that - iPhone users were actually the ones overwhelmingly buying the iPhones. That's because shifts in usage patterns can only be created by completely new users entering the ecosystem. iPhone sales were failing to create this...everywhere. When an iPhone user buys another iPhone it does absolutely nothing to grow the ecosystem and it doesn't increase the usage of the iPhone. That's why Apple's new iPhones no longer make any dent in their global market share figure no matter how many are sold. That's why they can have the so-called best selling phone model in the US but still see a simultaneous decline in their US market share. As a phone ecosystem they're plateauing and their only way to keep the illusion of ecosystem growth going is to find more ways to get their established base to upgrade to compensate for the falling numbers of first timers entering their ecosystem.

    And before I forget....the buy one get one free is a Verizon S5 promotion...Samsung's not selling these phones at those $199 prices. It's laughable that you guys actually tried to use this against Samsung...because it's actually great for them financially to have a carrier essentially increasing the subsidy on the device even if it's only temporary. Samsung gets about $650 per phone no matter what figure Verizon decided to use as their upfront price tag with contract in their promotion of the device. The $199 price has nothing to do with the true cost of the device because that money goes to Verizon as part of the payments that will allow them to recoup the $650 they pay to Samsung per S5.

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