Samsung dethrones Nokia, but can it wear the crown?

Samsung Electronics overtook Nokia (NYSE:NOK) as the world's largest handset maker by shipment volumes in the first quarter of 2012, according to several analyst reports, dethroning Nokia after its 14-year reign at the top.

The changing order, which has appeared more and more inevitable over the past year in particular as Samsung's smartphone sales have jumped and Nokia's have fallen, provides an opportunity to not only examine the past but look to the future. Why did these two companies cross paths, one on the down slope and the other rising swiftly? More importantly though, now that Nokia has been eclipsed by Samsung, what will Samsung do to maintain its position?

I heavily suspect that the factors that have driven Samsung to the top (massive scale as an electronics conglomerate, its embrace of Android and its execution as a fast-follower) will not be able to propel it forward much more. Why? It's an issue I've written about before: Services and the overall user experience are what will determine smartphone vendors' fates, not hardware specifications.

Before turning to the newly crowned king from South Korea, it's worth taking stock of Nokia, still a proud Finnish giant but one that has undeniably fallen on hard times. Nokia's downfall was catalyzed by two things, primarily. First was its ineffectiveness (up until its decision to adopt Microsoft's (NASDAQ:MSFT) Windows Phone as its primary smartphone platform) in responding to Apple's (NASDAQ:AAPL) iPhone and Google's (NASDAQ:GOOG) Android platform at the high end, and especially in the U.S market. It sputtered with Symbian phones and toyed with MeeGo, without much success. "Nokia redefined their Symbian phones as smartphones, which I thought was always preposterous," Recon Analytics analyst Roger Entner said. "That's like saying your soapbox car can compete with a NASCAR car because you're both racing."

Nokia also got hammered at the low end, especially in emerging markets, not only by cheap Android phones from Huawei and ZTE, but by dozens of smaller firms operating in China, from Alcatel to Tianyu. It also got undercut in markets like India where dual-SIM phones are critical; Nokia belatedly introduced dual-SIM devices in the second quarter of 2011 and has been working to grab more market share with its Asha sub-brand. 

So now that Samsung has the top spot, what will it do with it? Samsung has always been a great fast-follower, challenging Nokia at the low end, emulating Motorola's Razr and so on. However, as late as early 2010, Samsung was viewed as a relative laggard in smartphones. That changed with the introduction of the first Galaxy S Android smartphone in March 2010 and Samsung's ability to secure massive U.S. carrier distribution, something that Samsung would repeat with the Galaxy S II in 2011. To see how this strategy has borne fruit, consider this: According to research firm Strategy Analytics, Samsung had 44.5 million smartphone shipments in the first quarter of 2012, up from 12.6 million in the year-ago quarter.

Samsung has benefited from being fantastic at execution, leveraging its unmatched scale in developing its own components for displays, memory and chipsets. But will those advantages be enough to sustain it? I'm not so sure. We'll perhaps find out more May 3 when Samsung unveils its next flagship phone, presumably the Galaxy S III. CCS Insight analyst John Jackson said he is looking for not just more flashy hardware but a comprehensive services strategy. The services strategy may be a new cloud-based entertainment service, if rumors prove true.

"The industry has told us that hardware alone doesn't get you a sustainable position," he said. "They've risen on hardware but that's probably not the go-forward strategy." Moreover, Samsung cannot leverage its scale in content and services, because unlike in hardware, it doesn't have those resources. Its Media Hub platform has been respectable but does not compare to iTunes or even Amazon's library of content. Without a strong and compelling services strategy, Samsung's position at the top will not be secure.

Nokia is no longer the handset king; Samsung sits on the throne. But as Shakespeare wrote: "Uneasy lies the head that wears a crown." --Phil