Apple and Samsung's Next Challenge: A Chinese Phone You've Never Heard Of

Apple and Samsung have dominated the smartphone market in recent years, earning billions in the process. But a new phone from China could signal a major shift in the market.

Sam Mattera
Sam Mattera
Jul 6, 2014 at 12:00PM
Technology and Telecom

Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) collectively dominate the smartphone market. Combined, they account for more than half of the smartphones sold globally, and generate virtually all of the industry's profits.

But that could change. The OnePlus One, a phone that most have probably never heard of, has arrived to challenge the duopoly.

The best phone of the year?
In terms of hardware, the OnePlus One is not a particularly notable handset. In fact, it's virtually identical to Samsung's Galaxy Note III, with a 1080p, 5.5-inch screen, Snapdragon 801 processor, 13 megapixel camera, and a large, 3100 mAh battery.

What is notable about the OnePlus One is its shocking price tag -- it starts at just $300 unlocked. For comparison, Samsung's Galaxy Note III is twice as expensive, and Apple's iPhone 5S retails for $649. Business Insider's Steve Kovach, reflecting on the value offered by the OnePlus One, called it his "favorite smartphone of the year." Gizmodo described it as "unbelievably fantastic."

Like Samsung's Galaxies, the OnePlus One is powered by the Android operating system, but unlike Samsung's devices, it runs a version of Android (Cyanogen) that's closer to pure Android found on the Nexus devices. That's to the OnePlus One's credit, as many reviewers have found fault with the often goofy and confusing modifications Samsung makes to the Android operating system.

Samsung's Android problem
Samsung's use of Android makes it susceptible to competition from the OnePlus One. Samsung's Galaxies have been competing with other Android phones for years, but have remained dominant. Competitors, like HTC and LG, have been offering handsets of equal quality for some time, but have not been able to significantly undercut Samsung's prices. The HTC One M8 and LG G3, for example, are just as high-end as Samsung's Galaxy S5 -- but are also just as expensive.

In the absence of any notable price difference, consumers may have stuck with Samsung's familiar devices. The OnePlus One, however, offers compelling value, and as it uses the same operating system, buyers can remain in the same mobile ecosystem -- apps and content purchased from the Play store easily carry over.

Trading with a price-to-earnings ratio near 7, Samsung shares are cheap, and have been for some time. Although the company's CFO recently warned that Samsung's upcoming earnings report could be poor, value investors may be attracted to Samsung shares. The worst, however, could be yet to come -- if a company like OnePlus can so significantly undercut Samsung, the Korean tech giant may not be able to maintain its premium mobile pricing for much longer.

Apple has a wider moat
To Apple, the threat posed by the OnePlus One is a bit different, and far more nuanced. Apple has a monopoly on the iOS operating system -- no matter what its competitors charge, customers that want a phone with iOS have no choice but to choose Apple's handsets.

Those heavily tied to Apple's iOS ecosystem, either via app and media purchases, or out of pure familiarity, may continue to purchase Apple's gadgets for the foreseeable future. Apple's customers are notoriously loyal, with a recent survey from WDS finding that 76% of current iPhone owners are planning to buy another Apple-made handset when it comes time to upgrade.

But that's compared to other Android handsets of equal price. Samsung's Galaxy S5 and Apple's iPhone 5S are priced almost identically -- unless they want a larger screen or the Android operating system, there's no reason to pick a Samsung-made device over Apple's iPhone.

The OnePlus One changes that dynamic significantly. Apple's ecosystem may allow it to retain most of its customers, but the strength of that ecosystem may be tested.

High-end smartphones are increasingly a commodity
To be fair, there are many hurdles that the OnePlus One faces. In particular, retail: OnePlus doesn't have a deal with any major telecoms (currently), and quantities of the handset are extremely limited. In fact, buyers that wish to purchase the One need a special invite -- customers can't simply walk into a store and pick one off the shelves.

But the OnePlus One's existence signals a shift in the smartphone market: like other consumer electronics that came before it, including the TV and the PC, the high-end smartphone may finally have been commoditized. If a recently founded Chinese company can offer an almost identical phone for half the price, the days of Samsung and Apple's outrageous mobile profits may be coming to an end.