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.