Apple (AAPL) and Samsung (005930:KS) shipped about 470 million smartphones between them last year, just under half the total shipped worldwide. When you adjust for the fact that both companies are selling more expensive devices, the two account for more than 65 percent of the value in the smartphone market. Yet both companies seem uneasy.
Samsung released financial information about its latest quarter on Tuesday, revealing a drop in profits for the second consecutive quarter. The company is still printing Korean won—its profit was the equivalent of $8 billion—but the portion of that net income coming from mobile phones appears to be in decline.
Analyst estimates compiled by Bloomberg had the profit in that division down 13 percent from its peak last year. That’s due, in part, to the normal ebb and flow of the product cycle: Samsung hasn’t released a new version of its high-end smartphone in about a year, and Apple put out new iPhones in the fall. This puts a good deal of pressure on Samsung’s newest phone, the S5, which will go on sale in the U.S. on Friday.
The S5 is hardly being hailed as a revolutionary device. In a review, the Wall Street Journal‘s Geoffrey Fowler found that the only really novel feature is that the S5 will survive if you drop it in the toilet. “Anybody weighing this phone as an upgrade or a switch from another model may rightly wonder: Has smartphone evolution stalled?” he writes.
Then again, Samsung’s strategy is based as much on groundbreaking marketing as on groundbreaking technology. The company has spent lavishly on advertisements featuring celebrities, innovative marketing partnerships, and training employees in phone stores to sing the praises of its devices. With the company’s profits pinched, it is reeling itself in a little. Samsung has already begun to reduce marketing expenses in order to avoid cutting into margins, according to a report in Reuters.
This will likely come as a relief to Apple, whose fears about Samsung’s efforts have been exposed in documents released as part of patent litigation between them. Slides from an internal Apple presentation in 2013 released as part of the case and compiled by Re/Code, show that Apple has been concerned about Samsung’s inclination to spend “obscene” amount of money on advertising. In the presentation, Apple also laments increasing ambivalence from carriers, which it says want to limit Apple’s power in the smartphone market.
In one particularly revealing e-mail exchange disclosed by the lawsuit, Apple’s marketing chief, Phil Schiller, singles out a humorous Samsung commercial that ran before the Super Bowl. “It’s pretty good and I can’t help but think ‘these guys are feeling it’ (like an athlete who can’t miss because they [sic] are in the zone),” Schiller wrote to Apple’s ad agency, TBWA/Media Arts Lab, “while we struggle to nail a compelling brief for the iPhone. That’s said because we have much better products.” Here’s the Samsung ad that had Schiller worked-up:
But Apple’s concern isn’t just that it is being outgunned on advertising or shunned in negotiations with carriers. According to one slide in the presentation, Apple knows that “consumers want what we don’t have”—in short, phones with really big screens and really low price tags. Samsung has the big screen thing covered, but the move toward cheaper phones is going to make things harder for both companies in the years ahead.