In a recent interview at Business Insider, Cyanogen CEO Kirt McMaster declared that top mobile OEMs such as Samsung (NASDAQOTH: SSNLF) would be "slaughtered" within the next five years.
Yet the perpetrator would not be Apple (NASDAQ:AAPL), which McMaster claimed would also "have problems" in the low-end market. Instead, he believes a new wave of cheap smartphones with comparable hardware will marginalize the pricier players.
That has already started to happen with the rise of Xiaomi and Micromax, which toppled Samsung as the top smartphone makers in China and India, respectively. However, Samsung remains the second-largest smartphone manufacturer in the world after Apple, so expecting it to be "slaughtered" might be a gross exaggeration.
Will Samsung get slaughtered?
McMaster cited the fall of BlackBerry and Nokia as indicators that things can "get bad pretty damn quick" in the mobile industry.
Just as those two former market leaders were disrupted by the rise of iPhones and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android devices, a new wave of regional players are becoming more popular in their home markets. McMaster noted that BLU Products in Latin America and Cherry Mobile in the Philippines are following the same growth trajectory as Xiaomi and Micromax. These players all employ a similar strategy of selling powerful devices at a fraction of the price of tier one devices.
Samsung disrupted the market before with larger screens, but since Apple has now caught up with the iPhone 6 Plus, future form-factor improvements are likely to be incremental. "Everybody has a phone with a 5-inch screen," McMaster stated. "And you can now get a phone with a 5-inch screen that's sub $140." In other words, the entire market is being commoditized.
Meanwhile, Qualcomm is now offering "turnkey solutions" for OEMs in emerging markets. These package deals give manufacturers permission to use both Qualcomm's chips and software, which reduces the development and manufacturing costs of new phones. According to McMaster, turnkey solutions help local OEMs "arise out of nothing."
Stuck between a rock and a hard place
From the fourth quarter of 2013 to the same period of 2014, Samsung's global smartphone market share fell from 29% to 20%, according to IDC. During that period, Apple, Xiaomi, Huawei, Lenovo, and other OEMs all gained market share, indicating Samsung was being crushed between the low-margin players and Apple's premium phones.
Samsung tried to curb that decline by launching dozens of smartphones across all tiers of the mobile market. Unfortunately, that scattershot strategy did not prevent mobile profits from declining 64% year over year in the fourth quarter of 2014. Samsung also sold fewer smartphones than Apple during the fourth quarter.
Samsung can't keep up with Apple for two reasons. First, Apple has an established reputation as a luxury brand, which keeps it comfortably away from the low to midrange markets. Second, Samsung shares the Android ecosystem with other OEMs. As a result, Android owners have less incentive to stay loyal to Samsung, since they can retain their Google Play purchases across different Android devices. By comparison, iPhone owners must buy iOS devices to remain within Apple's ecosystem.
The escape plan to nowhere
Samsung clearly recognizes these threats. It aggressively installed its own OS, Tizen, across smartwatches, smart TVs, and a new smartphone to distance itself from Google. It launched its own app store to divert revenue from Google Play and lock users into the Samsung ecosystem. It is expanding that ecosystem with S Health, its health-tracking dashboard, and Samsung Pay, its new mobile payments platform.
Unfortunately, many of Samsung's low-end competitors are already doing the same thing. Xiaomi has spread MIUI, its forked version of Android, across smart TVs, tablets, and smartphones. Cyanogen's forked version of Android, CyanogenMod, is now preloaded in the OnePlus One, a Chinese phablet that is often compared to Samsung and Apple's top devices.
Fencing in users with its own ecosystem might help Samsung retain more existing users, but it won't block the rise of nimble turnkey OEMs that have their own ecosystem aspirations.
Samsung is in trouble, but it certainly won't be "slaughtered" within five years. Samsung still has a strong presence in low-end smartphones and feature phones, but it will have to lower prices across the board and increase marketing expenses to remain competitive -- which will likely weigh down its bottom line over the next few years.