In many ways, Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) couldn't be more different. Perhaps the most important difference is how the two companies approach product strategy. Apple is easily a paragon for product depth, while Samsung exemplifies product breadth.
For years, Apple only released one iPhone model per year. That all changed in 2013 when the Mac maker launched the iPhone 5c alongside the iPhone 5s, and followed up again this year with a pair of new iPhones, the 6 and 6 Plus. Meanwhile, Samsung has mostly been content to release dozens upon dozens of new phones every year in an attempt to address every possible market segment and price point.
For Samsung, that's all about to change.
Enough is enough
In the face of shrinking mobile profits, the South Korean conglomerate has now said that it will slim down its smartphone lineup in an effort to save on costs. So far this year, Samsung has released 56 different smartphone models.
Last quarter, operating profits from Samsung's important mobile division fell 74%, while mobile sales dropped 34%. While unit shipments were up sequentially, falling prices and a higher mix of low-margin devices hurt Samsung's smartphone business. Samsung's mobile segment still comprises over 40% of the company's total operating profits.
Samsung's head of investor relations, Robert Yi, said that the company would reduce the number of models it releases by 25% to 30%, starting in 2015. Yi also said that in order to cut costs, Samsung plans to use similar components throughout low-end and mid-range devices. That will help Samsung leverage economies of scale, since enjoys advantages in vertical integration and sheer volume.
Why stop there?
Marketing is another line item on Samsung's income statement that could use some trimming. The company realized this earlier this year and vowed to "raise the efficiency" of its marketing spending while reducing the proportion of revenue dedicated to advertising.
That may end up pressuring sales though, as Samsung's willingness to drop big bucks on lavish marketing campaigns has been a key aspect of its success in recent years. The company has no problem ensuring that you see the word "Galaxy" at every opportunity, and pays handsomely for it.
The upside of product breadth
Samsung likes to take credit for starting the phablet phenomenon, which isn't entirely misplaced. After all, what better way to discover unmet consumer demand than to try everything? In certain markets like China, demand for phablets continues to rise unabated, and even Apple has jumped into the phablet fray with the iPhone 6 and 6 Plus.
It's true that Samsung's broader approach to its product portfolio allowed it to thrive in certain market segments while Apple sat on the sidelines. Samsung enjoyed many years of dominating the low-end space as well as the phablet market. But things have changed.
Can you feel the squeeze?
The iPhone 6 and 6 Plus present very serious threats to Samsung's phablet position, not to mention other Android OEMs making large phones. Even Google's Nexus 6 could take a bite out of Samsung's market share. At the same time, low-cost player Xiaomi has now become the No. 3 smartphone vendor in the world by unit volume.
In order to compete with Xiaomi's lean cost structure and Apple's pricing power, Samsung must make tough choices when it comes to expenses.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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