Samsung’s Galaxy S III Success Ups The Ante For iPhone 5

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In keeping with the slew of high-profile announcements made this week and with the expected launch of Apple’s (NASDAQ:AAPL) next iPhone hogging headlines, Samsung (PINK:SSNLF) decided to take part in the media frenzy with an important announcement of its own. The South-Korean consumer electronics giant announced Thursday that its flagship Galaxy S III phone has sold more than 20 million units in a little over three months since launch. [1] In comparison, the predecessor, Galaxy S II, had taken more than three months to sell as many. The incredible success that Samsung has had with the new flagship Galaxy S points not only to the rapid pace of growth in smartphone sales worldwide, but also the company’s growing presence in high-end smartphone market – a segment that has long been Apple’s hegemony.

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Samsung makes a high-end statement

The past year has seen Samsung gain a lot of smartphone market share. Last quarter saw Samsung take a decisive lead in the smartphone market, selling almost twice as many smartphones as Apple. As a result, its market share doubled to more than 36% in Q2 2011 from about 18% during the same period last year. We believe that the big market share gains that Samsung has achieved is, for the most part, a result of the number of low-end Android smartphones it has flooded the markets with, both in emerging as well as developed markets.

However, Samsung’s superiority in low-end smartphone market was long foreseen considering the company’s scale and the market-flooding strategy it has used right from the start. What is, however, relatively new is that it has managed to leverage the huge following garnered with the wide array of Android choices to start challenging Apple in the high-end of the smartphone market.

The 20 million Galaxy S IIIs sold in just over a quarter after launch may be about half of what Apple managed in the quarter when the 4S was launched, but it should be kept in mind that a portion of Apple’s sales would have included the older versions of the iPhone, whose prices were brought down subsequent to the 4S launch, as well. Also, the Galaxy S series is only in the third-generation  compared to the iPhone 4S which is a fifth-generation product, meaning that Samsung had a comparatively smaller base of Galaxy owners to upgrade than Apple had with the 4S.

All factors considered, Samsung may still have some catching up to do in high-end smartphone market considering that the iPhone 5, which is expected to arrive next week, is gearing up to be Apple’s biggest upgrade cycle ever. However, with Samsung closing the gap faster than many anticipated at the start of the year, should Apple’s investors be worried?

iPhone 5 crucial for Apple

Not really, considering that Samsung’s big market share gains have largely came at the expense of others such as Nokia and RIM as opposed to Apple, which lost less than 1% market share last quarter. Also, the iPhone 4S was more than two quarters old when the Galaxy S III was launched. With rumors about the iPhone 5 circulating in the media, we believe that many customers may have postponed purchasing the new iPhone in anticipation of the iPhone 5. This could be easily gleaned from Apple’s last quarter financials, which showed that the company’s margins came under pressure from a drop in the iPhone’s average selling prices (ASPs). What this means is that the iPhone mix tilted toward the low-end, probably because many high-end smartphone buyers deferred their iPhone purchases until the launch of the iPhone 5 while lower-end purchases remained steady.

The pent-up demand might mean a phenomenal holiday quarter for Apple, like last year, but it also puts its stock under the risk of the iPhone 5 not meeting customer expectations. Meanwhile, the company’s last quarter margin compression could continue into this quarter as well, as expectations of an imminent iPhone 5 release strengthen.

However, the fact that emerging markets are still a largely unexplored market for Apple keeps the upside potential intact. China, for example, holds a lot of promise for Apple considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only about 18% in China and growing at a good rate). A deal with China Mobile, the largest carrier in the world by subscriber base, is looking increasingly likely following  Qualcomm’s recent announcement and Apple’s similar deals with the other two carriers. This deal would be very important for Apple as it would instantly double its addressable market for the iPhone in China and act as the next big boost to its stock. This is especially true because that the iPhone accounts for more than 55% of the company’s value, according to our estimates. (see China Mobile In Talks To Offer The iPhone; Can Alone Take Apple Past $800)

There is also a distinct possibility that Apple could leverage its latest patent win over Samsung to ban the sales of some of Samsung’s best-selling, high-end models such as the Galaxy S III in the U.S. How much of an impact that will have on both companies will depend on Samsung’s ability to bounce back with re-engineered/re-designed products as well as Apple’s ability to press for a ban in other geographies.

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Notes:
  1. Galaxy S III sales top 20 million in just 100 days, BGR.com, September 6th, 2012 []
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