Apple puts the big hurt on Samsung
Long the world's largest smartphone maker, Samsung is likely to see Apple iPhones rise to the top spot in 2015, pushing Samsung and its Galaxy and other smartphone models into second place.
What's more, Apple is releasing in April its first Apple Watch, which could knock the wind out of smartwatch competitors including Samsung, which already has several models on the market.
"No question, 2015 is going to be a challenging year for Samsung," said IDC analyst Ryan Reith.
There are many reasons for Samsung's decline and not all of them have to do with Apple's product superiority. What Samsung must do to reverse its declining share in smartphones and remain a competitor against Apple in smartwatches may sound like a complex marketing dilemma, but a lot comes down to Samsung's basic need to build a better overall brand reputation.
"Building brand loyalty and customer lock-in to a Samsung ecosystem is the major challenge Samsung faces in battling Apple, " said Jack Gold, an analyst at J. Gold Associates.
Samsung's smartphone decline
Fourth-quarter smartphone shipments show Samsung's embarrassing decline. Apple and Samsung virtually tied in global shipments, each reaching about a 20% share of the total market, according to research firms Strategy Analytics and IDC.
A year earlier, in the fourth quarter of 2013, Samsung had about a 30% smartphone market share, compared to Apple's 17%.
IDC on Thursday said that the smartphone gap between Samsung and Apple had narrowed to 600,000 units at the end of 2014 with Samsung still in the lead. But IDC warned: "Continued success from Apple, coupled with ongoing challenges facing Samsung, could enable Apple to overtake Samsung during the 2015 calendar year."
In the fourth quarter, Samsung shipped 75.1 million smartphones, while Apple shipped 74.5 million, IDC said, well ahead of the others in the top five: Lenovo (24.7 million), Huawei (23.5 million) and Xiaomi (16.6 million).
Even in South Korea, home of Samsung, Apple surged ahead in smartphones in the fourth quarter, grabbing 20% of that market, up from 11% a year earlier, Strategy Analytics said. For November, Samsung's domestic share fell to 46%, down from 61% in September (before the new iPhones had taken their toll), according to Counterpoint Research.
Clearly, Apple did well with its new iPhone 6 and iPhone 6 Plus in the fourth quarter, but Samsung also crashed, comparatively, with its Galaxy S5, introduced earlier in the year.
"The Galaxy S5 sold horribly and had a significant impact on Samsung's profitability last year," said Kevin Burden, an analyst at 451 Research.
Patrick Moorhead, an analyst at Moor Insights & Strategy, said U.S.buyers perceived the Galaxy S5's plastic case as "cheap." Plus, the phone had new technologies that consumers didn't find valuable, such as a heart rate monitor. "Samsung has to do a better job aligning their technological capabilities with what consumers are asking for and new innovations that they can create," he said.
"Samsung's biggest issue is that they failed in 2014 to innovate and build upon the success they were having over the past five years," added IDC's Reith. "They have very much stayed stagnant, in terms of brand image, device lineup and marketing. The Galaxy S line should have been a three-year, three-device strategy, with another completely different sub-brand to follow-on. Instead, it is almost six years now and becoming stale."
The coming Galaxy S6
While Samsung need to end the Galaxy S line, there are already reports indicating that Samsung will produce a Galaxy S6, probably to be unveiled at Mobile World Congress in March.
Rumors suggest the Galaxy S6 could have Samsung's own in-house Exynos processor, instead of a Qualcomm 64-bit Snapdragon 810, which has been found to be susceptible to overheating problems.
Using its Exynos processor, Samsung could save on costs and flex its technology muscles, but better styling and other features are what may more important in Galaxy S6. Some pundits have suggested the device needs an "Edge" version, where the screen wraps around one side, but even the value of the Edge technology isn't a proven market winner.
"We are hearing rumors of a Galaxy S6 announcement at Mobile World Congress and if so, my guess is that it won't be well-received," Reith said. "This is the time when Samsung needs to launch something new in its product line, its brand, its messaging and overall value proposition."
The China effect
While Samsung may need to overhaul its smartphones, there's little question it is being hurt by a range of cheaper smartphones, mainly from at least 10 Chinese manufacturers.
IDC put Lenovo, Huawei and Xiaomi -- all based in China -- in third, fourth and fifth place in total shipments in the fourth quarter behind Samsung and Apple.
Apple has always been seen as a premium brand and hasn't competed in the low-cost smartphone segment. Even so, Apple walloped the smartphone market in China in the fourth quarter of 2014, doubling its sales over the prior year, and accounting for 22% of Apple's overall sales for the quarter. Apple managed to attract customers to its high-end iPhones in China, a feat that's been out of reach for Samsung.
"The case in China is less that Samsung is getting pushed around by Apple as they are feeling the pressure from Chinese vendors that are hungry and satisfied with low-digit profit margins," Reith said. "At the same time that Apple is clearly not letting up, Lenovo, Huawei and Xiaomi are all gunning for the top."
While Samsung gets drubbed for not being more innovative in smartphones, it is simply harder to be innovative with lower-priced smartphones that cut out expensive features, Gold noted. At the low end, "you have newcomers with new models like those from Xiaomi that have stolen a lot of Samsung's thunder," he said.
Changes needed for Samsung's smartphone brand
Samsung seems to miss something basic that Apple is really good at: Long-term market research about what technologies matter most to buyers and the ability to act on those insights.
To that point, Apple took several years before increasing the size of its iPhones, finally deciding on a 4.7-in. display size in the iPhone 6 and the 5.5-in. screen of the iPhone 6 Plus. Apple saw the larger-sized smartphone market trend proven repeatedly, then responded, and has reaped the benefits.
