Last summer, the Galaxy Alpha generated a lot of buzz as it represented a divergence from Samsung's plastic-framed smartphones. Samsung opted for an aluminum frame like the Apple (NASDAQ:AAPL) iPhone. In fact, the Galaxy Alpha looks strikingly similar to the iPhone 5.
Now, Samsung is shifting its focus to more mid-to-low-priced smartphones to compete with Chinese OEMs like Xiaomi and Huawei. The fact that Samsung tried to expand its high-end smartphone line and failed is a testament to how hard it is for new entries to succeed at that price level. That's great news for Apple investors, as it clearly takes more than copycat products from companies like Samsung and Xioami to make a dent in Apple's smartphone share.
The high end is where the profits are
Despite Apple's small 12.7% share of smartphone sales in the third quarter of 2014, it took an estimated 86% of the total profit share. Samsung saw its profit share decline from 53% in the third quarter of 2013 to 18% in the third quarter of last year. Poor sales of the Galaxy S5 led to increased marketing expenditures and declining profits for Samsung's mobile division. It looks like the Galaxy Alpha didn't fare any better than the struggling S5.
Samsung is still doing better than the rest of the competition, which all posted profit share in the single digits on the high end and negative profits on the low end. Even Xiaomi, which dramatically increased sales 335% in the third quarter, recently revealed its operating margin was just 1.8% -- leaving little room for profits.
With high-end phones presenting the largest opportunity for profits, Samsung was smart to try its hand at another high-end device. Unfortunately, not even the marketing machine at Samsung could ensure the success of the Galaxy Alpha as Apple prepared to launch the new iPhone 6 and iPhone 6 Plus.
Great news for Apple investors
Apple has become increasingly reliant on iPhone sales during the past several years. The fact that Samsung -- with its huge marketing budget -- failed to make a dent in Apple's sales with the Galaxy Alpha bodes well for the iPhone's future. Still, there's a bit of risk involved in the vast majority of Apple's profits coming from one product.
In fiscal 2014, the iPhone made up 55.8% of Apple's total net sales. That number has climbed each of the last two years. In 2012, the iPhone generated 50.4% of revenue. With the iPhone generating an above-average gross margin, it's likely that the single device accounted for an even larger piece of Apple's total profits.
The release of the iPhone 6 and iPhone 6 Plus, which have reportedly been selling very well, could cause that concentration to climb once again in 2015. The addition of the 6 Plus to the product line should help increase the average sales price per iPhone unit.
While Apple's iPhone business seems to always stand up well to new high-end competition -- including Samsung, Xiaomi, Google, Nokia, or anyone else during the last five-plus years -- there's no guarantee that it always will. The failure of Samsung to move the needle with the Galaxy Alpha is yet another indication that it's extremely difficult to break into the high-end smartphone market; but it's definitely not impossible.
For Apple, there's not much it can do to solve its revenue concentration problem. It has two other products generating more than $20 billion in revenue, and it could have a third on the way with the Apple Watch. Sales of the new wearable device, along with iPhones, Macs, and iPads, will likely push iTunes into $20 billion territory next year, as well.
About the only thing Apple can do to protect itself from a competitor taking a bite out of its iPhone business is to continue improving the device. And that might actually make the problem worse. But it means copycat products like the Galaxy Alpha will continue to fall behind.
Adam Levy 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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