Like Apple (AAPL +2.65%), Samsung Electronics (NASDAQOTH: SSNLF) has benefited immensely from the smartphone boom. Though Apple plays almost exclusively in the high end and midrange of the smartphone market, Samsung's offerings span the entire gamut of smartphone price-points.
However, as competition in the midrange and the low end of the market has intensified, Samsung's smartphone profitability has been pressured, with mobile division sales and operating profit dropping 21% and 29%, respectively, in the most recent quarter.
How does Samsung plan to counter this? With new smartphones, particularly at the high end.
Samsung's next big things: Galaxy Alpha and Galaxy Note 4
While Samsung made it clear on its earnings conference call that it would release new products across all price tiers, it took special care to emphasize that two new premium models are coming. While the executives on the call were cagey with details about these new models, recent leaks and a not-too-large stretch of the imagination suggest that Samsung is planning the following two models: the Galaxy Alpha and the Galaxy Note 4.
The Galaxy Alpha appears to be a 4.7-inch device with a 1280x720 display, metal edge, fingerprint scanner, and Galaxy S5-style faux leather back. According to various GSMArena articles, the device could be launched on Aug. 4, well ahead of the anticipated launch of the next-generation iPhone in September.
The alleged Galaxy Alpha. Source: SamMobile.
Details on the Galaxy Note 4 haven't yet been leaked in the same detail as the Galaxy Alpha, presumably because it's coming a bit later. If history is a guide, then this next-generation Galaxy Note, which Samsung hinted on its call would bring some radical new features and materials to the table (though, for obvious competitive reasons, not much was disclosed), should launch at the IFA conference in early September.
However, we can deduce that at least some models of the Galaxy Note 4 will include a 20-nanometer Samsung-designed Exynos processor since Samsung noted on its call that it would roll out 20-nanometer applications processors. The handset is also likely to include a quad-HD (2560x1440 resolution) display, especially since the company noted that it was now in volume production on quad-HD smartphone panels in its earnings release. Samsung also needs to compete with other vendors -- like LG -- that have already introduced quad-HD panels.
Does this solve Samsung's fundamental problem?
The problem facing Samsung in the smartphone market is that in the midrange and low-end, it competes with companies that aren't used to the relatively fat profits that Samsung has become accustomed to. Against vendors willing to settle for less, Samsung will need to follow suit and lower prices -- putting its massive mobile profitability at risk. To put it in context, even in this bad latest quarter, Samsung still raked in about $7 billion in operating income, with a cool $4.4 billion coming from mobile device sales.
While Samsung has several key advantages over these other players, including economies of scale, vertical integration (Samsung makes memory, flash, displays, and processors), and a well-known brand, this only positions the company to be the winner in what's increasingly looking like a race to the bottom.
If Samsung's mobile division is going to see margins stabilize and revenue begin to grow again, it needs to differentiate itself so as to command hefty, Apple-like premiums. Apple does it by having an aspirational brand, unmatched retail experience, differentiated operating system, and many other intangibles.
Foolish takeaway
The fierce competitive environment in the mobile device space explains why Samsung has been so keen on nurturing its other segments, particularly its semiconductor businesses. The barriers to entry in those markets (memory and logic foundry) are much higher than those of building mobile devices, making them a more reliable long-term bet for steady top and bottom-line growth.
That said, the success or failure of the upcoming Samsung Galaxy Alpha and Note 4 smartphones will give industry observers insight into whether Samsung's mobile business has long-term staying power, or if it will ultimately degenerate into a high revenue but very low profit business akin to its consumer electronics division.