Samsung had been making larger smartphones and so-called phablets for years before Apple, especially with the Galaxy Note line. But at the same time, Samsung introduced each year what turned out to be an array of unpopular technologies, especially in its custom user interface and services, to which many Android customers have balked.
"To regain momentum, Samsung needs to have something different and appealing to the consumer around the corner," Reith said. "Possibly it's a rebranding of some sort, rather than another device with 15 different unusable technologies. It's going to be a challenging road ahead for them."
As part of buffing up its smartphone brand, Gold said Samsung has to establish a more "comprehensive user experience that creates some level of loyalty and lock-in. They haven't been able to do that and are unlikely to in the short run. They really don't have any end-user ecosystem to speak of."
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By contrast, Apple has a "tremendous" ecosystem, Gold said, which translates into "brand lock-in and loyalty." Apple offers the "complete experience" with quality devices, matched with services like iTunes and an enormous App Store.
"People are basically buying a device from Samsung and not the complete experience that Apple offers," Gold said. As a result, Samsung loses out if a better device from another vendor comes along, meaning a Galaxy S5 customer might easily jump to an HTC One, or another phone.
The Apple ecosystem comes closer to what Google does with all Android services and smartphones, but Samsung can't take full advantage of the Android ecosystem because it competes with other Android smartphone vendors, Gold said.
Smartwatches and the Apple Watch
As if Samsung didn't have enough on its plate in competing with the iPhone, Apple is expected to launch its Apple Watch in April.
Samsung ought to be prepared for competition from the Apple Watch, having introduced six smartwatch models and smart fitness bands in just over a year. The latest smartwatch, introduced last August, was the Gear S, which is powered by the Tizen operating system, not the Android Wear OS that powered Samsung's previous Galaxy Gear S smartwatch.
The newer Gear S has a 2-in., curved Super AMOLED display with 360 x 480 resolution, but no camera as in earlier models. However, it is Samsung's first smartwatch with 3G cellular connectivity, allowing calls directly from the timepiece.
One big difference between the Gear S and the Apple Watch is that Apple will incorporate NFC (near-field communications) in its timepiece, which allows quick payments with Apple Pay. Kevin Harwood, a consultant for Mutual Mobile, which designs mobile products, said recently he expects the NFC in the Apple Watch to be a major selling point, and that Samsung might try to duplicate it.
The Tizen difference
With Tizen in its Gear S, Samsung is showing that it wants to find alternatives to Android. Samsung also has said it will use Tizen in its future smart TVs and recently launched the Samsung Z1 smartphone on Tizen in India.
Gold said Tizen, a lightweight operating system, makes sense from an embedded technology standpoint in TVs and smartwatches, but less sense for higher-end devices like smartphones. In the smaller devices, Tizen is more adaptable than Android and can run more efficiently with devices that have fewer or less sophisticated hardware components, he said.
Samsung has a deep knowledge of the Tizen OS and may be able to improve the user experience and performance while also using fewer hardware resources or even a smaller processor, Gold said.
But the biggest commercial benefit of the Tizen is that it gives Samsung an alternative to Android, and makes Samsung less dependent on Google. "Tizen gives Samsung differentiation, while Google will enforce much more uniformity across various manufacturers that want to use Android Wear for watches," Gold said.
Whether the Tizen difference resonates with smartwatch buyers is unclear. If Samsung can produce a smartwatch with superior battery life and at low cost with Tizen, it could be important. So far, battery life in smartwatches is limited, sometimes requiring daily recharging, depending on the model. As for cost, early-adopter smartwatch buyers have paid $300 or more, atop of the cost of a smartphone that gets paired via Bluetooth with the smartwatch.
Apple Watch legitimizes Samsung's smartwatches
The overall market for smartwatches is expected to be a small fraction of the smartphone market, but that doesn't mean it won't be an enormously important market to both Samsung and Apple.
Both companies are expected to put major marketing dollars behind their smartwatches because of the devices' connections to a wide variety of fitness and other applications, as well as to more expensive smartphones. They will be seen as the must-have fashion and gadget item for many tech-savvy buyers, and will offer either company a chance to create a greater brand connection.
On that score, Apple would seem to be the clear winner because an Apple Watch could delight its loyal Apple base eager for new technology. Some analysts have predicted as many as 30 million Apple Watches will be sold in the first year, about 75% of all smartwatch sales for the same period. About 10 million smartwatches sold in 2014, Gartner said, with Samsung taking the largest share.
Apple's big splash with its Apple Watch will undoubtedly legitimize the entire smartwatch category. Apple has said it will have 34 different models, starting at $349, which matches the initial price of the Gear S.
While Samsung might be envious of the enthusiasm for the Apple Watch, Apple's entry may help Samsung -- for a time.
"Samsung's smartwatches are going to benefit from the Apple marketing machine," Burden said. "Apple has a way of legitimizing markets in the eyes of consumers, and Apple will push a rising tide that lifts all ships."
Samsung might see Apple as its biggest smartwatch competitor, but the Apple Watch marketing storm will probably push traditional watch makers, such as Tag Heuer and Swatch, to enter the market. "They'll see that the smartwatch market is not likely to go away and these vendors will want to have a stake," Burden said.
"The competition Samsung faces will only become more fierce, but Samsung should benefit from Apple's Watch launch in the short run," Burden added.
That could be small comfort, given all the disappointing news Samsung has faced on the smartphone front in recent months.