Midway through the fourth-quarter earnings season, it's becoming apparent that while Apple (NASDAQ:AAPL) had a record-breaking quarter with 37 million iPhone sales and Samsung did nearly as well, most other handset makers are struggling or facing stagnation.
Click here for a chart on the 2010 and 2011 smartphone shipments reported so far this year.
Why are Apple and Samsung so successful? And what can other handset makers do to emulate them in today's cut-throat market, especially for smartphones? Analysts point to the unique attributes that have buoyed Apple and Samsung, including their access to components, scale, brand recognition and overall product execution. Still, they argue, it is becoming more difficult for OEMs to succeed with traditional business models. The weak fourth quarter results--traditionally handset makers' best--either posted so far or expected from HTC, Motorola Mobility (NYSE:MMI), Nokia (NYSE:NOK) and Sony Ericsson, attest to the challenges.
One of Apple and Samsung's advantages is that they develop components internally, including chips, and they have massive scale. "They're not just OEMs that slap a bunch of components together," said ABI Research analyst Kevin Burden. "They are able to develop their own component technologies. What other companies have those?" Samsung, an international electronics conglomerate, recently said it will spend $42 billion in 2012 on research and development and on upgrading plants, an investment few companies can achieve.
Analysts said another advantage Apple and Samsung have over their competitors is their ability to engineer and deliver products to market that carriers will quickly pick up. Samsung does this at a much faster rate than Apple, but both have developed strong relationships with scores of operators and can deliver flagship products that operators can easily get behind. "That combination of consistent new product development and launch really helps with operator demand," Informa Telecoms & Media analyst Andy Castonguay said of Samsung.
The ability to stand above the fray, as Apple has done with the iPhone 4S and Samsung has with its Galaxy S line, speaks to an issue affecting handset makers more broadly: that there are too many SKUs in the market, and new models get lost in an largely undifferentiated sea of devices. To combat this, analysts said handset makers should try and focus on fewer models. Indeed, Motorola Mobility CEO Sanjay Jha said at the Consumer Electronics Show that the company intends to release fewer devices in 2012 as it focuses on producing models that can break through the smartphone clutter. Executives at HTC, which posted a 25.5 percent drop in fourth-quarter profit, have made similar comments. Ultimately, Burden said, this comes down to the bottom line. "Do they end up spending too much money per phone and not getting the same return back if they limited their SKUs?"
Yet for all of Samsung's ability to invest in components, it may soon struggle with the same problems affecting other OEMs, said CCS Insight analyst John Jackson, noting that Samsung and Apple are "two very different animals."
"Apple is a formula," he said. "Apple is a self-reinforcing formula built on top of control of the distribution of third-party content, world-beating industrial design, a world-beating brand, a fantastic retail footprint and a legacy of innovation that consumers are aware of."
While Samsung has tried to become more vertically integrated with the introduction of its Media Hub services and has attempted to make mobile devices the centerpiece of the digital living room, Jackson contends that Samsung is at heart a very good OEM. "If you are a device business and nothing else, sooner or later your margins will fall away," he said. "It's harder and harder to create and sustain a differentiated proposition."
The market is accelerating its move away from OEMs and toward platform companies such as Amazon, Facebook, Google (NASDAQ:GOOG) and others, Jackson said, arguing that the market essentially forced this transformation at Nokia, pushing it into the arms of Microsoft (NASDAQ:MSFT) and led Motorola into the arms of Google. Sony's move to take control of the Sony Ericsson venture could be seen as an attempt to create its own platform for its content and devices--it was simply missing a mobile phone unit to call its own. Jackson said that as this shift continues, OEMs that are muddling along may either be acquired or exit the market. What is clear, analysts said, is that there is a great deal of upheaval in the market.
"This is perhaps the most fascinating time in terms of watching how the competitive levers are pulled and changed," Castonguay said.
Special Report: Wireless in the fourth quarter of 2011
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