Although Apple Inc. (NASDAQ:AAPL)’s iPhone 5 sold more impressively than the Galaxy S4, the smartphone market appears to be rapidly moving against Apple.
The S4 figures in context
To be completely fair, the iPhone 5 did sell better than Samsung’s S4. There’s no question about that. Apple sold 5 million of its latest iPhone in just the first weekend.
AppleInsider has pointed out the apparent media bias when it comes to coverage of Apple Inc. (NASDAQ:AAPL): many articles characterized the iPhone 5’s launch as a failure, while Samsung’s S4 has received praise.
But those numbers have to be taken in context. Apple’s iPhone has been a tremendous success in recent years, captivating and dominating the smartphone since its release in 2007.
Samsung is still a relative up-and-comer. Its initial Galaxy phone wasn’t released until 2010, and it wasn’t until last year — with the third iteration of the Galaxy — that the company’s phones were accepted as comparable to Apple Inc. (NASDAQ:AAPL)’s.
The real problem for Apple in terms of Samsung, is the general sales trend: from obscurity in 2010, to respect in 2012, to even better sales in 2013. If that trend continues, might the Galaxy S5 or S6 be expected to outsell the iPhone 6 or 7?
Samsung’s challengers
I’ve written about this before, but the biggest misconception people make in terms of the smartphone market is to view it as a two-horse race: Apple and Samsung.
While that may have been true last year, that’s increasingly no longer the case. As I’ve pointed out, most of the reviews Samsung’s S4 received were lukewarm at best. Reviewers liked the phone, but found it to be a mere incremental upgrade from the S3.
Instead, the general consensus among tech critics has been to praise the HTC One, mostly on the strength of its iPhone-like body design.
Of course, it isn’t just the HTC One: Other Android phones lay in wait. Sony Corporation (ADR) (NYSE:SNE)’s 5-inch Xperia Z (coming to the US “soon”) offers something no other phone can match: the ability to survive underwater. Then, there’s Motorola’s long-rumored X phone, which has been the target of much speculation, owing to the fact that Google Inc (NASDAQ:GOOG) itself now owns Motorola. Recent reports suggest that this X phone could go on sale later this year, and offer unprecedented durability.
The economics of monopoly
It really comes to basic economic theory: monopolists generally make more money than businesses in a competitive industry. Monopolists are free to charge whatever they want, confident in the fact that they face no competition.
Apple Inc. (NASDAQ:AAPL)’s iPhone was, for all intents and purposes, a monopoly market from its debut in 2007 through the middle of 2012. If a consumer wanted a fast, powerful phone that could browse the web and utilize apps, the iPhone was the only real choice.
Yes, there have been Android phones for years. But to be frank, they’ve stunk. Earlier incarnations of Android were buggy and unstable — the experience offered by an iPhone was infinitely better. But that’s no longer the case. After Google Inc (NASDAQ:GOOG) released Android 4, high-end Android devices (like Samsung’s Galaxy S3 and S4) have become every bit as good as the iPhone.
(Unfortunately, I fear that many Apple investors still hold to this notion. I would encourage anyone who believes that the Android experience still falls short to invest in a top-tier Android phone.)
This trend is only likely to get worse. With the competition heating up among Android hardware makers, innovation should spur individual companies (LG, Samsung, HTC, Motorola, Sony) to make their phones even better.
Don’t invest in smartphone makers
I wouldn’t suggest anyone purchase Samsung stock on the belief that the Galaxy line will surpass the iPhone. That could happen, but it isn’t really a fair representation of where the market is going.
In short, the smartphone market is over. Competitive pressures have accelerated to such a great extent that no company is likely to ever capture as much from the sale of handsets as Apple did in 2012.
As Apple remains wholly dependent on the iPhone for the majority of its revenue and profit, Apple Inc. (NASDAQ:AAPL) shouldn’t be expected to do particularly well either. Capital returns may keep a floor in the stock, but barring the introduction of a revolutionary new product, margins will continue to compress as the competition improves.
If one remains keen on getting exposure to the smartphone market, Google Inc (NASDAQ:GOOG) seems to be the better play. Although Google makes no money off Android directly, the widespread adoption of Android benefits the search giant tremendously. More top-tier Android handsets means more gmail users, more Google maps users, more Google search users, and potentially more Google+, Google Docs and Google Music users.
Samsung, Apple and Google
The popularity of Samsung’s Galaxy devices has grown tremendously in recent years, enough to threaten Apple Inc. (NASDAQ:AAPL)’s iPhone empire. But the real problem with companies dependent on the smartphone market is the wave of competition coming.
Other Android makers should soon offer devices every bit as good as Samsung’s (arguably, HTC already does). That’s good for the consumer, but not for the companies behind the phones. Margins should continue to plummet as companies compete amongst each other in a cutthroat competition for sales.
If anyone stands to benefit, it’s Google, whose Android operating system seems destined to maintain its dominant position.
The article Samsung’s S4 Sales Figures Are a Disaster for Apple originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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