Samsung (NASDAQOTH:SSNLF) unveiled some unfortunate news for investors earlier this week. Operating profits fell 24% to a two-year low. The driver? There were a few, but among them, this was key: waning demand for its smartphones, particularly in China. Meanwhile, analysts are expecting Apple (NASDAQ:AAPL) to report record quarterly iPhone sales for the same period. Is Apple stealing Samsung's profit opportunities in the smartphone market?
How Apple could be snapping up Samsung's market share in China
Just before the start of 2014, Apple announced it would be adding China Mobile as an authorized carrier for the iPhone in China. This was big news. China Mobile isn't just any carrier. It's the world's largest carrier ... by far. As of May 31, the company boasted 787.3 million wireless subscribers, adding 2.7 million in that month alone.
With China Mobile finally selling iPhones, the implications for Apple are huge. Not only will it tap into pent-up demand for the iPhone on the network, but the iPhone's availability on the network came simultaneously with the beginning of the carrier's 4G LTE rollout. And while the 4G rollout is still in its early stages, it's already proving to be a promising growth opportunity for smartphone manufacturers. The carrier's 4G customers have ballooned from zero in January to 8.1 million by the end of May.
But, unfortunately for Samsung, Apple could end up being the major beneficiary of this booming opportunity.
Consider this statement from Samsung when it released its early preview of its poor quarterly results last week.
In China, channel inventory level increased due to weak seasonal demand, 3G demand declined ahead of the expected expansion of 4G LTE during the second half and intensified price competition among local players.
Sure, some of these 3G customers that are holding out for the expected 4G LTE rollout could be planning to upgrade to one of Samsung's flagship smartphones, but there is also a great chance they may be planning to buy one of the rumored iPhone 6 phones. The two next-generation iPhone models will reportedly come in larger screen sizes: a 4.7-inch version and a phablet-like 5.5-inch version. Given the popularity of smartphones with larger displays in China, the iPhone 6 line is destined to be a homerun in the country. When the iPhone 6 launches, the pent-up demand for both the iPhone and a 4G-compatible phone will likely serve as a catalyst for a large number of iPhone upgrades.
Further, in the premium smartphone market in China, Apple's iPhones have already proven to be the most sought out device. Of the 27% of $500 plus phones in China, approximately 80% of them are iPhones, according to Chinese app analytics company Umeng.
If Apple's year-over-year sales in China for its third fiscal quarter are up significantly (and they likely will be since China Mobile wasn't an authorized reseller of iPhones in the year-ago quarter) it would be safe to assume that Apple is probably already playing a key role in putting a lid on Samsung's opportunity.
Also worth noting, as Apple's iPhone lineup ages, the company will have more capable smartphones to compete with Samsung at the mid-price range, too.
And worst of all for Samsung (and best of all for Apple), the market share opportunity that Apple is likely to steal from Samsung will not be at the less-profitable low-end, instead it will be from the lucrative sales of Samsung's flagship smartphone lines.