Rising smartphone tide washes away old handset order in Q2

Phil Goldstein
The second-quarter earnings season is over, at least for the world's handset makers, and what's clear is that vendors that managed to innovate and sell lots of smartphones distanced themselves from the pack. Meanwhile, those that did not fell further behind as smartphones continue to make up a growing percentage of overall handset sales.

The central drama of the quarter--whether Samsung would claim the world's top smartphone spot--remains somewhat unresolved, unfortunately. Samsung did not report its handset or smartphone shipments for the second quarter. However, Strategy Analytics estimated that Samsung shipped 74 million handsets in the quarter and 19.2 million smartphones, just behind Apple's (NASDAQ:AAPL) 20.3 million iPhone shipments. Apple also passed Nokia (NYSE:NOK) for the first time in smartphone shipments in the quarter--a crystallization of the downward trajectory Nokia has been on. What makes Apple's growth remarkable is that it has charged to the front of the smartphone pack with just two models: the iPhone 4 (more than a year old) and iPhone 3GS (more than two years old). Further, Apple captured two-thirds of the handset market's profit in the quarter, according to asymco.

According to Strategy Analytics, Apple shipped the largest number of smartphones in the second quarter, followed by Samsung and then Nokia.

Yet it is Samsung's growth that is truly astounding. "Although Apple's 142 percent year-on-year growth placed it as No. 1 this quarter, Samsung's 500 percent year-on-year growth shows that going forward, the top smartphone OEM position is Samsung's to lose," said ABI Research analyst Michael Morgan. Samsung has more models, is using more smartphone platforms and has more of an opportunity to outpace Apple in the months ahead.

As for the overall handset market, the distance between market leader Nokia and No. 2 Samsung continued to shrink. Research firm IDC said Nokia's lead shrunk to 18.3 million units; Strategy Analytics estimated the gap is even smaller at 14.5 million units.

Nokia's transition to Microsoft's (NASDAQ:MSFT) Windows Phone as its primary smartphone platform is still underway, so it is not surprising that the company hit an especially soft patch in the second quarter. NPD Group analyst Ross Rubin warned that it will be quite some time before the market can gauge the success of Nokia's transition.

"We'll see the fruits of their labor before the end of the year," he said; Nokia will release its first Windows Phone device year-end. However, Rubin warned that Nokia's future shouldn't be judged on its first Windows Phone handset, and instead the market should look at "what is the potential for Nokia to differentiate and build on the platform."

According to IDC, Nokia remained No. 1 in overall handset market share in the second quarter, followed closely by Samsung.

And what about the rest of the pack? In the overall handset market, Chinese vendor ZTE once again muscled its way into the top 5 rankings, claiming the No. 5 overall handset spot, just behind Apple. ABI analyst Kevin Burden said ZTE could continue to gobble up low-end sales away from Nokia in emerging markets. 

LG posted a narrower loss in its handset unit, and the company expressed hope that its transition to selling more smartphones will start to pay off later this year. However, the company continued to post weak overall handset sales figures, and, according to IDC and Strategy Analytics, its global handset market share slipped below 7 percent. Burden said LG's brand is suffering in the minds of consumers, especially in the U.S.

"The LG brand isn't inspiring this feeling that you are buying a high-end piece of electronics with a lot of forethought," he said. "What can make you win or lose in this game is brand and brand perception. And I think it's losing." Rubin noted that LG faces intense competition from HTC, Motorola Mobility (NYSE:MMI) and Samsung on Google's (NASDAQ:GOOG) Android platform, particularly at Verizon Wireless (NYSE:VZ).

Meanwhile, Motorola continued to chug along in the second quarter, HTC wowed, Sony Ericsson struggled as it recovered from the March disaster in Japan, and Research In Motion (NASDAQ:RIMM) posted weak BlackBerry shipment numbers, and then said it will cut 2,000 jobs, as it tries to manage its transition to using QNX software for its smartphones.

The story of the second quarter is largely between the smartphone have and have-nots. Those that have been able to make an impression on consumers as they transition away from feature phones--IDC said the worldwide feature phone market declined for the first time in nearly two years--and to smartphones were able to make gains. The companies that could not saw their market share shrink and the pressure to perform grow.

Looking ahead to the third quarter, Burden predicted a major clash between Apple and Samsung. Apple is expected to release a new iPhone while Samsung is likely to unleash its Galaxy S II on U.S. carriers. It looks like it will be a heavyweight fight. I can't wait. --Phil