Fresh off the heels of Samsung's (NASDAQOTH:SSNLF) new Galaxy Alpha release announcement, a leaked document obtained by SamMobile confirms the company intends to bring a host of A series models to market. Specifically, the article references three models: the SM-A300, SM-A500, and SM-A700.
The midlevel SM-A500, according to the article, will boast high-definition resolution and use the Android 4.4 KitKat as its operating system. In addition, it appears Samsung has remained true to the original Alpha design by incorporating metal into the design of all three models. So since the upscale smartphone market is a virtual duopoly between Samsung and Apple (NASDAQ:AAPL), what does this mean for Cupertino(NASDAQ:AAPL)?
Samsung's Galaxy Alpha -- a phone with a very specific purpose
From a size and materials standpoint, it is clear that Samsung's Galaxy Alpha has a simple purpose -- to steal market share away from Apple's iPhone. Not content with growing its market share from 17% in 2011 to a leading 25% last quarter, Samsung has set its sights on the other smartphone maker that has substantive market share in high-end units. The chart below gives some context:
Apple has seen its share of the smartphone market fall as new entrants have introduced lower-cost handsets and expanded the market. The end result is a company that is growing its smartphone market -- over the last year Apple increased its iPhone revenue by more than 10% -- but still not growing enough to keep pace with lower-cost units.
The difference in the charts for the two companies is important -- while Apple only pursues a premium smartphone approach, Samsung chooses a bifurcated approach that involves selling both lower-cost phones and premium devices.
Lower-cost phones are low profit as well
So if Samsung is doing well and growing market share, why is it not comfortable with its current position? Simply put, the low-cost smartphone market is also low profit. And as previously noted, when it comes to smartphone profits, it is essentially a duopoly between Apple and Samsung. For perspective, Raymond James analyst Tavis McCourt estimated that in the fourth calendar quarter of 2013, Apple and Samsung captured nearly 120% of all phone industry profits -- Apple pulling in 87.4% and Samsung capturing 32.2%.
Samsung ships more units but reports a lower profit because many of its units are the lower-cost variety, while Apple's maintains its premium approach. If Samsung wants to take a larger portion of industry profit, it must establish a reference flagship line that competes with Apple's iPhone.
Will the shotgun approach work?
Samsung's has thus far taken a shotgun approach to the market -- release as many versions as possible in many markets and basically see what sticks. That has worked well at the commoditized low end, where price is the primary concern and functions are second.
However, at the high end this doesn't appear to be a promising strategy. High-end users are looking for an elegant form factor, an immersive ecosystem, and a seamless hardware/software partnership. Furthermore, many high-end phone shoppers are brand conscious, and a company that has both low-end versions and high-end versions of smartphones could muddy its brand cachet.
It's apparent that Samsung is attacking Apple's iPhone line with it's A line of cell phones. Samsung is quickly becoming a company dependent of cell phones -- four years ago smartphones accounted for 25% of its profit, but the number is now 76%. Astute readers should have noticed that although Samsung has grown its smartphone market share since 2011, on a year-over-year basis that number dropped this year.
Does Apple have anything to fear from this line of phones? In my opinion, not really. In the end, Samsung's A line appears to have a more elegant bezel and a smaller size to compete with the iPhone 6. However, Apple investors should closely pay attention to Samsung's higher-end strategy. Much like Samsung, Apple is relatively dependent on iPhone sales. Any threat to the iPhone line presents a risk to the investment.