A decade ago, the word "phablet" -- a portmanteau of phone and tablet -- didn't exist. But today, the market for phablets, which are larger than regular smartphones but smaller than tablets, is growing faster than the markets for those other devices.
IDC expects global sales of phablets to grow at a whopping compound annual growth rate of 60% from 2014 to 2018. By comparison, sales of regular smartphones are only expected to climb by 5.5%, while sales of tablets and 2-in-1 devices are projected to rise 6.8%. By 2018, IDC expects phablets to account for 24.4% of all connected devices, compared to 51.2% for smartphones and 12.5% for tablets and 2-in-1 devices. The remainder is expected to be made up of portable and desktop PCs.
Therefore, investors might wonder which companies will benefit the most from that phablet growth. A good place to start would be the top phablet makers in the world: Samsung (NASDAQOTH: SSNLF) and Apple (NASDAQ: AAPL).
Samsung is widely credited with starting the phablet revolution with the Galaxy Note in 2011. The Note whetted consumers' appetites for larger phones, which led to the launch of the wildly popular 4.8-inch Galaxy S3 in 2012. That year, the S3 outsold Apple's iPhone 4S, securing Samsung's position as the top smartphone maker in the world.
Samsung's success continued with the S4, but its streak was broken when the S5 failed to outsell both its predecessor and the iPhone in 2014. Apple's launch of the iPhone 6 and 6 Plus last September nullified Samsung's big-screen advantage, while low-cost rivals like Xiaomi and Micromax lured away midrange customers. Sales of phablets also slipped year-over-year -- Samsung only sold 4.5 million Note 4 units within the first month, down from 5 million Note 3 units in its first month in 2013. As for the new Note Edge variant with the curved screen, only 630,000 units were shipped between November 2014 and February 2015, according to Korean tech site DT.
All that pressure caused Samsung's global market share to slip from 29% to 20% from the fourth quarter of 2013 to the same period of 2014. Its mobile profits plunged 64% year over year last quarter.
Looking ahead, things are looking a bit brighter. For example, BNP Paribas analyst Peter Yu expects Samsung to ship 44 million S6 units this year, compared to 38 million S5 devices. However, Samsung still needs to outmaneuver makers of cheaper smartphones and phablets in emerging markets while preventing high-end Android users from switching over to rival Android platforms or iPhones.
Meanwhile, Apple's entrance into the phablet market has been explosive. Last quarter, sales of iPhones surged 46% year over year to 74.5 million units, compared to Samsung's sales of 73 million smartphones across all price tiers.
That massive growth also helped Apple's iOS top Google (NASDAQ: GOOG) (NASDAQ: GOOGL) Android during the holiday season in the U.S., Japan, and Australia, according to Kantar Worldpanel ComTech. The iPhone 6 Plus also captured 41% of the U.S. phablet market within its first month of availability. Another study from Counterpoint Research found that key Asian markets including China, Japan, and South Korea all favor the 5.5-inch iPhone 6 Plus, indicating that it was stealing that Note 4's thunder.
Another key advantage Apple has over Samsung is brand appeal. A recent survey from the Hurun Research Institute in Shanghai found that Apple was the top brand for gifting among China's richest men and women. That status-symbol appeal enables Apple to sell cheaper hardware at higher prices, which gives it a magic mix of high sales and margins that Samsung and other smartphone makers can't replicate.
However, investors should recognize Apple's biggest weakness -- its overwhelming dependence on iPhone sales, which accounted for 69% of its top line last quarter. Unless Apple can diversify its top line with stronger Mac sales, new products such as Apple Watch, or new services like streaming TV, a single dip in iPhone sales could dent the stock.
Phablets are certainly here to stay. A recent survey from market research organization AYTM found that 39% of respondents planned to buy a phablet as their next smartphone, which reinforces IDC's optimistic sales projections.
However, investors should be aware that the phablet market is a crowded space filled with a huge number of hungry OEMs. Low-margin start-ups, helped along by turnkey mobile solutions from Qualcomm (NASDAQ: QCOM), are lowering price expectations across the market.
In this market, Apple has a clear advantage over Samsung due to its brand appeal, but that doesn't make it invincible. Investors should also remember that if smartphone sales keep fading, Samsung can fall back on its other businesses, such as consumer electronics and semiconductors. Apple, however, isn't diversified enough to withstand a slowdown in iPhone sales.