When it comes to making money in the smart phone arena, Apple is number one and by a large, large margin. Who has a stake on second place?
Apple’s arch rival, Samsung, headed by the hot selling Frankendroid equipped Galaxy line of smart phones. Making money in smart phones is so lopsided that nobody else has a profit to brag about. How does Samsung do it?
Spend Money To Make Money
Business gurus will tell you that to make money you have to spend money. Apple spends a lot of money each year to improve and promote the iPhone and iPad.
How much Apple spends to sell their products is part of the public record. What about competitor Samsung?
Does the Galaxy maker’s position as the second most profitable (and the only other) smart phone maker spend as much as Apple?
ASYMCO’s Horace Dediu has a very graphic analysis of the war between Apple and Samsung when it comes to money spent to promote the products to achieve profitability.
An interesting aspect of the SG&A (Sales, General and Administrative expense in a company’s financials is that, as sales increase, SG&A should remain steady or drop as a percent of sales.
Dediu points out that Apple’s SG&A has dropped steadily since 2009 as a percent of sales. Why? Sales of the iPhone and iPad and Mac have grown very fast, and Apple is able to capitalize on the halo effect in the ecosystem.
In other words, Mac customers are more easily (and economically) persuaded to buy an iPhone and iPhone users are more easily (and economically) persuaded to buy an iPad.
What of Samsung? As sales of the Galaxy line of smart phones and tablets have increased, so has Samsung’s marketing expenses. That’s in stark contrast to Apple.
In other words, Samsung is spending money to make money. But they’re spending much more than Apple to achieve a larger market share than the iPhone, but with a much smaller profit share.
Dediu’s graphics indicate Samsung may spend four times what Apple spends on advertising and promotion for 2012, and the rate of expense is increasing. What does Samsung gain for that extra expense? While not keeping up with Apple in profitability, Samsung has pulled away from all other smart phone makers in profitability (none of the others– RIM, HTC, Motorola, Google, Nokia, Microsoft– are profitable in smart phones; essentially running cost centers in their efforts to catch up).
Samsung may be the market leader (especially at channel stuffing) in smart phone unit sales, but trails Apple by a wide margin in profits, mostly due to the much larger SG&A and advertising expenses.
For now, it’s a crowded field with Apple racking up the most profits, and a large war chest of cash. Samsung’s efforts are profitable, though not as much, and everyone else in the race struggles to gain relevance, often resorting to desperate measures to increase sales.
Witness Google selling the Nexus line at near cost, with no profit in sight. Microsoft and Nokia struggle to sell what many define as a quality product with a unique interface in Windows Phone. It may not be an apples to apples comparison of Windows vs. Mac, but Android vs. iOS is shaping up to be a two horse race.
About Kate MacKenzie
No one would hardly ever know that Apple is making the most revenue and profits from both iPhones and iPads as far as Wall Street is concerned. Apple’s lost a hefty chunk of share price and has been downgraded as of late whereas Samsung has been climbing. Apple is almost always considered as losing out in the future to Samsung’s Android devices and almost all other Android devices. This is one of the many reasons why Apple has been relegated to having a measly P/E of 13. It seems as though Wall Street only regards companies that crank out smartphones by the millions at lower price levels to stand a chance of succeeding where Apple will fail. All the articles only talk about how Samsung is outselling Apple iPhones in the number of smartphones without regard to revenues and profits or anything else for that matter. I think investors actually believe that Apple is falling behind Samsung as a smartphone vendor and this has negatively impacted Apple’s share price.
Horace Dediu of asymco always digs deep for numbers showing how well Apple is doing but it seems to fall on deaf ears. Apple continues to be seen on Wall Street as a doomed company with almost no growth potential at all. Android in general is a train wreck built for the lower-middle class masses. It’s a terrible financial model where only a couple of companies can make any money. This is easily seen, but still Wall Street thinks that Android is such a wonderful and dominant platform for the future.
Truly, this is a battle to the death. Samsung is willing to forego profits for market share. At least they have profits. None of the other smart phone manufacturers beyond Apple and Samsung make a dime, and most are losing money by the hundreds of millions. Even Google only loses money on Android. Talk about desperation. Notice the difference in margins. Samsung at about 17% and Apple at about 45%. No wonder Apple has so much money in the bank.
It’s a nice try. But you forgot something.
Apple, as you like to point out, basically has one phone that it advertises–the iPhone 5. Samsung has many products. Also, needless to say, Apple’s iPhone spending happens mostly after a release. Because of it’s many products, you also have many releases. So you’d need to compare Samsung advertising for a particular phone versus Samsung advertising in general.
Heck, I notice ads for the Samsung Galaxy S III and the Samsung Galaxy Note 2.
Samsung is buying market share, keeping profits low (and gross margins), while ramping up the advertising and promotion expenses. They may not match Apple’s revenue or profits or margins, but they sure own second place. Every other manufacturer is losing money.
The argument that droids sell more units than iphones is not important to people who invest.
It is not the number of units shipped, it is the profit per unit that matters.
If A sells a million units but only make a $1 per unit and B sells 50,000 units but make $100 per unit, A has “outsold” B by a factor of 20 to 1. But, at the end of the day, B has out-earned A by a factor of 5 to 1. B is the winner because they got the cash.