3 Reasons Apple's Fate Won't Be the Same as Samsung's

Samsung's smartphone business may be in trouble. Why Apple might not suffer the same fate.

Sam Mattera
Sam Mattera
Jul 6, 2014 at 3:00PM
Technology and Telecom

Samsung (NASDAQOTH:SSNLF) might be be struggling. Its CFO recently told a group of reporters that the company's upcoming earnings report wasn't looking too good; meanwhile, the upstart handset maker Xiaomi may have overtaken it in China.

Although I believe Apple (NASDAQ:AAPL) shareholders should be mindful of Samsung's earnings, in so far as it reflects on the broader smartphone market, there are a few stark differences between the two firms. If Samsung's mobile business begins to decline, Apple won't necessarily suffer the same fate.

A monopoly on the operating system
The biggest, most overwhelming difference between the two comes down to the operating systems powering their respective handsets. Samsung uses Android, an open source platform primarily developed by Google (NASDAQ:GOOG)(NASDAQ:GOOGL). Apple, in contrast, uses iOS -- an operating system it develops in-house and maintains exclusive control over.

Handset owners who value Apple's iOS, and the larger ecosystem that comes with it, have no choice but to purchase smartphones from Apple. Samsung buyers, in contrast, can easily switch to other Android-powered handsets.

For the most part, they haven't, but they may be starting to. TechCrunch notes that nearly a quarter of Xiaomi's recent handset customers in China were switching over from a Samsung-made device.

Samsung has been mindful of this threat, and has been working to build a rival ecosystem on top of its Android-powered handsets -- its Gear and Gear 2 smart watches, for example, use an alternative operating system (Tizen) and only work with Samsung phones. Unfortunately, its Gear watches have seen relatively little adoption, leaving it exposed to competition from other Android-using rivals.

Not fighting itself
At the same time, Samsung has somewhat of a tenuous partnership with Google. Although the companies have insisted that their relationship is amicable, their interests often diverge.

Consider Google's newly announced "Android One" initiative. The program, if successful, will see millions of new smartphone owners adopt Google's Android platform. Google's idea is to provide a sort of reference handset aimed at emerging markets. Local manufacturers are free to run with the design, making it easier to produce cheap Android handsets of decent quality.

If it works, it will be fantastic for Google, but not particularly great for Samsung. Android One phones won't compete with Samsung's high-end Galaxy handsets, but they could definitely rob Samsung of low-end market share. Although the margins on these phones are likely to be slim, declining sales is still something Samsung investors won't wish to see.

Apple, of course, would never do such a thing: as a single entity, it has no incentive to compete against its own hardware business. Analysts have been hoping that Apple would offer a cheap iPhone aimed at emerging markets -- so far, it hasn't done so. Even if it did, it would still be Apple making the handsets; vertical integration is central to its business model.

Focused on the high-end
That commitment to focusing solely on the high-end of the market is another major point of differentiation between Apple and Samsung. Samsung's flagship Galaxies, including the Galaxy S5 and Galaxy Note III, are just as powerful and just as expensive as Apple's iPhones.

But Samsung also makes many cheaper Galaxies, some of which retail for around $100. This has allowed it to become the largest smartphone manufacturer in the world -- in 2013, for example, it sold almost twice as many handsets as Apple.

Yet this commitment to every market segment means that it's competing directly with many more handset manufacturers. In addition to Samsung, there are only a few other companies offering high-end Android handsets -- but there are countless emerging market firms producing budget phones, many of which investors are likely to have never even heard of (Micromax, Karbonn, Spice, the aforementioned Xiaomi, etc.).

The PC market all over again?
The smartphone market has often been compared to the PC market of old, and though many of the links are questionable, one comparison appears quite apt.

Last year, Horace Dediu took a look the profits generated by the PC market in the fourth quarter of 2012. Despite a relatively small sliver of the market, Apple captured 45% of the industry's profits. The other players, despite selling many times more PCs, were left to fight over the remaining 55%, playing what was essentially a commodity game.

As other Android handset makers grow in competency, Samsung may suffer the same fate as the Windows OEMs of old. Apple, with its monopoly on iOS, could persevere.