Few industries change at the pace the mobile phone industry does. With 6 billion active mobile phones in the world, this sector experienced immense growth and brought fortunes to many companies. As this market’s demand shifts, each smartphone producer needs to come up with new product features that will retain and persuade new customers. This continuous search for innovation has created a hyper-competitive and highly concentrated market in which manufacturers have to differentiate themselves more than ever. And now we have a new billion-dollar factor: patent infringements suits. These have become common and are deviating resources away from innovation.
How are the three major mobile companies performing?
The best days may be behind
Apple Inc. (NASDAQ:AAPL) leads the U.S. market with a 39% volume share. Until January this year, it was the biggest public company, but Exxon Mobil Corporation (NYSE:XOM) regained its position. The reason: Apple stock has dropped from a high of over $700 a share in September to trading around $403 now. What happened?
To start with, Apple Inc. (NASDAQ:AAPL)’s results were not very encouraging. The company posted revenue of $43.6 billion and net profit of $9.5 billion in the quarter ending in March, 19% lower from the year-ago quarter. In addition, gross margin fell from 47.4% to 37.5%. Competitors are catching up while Apple lacks a new, great and innovative product.
On June 4, 2013, Apple Inc. (NASDAQ:AAPL) was given a ban on some of its products after it was found that it had violated a Samsung patent by the U.S. International Trade Commission. To be honest, I do not think this particular event will have a negative effect on sales. But I do believe that this situation affects the company’s strategy, which should be focused on regaining engagement and customer fascination as well as attracting new demand.
Credit: Apple Inc. (NASDAQ:AAPL)
Nonetheless, new announcements are expected. Among recent developments, we find iOS7 and iTunes Radio, but also rumors of an older iPhone trade-in program as well as a new, cheaper iPhone. I am not very optimistic about these initiatives as an instrument to help rebuild customer loyalty.
Growing a customer base is another important issue to tackle. I think the company will manage to gain share at the high end of the market, but the big factor remains low-end phones. The growing emerging markets require this type of product, and this is exactly where Samsung and Nokia manage to drive customers. Plus, the company runs the risk that wireless carriers could reduce or eliminate the subsidies on the iPhone, raising customers’ up-front costs and make other smartphones appear better alternatives. In this context, I doubt Apple Inc. (NASDAQ:AAPL) will manage to retain all of its loyal customers.
Still unable to step up
Nokia Corporation (ADR) (NYSE:NOK) was the largest vendor of cell phones for many years thanks to its low-cost structure, strong brand recognition and distribution network. However, over the past five years, the growing use of smartphones has caused it to lose market share.
The reason behind this loss, and today’s burden, goes back to how the company executed its strategy. In the late 90s, Nokia Corporation (ADR) (NYSE:NOK) spent millions on R&D and developed many of the devices and features that consumers love today. However, they were not brought to the market in order to concentrate on basic phones, where Nokia Corporation (ADR) (NYSE:NOK) was, by far, the leader.
During 2012 financial results improved and, after six quarters of losses amid falling sales, it reported profits of $585 millions. Currently, the stock is selling at about $3.8, which means a modest bounce. Investors have not been happy, but the transition to Windows Phone from Nokia Corporation (ADR) (NYSE:NOK)’s own Symbian system caused sales of Lumia smartphone to grow. My impression is that it will be hard for Windows Phone to become a major factor to drive new customers. This new system still needs to gain popularity, and this is why Windows will pay Nokia $1 billion over a period of five years relating to marketing expenses.
Despite this positive impact on the financials of the company, liquidity remains a major concern for Nokia. Credit agencies have downgraded the company’s overall rating and, to ensure liquidity, the firm has proposed suspending its annual payment of dividends for the first time. Investors will not like this.
A growing giant
Samsung became the largest smartphone vendor worldwide thanks to strong sales of its Galaxy SII and Galaxy Note devices. In the U.S., it is the second largest, behind Apple Inc. (NASDAQ:AAPL), with 22% market share.
Samsung’s latest earnings report shows that the company’s profit soared by 42% to $6.5 billion in this quarter compared to the same period last year. Samsung has challenged Apple’s dominance by flooding the market with a range of new models with a variety of screen sizes and prices and by updating its versions faster than Apple ever has. However, the stock has recently been wiped following slow S4 sales.
After winning the patent case against Apple, Samsung stated that Apple’s history of free-riding on its technological innovations was over. If the case has an impact, it will be for sure positive. Ideally, a ban on Apple’s products and a change in the customer’s conception of Apple – from ‘innovator’ to ‘copier’ – would work fabulously for the company. I doubt this scenario is very likely though.
Given Samsung’s recent history and the fact that it announced it had finally managed to test speed-enhanced fifth generation (5G) technology successfully, I consider the company’s recent bad performance to be something temporary. Even if S4 sales do not grow, Samsung’s strategy of building a strong presence in each segment will prove successful.
Bottom line
Both Apple and Samsung have strong balance sheets, but Apple’s results were not as good as last years’ whereas Samsung’s improved enormously. I believe Samsung will not stop growing in the near future. Its products will keep on penetrating every category and niche, backed by constant investments in research and development.
Apple Inc. (NASDAQ:AAPL), on the other hand, appears to be at a standstill and will need successful new products to maintain its leadership in the US. Until I see a new release with good acceptance, I would stay away from this share.
As far as Nokia Corporation (ADR) (NYSE:NOK) is concerned, the company is struggling, and its glory days in the mobile industry seem far behind. Recent growth in sales may bring some improvement in the future but it is still hard to think the company will catch up with its peers. Windows Phone is the key and should be closely monitored.
Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Louie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The 3 Leading Mobile Companies: Where Are They Heading? originally appeared on Fool.com and is written by Louie Grint.
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