Samsung's mobile division is in trouble. While its full Q3 2014 results will be published later this month, the pre-earnings guidance issued today does not make for comfortable reading. Once more Samsung's earnings and income has dropped, and Samsung's future outlook places a huge reliance on the Note 4, Galaxy Alpha, and its previously announced mid- and low-end devices.
The drop in revenue and profit has accelerated since Q2 2014, with a quarter on quarter drop in revenue of 10.22%, and profit of 42.98%. Q3 revenue year on year is down 20.45%, and Q3 profit year on year is down 59.65%.
According to the guidance this is "as a result of declines in the mobile business due to intensified smartphone competition, which also had an adverse effect on the performance of the OLED and S.LSI businesses, and weak seasonal demand for the CE business, including TVs."
While shipments of smartphones have "increased marginally" there is no mention of unit sales. Operating margins are down due to aggressive marketing expenses, a lower average selling price, and reduced demand for high-end models (which generate the majority of profits in the portfolio).
Samsung's continuing answer to falling revenue and profits is to double-down on the existing hardware line-up through "new material and innovative design" and "strong competitive pricing" at the lower half of the portfolio. Unfortunately the models that will lead this charge are not proving as successful as they need to be.
Samsung is placing a lot of trust in sales of the Note 4, a phablet device that the South Korean company seems to have little faith in. The launch was brought forward a week because of the positive public reaction to the iPhone 6 Plus and the Note 4 was given an immediate price cut, reducing revenue and profit before it even went on sale.
The innovative design that could have sparked a rush to the Note 4 was the curved display show on the Galaxy Note Edge. While this created a lot of media interest, Samsung will not be putting this on sale in any significant number, labelling it a "limited edition concept device" three weeks after the device was announced at Berlin's IFA.
The "new material" device is the Samsung Galaxy Alpha, and while Forbes' full review is not yet posted (I'll be taking a closer look at the handset this coming weekend) the handset has not been well received by the critics. Reviewing the handset for The Verge, Vlad Savov wrote:
The issue for Samsung is how it'll convince people to spend their money on the Galaxy Alpha instead of some seriously compelling competition. In the US, the Alpha is going directly up against the iPhone 6, which is about as tough a fight as you can imagine until you look at its pricing in Europe. The Galaxy Alpha costs as much as the Xperia Z3, which has a better camera, display, and battery while also being waterproof. And then there's the Z3 Compact, which has all those things and costs less.
As for the low- and mid-range handsets, Samsung announced its full line-up in July. None of them set the world alight, and in the vast majority of cases they use the same model name as previous years but with at the next number in sequence (so the Galaxy Ace 4, the Core 2, and the Star 2). These are iterative designs, providing the same choice once more for the consumer. The consumers who are already turning away from Samsung.
The signs pointing to a massive drop in profits have been there for some time, but were brought in to sharp relief with the Q2 2014 numbers. That was the point where Samsung needed to disrupt itself with a burst of innovation and a change of approach, or its mobile division would suffer a s similar fate to Nokia, Palm, BlackBerry, Ericsson, and other mobile manufacturers lost to history.
Once a mobile manufacturer starts losing revenue and profit, it is invariably too late to save the company's long-term position in the market. Thanks to the short replacement cycles inherent in smartphones (which averages under a year), a reliance on third-parties to sell handsets instead of a dealership or a direct-to-customer approach, and the unequal relationship with carriers; there comes a point where sales cannot be maintained and a rapid downward trend begins.
This cliff theory (popularised by industry analyst Tomi Ahonen) has been seen before with other manufacturers. Samsung may have thought that the volume of sales and the dominance of Android would make it immune to the trend, but that is not the case.
Samsung's product line-up for the holidays is set in stone. My feeling is that Q4 will continue to show falling revenue and profit year on year. The company has one more throw of the dice to stay on top of the Android pile - a new device range launched at or around MWC in February 2015.
Honestly I think they'll carry on with an iterative product line and continue to rely on marketing to deliver the same volume of sales without addressing the falling revenue per handset numbers. During the summer of 2015 Samsung will leave the number one spot in the sales charts, and the smartphone world will pick up a new favored manufacturer.
