Can Samsung Continue Its Reign as Android King?

The smartphone consumer market has seen two consistent leaders: Apple (AAPL) and Samsung (SSNLF). However, while the iPhone continues to drive record profits for Apple, Samsung has fallen on hard times.

Can Samsung Continue Its Reign as Android King?
Source: Samsung

In the latest blow to Samsung’s position as king of Android smartphones, the Galaxy S6 and S6 Edge failed to revive sales, as the company reported second-quarter earnings down 8% from 2014.

The Galaxy S6 was a pivotal release for Samsung, after the poorly selling Galaxy S5 led to cratering earnings and a vow to “fundamentally reform” its mobile division. The S6 was a new attempt by Samsung to radically redesign its flagship device, which did earn Samsung some positive reception (read our review here).

In its Q2 earnings announcement, however, Samsung describes the Galaxy S6 and Galaxy S6 Edge as having a “quite marginal” impact on its bottom line, and now plans to keep up sales by lowering the price of both phones.

In other words, Samsung’s Galaxy brand and Apple-like approach to premium design are no longer keeping Samsung atop the flagship Android heap; so in a last-ditch effort to hold on to its crown, Samsung is willing to cut margins and slash prices.

The Smartphone Market Has Changed

This is a move that would have been unthinkable only a few years ago, when Xiaomi was all but unknown outside of China and Motorola was struggling under Google (GOOGGOOGL) ownership.

The consumer smartphone market is less than a decade old, and it’s brutal one. It has punished companies that couldn’t quite figure it out, like BlackBerry (BBRY) and Sony (SNE), and elevated Apple to lofty heights. But one thing has remained constant through recent years: Apple and Samsung have owned all of the profits in the industry.

Consumer demand for high-margin flagship smartphones — Apple’s iPhone and Samsung’s Galaxy — created a market where Apple and Samsung were the only players who actually made money. At one point in 2013, the two combined for 109% of industry profits (split roughly even), a total made possible because everyone else was losing money.

At that time, just over 30% of all Android smartphones sold worldwide bore Samsung’s name, a number that would reach one-third of all Android smartphones, as Samsung outsold all of its top competitors combined.

The smartphone landscape today is almost unrecognizable from two years ago, at least when it comes to devices powered by Google’s Android operating system.

The latest figures from Strategy Analytics show Samsung’s smartphone market share has slid to just 20.5%, while Chinese competitors Huawei and Xiaomi are surging at 7.0% and 4.6% respectively (both showing impressive growth on the year).

Even worse, under the ownership of Lenovo (LNVGY), Motorola appears determined to take a meaningful chunk of the flagship smartphone market, and its new Moto X Pure flagship can go toe to toe with the S6, and at nearly half the price. The latest Moto X is winning rave reviews for both looks and performance, boasting a bigger 5.7-inch Quad-HD display, 21 mega-pixel rear camera and removable MicroSD card (all of which the Galaxy S6 lacks).

If Samsung isn’t worried yet, perhaps the price of the Moto X will put some fear into it.

The Galaxy S6 costs $649 at full-retail, compared to a full-retail price of $399.99 for the Moto X Pure as an unlocked device compatible with all major carriers. To put it another way, Samsung’s previous Galaxy S5 — the unloved smartphone scapegoated for Samsung’s current market share woes — is still priced at $499 off-contract.

The Moto X Pure is a true flagship device, and the Galaxy name is no longer a must-have for Android shoppers. The price difference between Motorola’s new smartphone and Samsung’s Galaxy phones sets Samsung up to make a painful decision regarding the price of its Galaxy line-up.

Bottom Line

If Samsung slashes prices, it loses the margins it’s enjoyed as the seller of the premium Android smartphone, and that’s likely to further impact its bruised bottom line. If it doesn’t respond, further erosion of its market share seems all but certain.

And while Chinese manufacturers are kicking Samsung in the teeth at the lower-end in emerging markets, Motorola, Xiaomi, LG and others are adding pressure with more attractive and less expensive phones.

In other words, Samsung is caught in a vice and its time as the undisputed king of Android smartphones is likely reaching an inevitable conclusion.

Samsung is holding a Galaxy Unpacked 2015 event later in August, where it’s expected to announce updated versions of its premium phablets (the new Galaxy Note and Galaxy Note Edge).

With the $400 Moto X Pure sitting in phablet territory and the previous versions of the Note and Note Edge priced at $699 and $799 off-contract, respectively, the Galaxy Unpacked event should be very interesting indeed.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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