Earlier this week, Samsung (NASDAQOTH: SSNLF) issued earnings guidance for the second quarter. The figures left a little to be desired, and the South Korean conglomerate pre-emptively offered up an explanation for why operating profits should shrink by an estimated 24%. The extra context is a departure for Samsung, which usually only releases guidance on revenue and operating profit.
As its biggest rival, what does Samsung's guidance mean for Apple (AAPL +1.50%)?
Apple is right to avoid low-end smartphones
Samsung's mobile division accounted for 68% of operating profits in 2013, so the company is as intimately tied to the smartphone market as Apple is. The big difference is that Samsung addresses every possible market segment in the pursuit of unit market share, while Apple mostly plays in the mid-end and high-end for the sake of profit share.
The low-end and mid-range are precisely where Samsung is now facing intense competition from other low-cost rivals, mostly in Chinese and European markets. Channel inventories are swelling, and Samsung is resorting to its usual response of increasing marketing expenses with the hope of getting units moving.
Apple has about 17% share of the five major European markets, even as it avoids the low-end. Within the high-end, both the iPhone 5s and 5c are outselling the Galaxy S5 in key markets like the U.K. Apple is less affected by low-end competition, and Microsoft's continued share gains are predominantly in this segment of the market.
China is just now beginning its transition from 3G to 4G LTE, leading to some demand slowdown. While this shift is hurting Samsung, Apple should benefit as the iPhone is helping to drive 4G LTE adoption following its launch on China Mobile's (CHL +0.00%) brand new TD-LTE network in January. At the end of May, China Mobile had already added 8.1 million 4G subscribers. China Mobile Chairman Xi Gouhua confirmed that most of the 1.3 million 4G subscribers added in the first month were iPhones, a trend that's likely continuing as pent-up iPhone demand can now be met.
Samsung's current woes in the low-end smartphone market should not affect Apple directly, and even imply that Apple is faring quite well in the high-end.
The iPhone 6 may cannibalize the iPad Mini
Samsung says that the overall tablet market is seeing weak demand. Indeed, the overall market in the first quarter grew by just 4%, and Apple reported a drop in iPad units last quarter (most of this drop was attributable to changes in channel inventory).
iPad Mini. Source: Apple.
Beyond that, Samsung noted, "demand for 5-to-6 inch smartphones also cannibalized the demand for 7-to-8 inch tablets." That could similarly imply that the expected 5.5-inch model of the upcoming iPhone 6 could eat into sales of 7.9-inch iPad Minis. Again, what's bad for Samsung might even be good for Apple.
Make no mistake: Samsung has been a key driver in phablet adoption. The company helped create this market, and it offers a wide variety of devices in the 5-to-6 inch segment. Samsung has played in this category since as early as 2011, which also means that it should be seeing downward pressure on average selling prices as older models continue to sell.
In contrast, only Apple's newest and most expensive model will fit in this category later this year. The iPad Mini lineup starts at $299, and has lower gross margins than Apple's consolidated gross margin. iPhone 6 cannibalization of iPad Minis would be a good thing. Furthermore, it could incentivize prospective iPad buyers to go for a larger iPad Air, improving product mix.
Ultimately, Apple has never worried about product cannibalization, and neither should investors.
