Samsung’s weak quarterly results, and the changing smartphone galaxy: Control Shift

This week, South Korean tech giant Samsung Electronics released its second-quarter profit outlook, and the news was far from good.

After weeks of leaked internal documents in the Korean press alluding to a bad result, it revealed its operating income fell around 24% in the June quarter to 7.2 trillion won ($A7.1 billion).

To add insult to injury, in the very same week, a highly organised criminal gang stole 40,000 computers, smartphones and tablets from one of its factories earlier this week.

And all this against the backdrop of the recent health issues of the 72-year-old chairman of Samsung Group, Kun-hee Lee, and the dynastic succession crisis this has raised.

In a statement, the company blamed the result on the strong Korean currency, as well as weak demand in Europe and China.

However, I believe there were a number of more fundamental changes at play in the mobile industry that fed into the result. These will profoundly affect all companies in the mobile sector – including Samsung.

1. Smartphone saturation

Since 2007, the high-end smartphone market has grown at an explosive pace in most developed countries. This has led to tremendous profits for Apple, Samsung and others as high-end flagship smartphones (such as the iPhone and Galaxy S series) have sold in rapidly increasing numbers.

However, the high-end market in most developed countries is reaching saturation point. According to recent ACMA figures, for example, 59% of Australians now own a smartphone, along with 56% of Americans and 51% of Britons.

These consumers will still continue upgrading their phones every two years or so, as they always have. However, there is no longer a vast pool of featurephone-owning holdouts waiting to spend $800 outright on their first smartphone.

2. Low-end growth

With little growth to be had in developed markets, most of the growth will be in emerging markets. Unfortunately, this growth is potentially high-volume, but very low margin.

At Mobile World Congress this year, Mozilla unveiled a $25 smartphone running Firefox OS aimed at emerging markets. This was the moment the bottom fell out of smartphone prices.

Sure, Firefox OS is to smartphones what Yugos are to cars. However, a $25 smartphone is affordable to a consumer earning $2 an hour in an emerging market, where an $800 phone is not.

Along with Mozilla, low-cost Chinese companies such as Huawei, Xiaomi, ZTE and others are competing in this space. However, the low margins mean this end of the market won’t be the cash cow high-end smartphones in developed markets are.

3. Good enough

A couple of years ago, there was a world of difference between the $800 flagship smartphones and their cheaper counterparts. This was especially true around screen sizes and processor speeds. However, this has changed tremendously recently.

Lenovo subsidiary Motorola recently released the 4G Moto G in Australia. This is a 4G smartphone with a 4.5-inch display and a quad-core processor for just $299 outright.

For consumers willing to put up with 3G and a dual-core processor, the Moto E costs just $179 outright.

Meanwhile, Microsoft’s Lumia 635 is a 4G phone with the latest version of Windows Phone, a quad-core processor and a 4.5-inch display. It costs just $279 outright.

Now, these phones aren’t the best in terms of specs. But for many consumers who want to make a few calls or run a few basic apps, they will be more than good enough. And they won’t buy a full-priced flagship smartphone when a “good enough” phone costs less than half the price.

4. The elusive next big thing

Okay, so developed markets have reached a saturation point, “good enough” smartphones are poaching flagship smartphone customers, and the growth that is happening is in low margin emerging markets.

So what – if anything – replaces smartphones as the growth engine of the consumer electronics and tech industry?

Well, this is the $160 billion question.

It’s also what’s behind the tech industry’s urgency to find something – anything – to replace the rapid growth of smartphones. Will the next big thing be wearables or smartwatches? The Internet of Things? Oculus Rift-style virtual reality headsets? Smart cars?

Or – and here’s a thought that drives fear into the tech industry – perhaps all of these devices will flop and there’ll be a huge industry shakeout.

Conclusion

Samsung’s result is not the end of the world. Most executives would love to have a bad quarter where they only make a profit of over $7 billion. The company also remains the world’s largest mobile phone manufacturer.

However, there are big structural challenges ahead for the company at the same time it faces the challenge of generation succession. How well they handle it will have big implications for everyone involved with the mobile industry.