A King in waiting

The race for the smartphone crown, in which Samsung has gained pace, is for Apple to lose

The anointment of Jorge Mario Bergoglio as the new Pope was overshadowed by a coronation of a different kind last week. Amidst hype, some warranted and a lot not so, Korean chaebol Samsung was anointed as King of the Smartphone by all and sundry after it unveiled the Galaxy S4 last Thursday night in New York. The S4 is the chaebol’s latest shot at dethroning the King from Cupertino.

“The King is dead; long live the King”, the cry went out—a narrative whose truth is directly proportional only to the number of times it is repeated, and not based on any solid foundation.

Ironically, this new coronation story is far more apt from the perspective of the Indian market. But more on that a little later.

From 2009 – 2011, Apple, which invented the modern smartphone, enjoyed being the lone player in the market. This period also saw Apple’s stock zoom, in pace with its profits. The last two years however, which has seen the death of Steve Jobs and a management reshuffle, have given observers and investors alike a number of wrong assumptions.

Myth number one: Apple at any point had an overwhelming market share advantage for the iPhone. And myth number two: Now that Apple has a serious and successful competitor, it won’t be able to compete as its forte has always been staying ahead of the market rather than fighting it out.

Be the smartphone market or the mobile phones market, the fact is that Apple has always been behind in terms of sheer units sold. In the wholly smartphone market, the iPhone has a 20 per cent market share, and in all phone handsets, it has never crossed the double-digit mark. Nokia, BlackBerry and Samsung have always beaten Apple in this.

Criticising Apple for not winning the market-share game and letting Samsung sell a huge number of S3s is similar to criticizing BMW for selling fewer cars than Maruti Suzuki.

The second myth comes with the assumption that because Apple finally has a serious competitor in Samsung, it has already lost the race. Au contraire, the race has only begun! Last quarter, Apple took 72 per cent of the industry’s profits, while Samsung got 29 per cent. These numbers total more than 100 per cent because all other handset makers, combined, are losing money.

And this is where the true race is – in profits, not market share— a lesson that Nokia and Microsoft are learning now. It is because over the next four or five years, the smartphone bubble is going to burst, very similar to the way the personal computer (PC) bubble burst a couple of years ago. The PC market didn’t solely slow down because of the explosion of tablets and smartphones. It went down mainly because technology had reached a point where PCs went right past being “good enough” and straight into “insanely overpowered” for the normal user.

The average mom-and-pop user suddenly became satisfied with buying a new PC once in four or five years, when ten years ago it used to be once in two years. The market for PCs, consequently, took a big hit.

The same thing is destined to happen with smartphones, once the technology for durability is set in place. And indeed, one can see evidence of it already with the eight core processor in the Galaxy S4.

Nevertheless, no matter how many times Samsung executives click their heels together and say “There’s no place like Cupertino, there’s no place like Cupertino,” – they will not be able to win the profit race. Unless, of course, they discover some way to cash in on downstream revenue the way Apple does with its golden egg laying hen- the App Store.

While the momentum lead might be with Samsung, there is no evidence in what is happening in the Western markets that suggests that Apple has been dethroned in any way. If anything, a glimpse at what is happening in the Indian market is a far better indicator of Samsung’s ascension.

It is no secret that Apple prefers Chinese noodles over Indian curry – its focus over the last two years on China at the expense of India has allowed Samsung to entrench itself here quite deeply. Samsung sold nearly 45 per cent of the 5.2 million smartphones sold in India in the last quarter. However, numbers don’t wholly matter as evidenced above.

What does matter is that Samsung has taken a leaf out of Apple’s book and, over the last three years, has started the process of cleverly positioning itself as a premium/luxury brand. It started simple – the company set up posh, aesthetically-pleasing Samsung ‘experience centres’. Contrast this to where iPhones are sold in India – lined up with other phones in normal mobile stores like a street cart vendor who sells vegetables.

A huge marketing and advertising budget, and a focus on a plethora of features, has seen the last two premium launches of Samsung, the Galaxy Grand and the Note, greeted as a sort of status symbol.

Whether or not Samsung can replicate this success in international markets depends on how intensely Apple is willing to fight back, even as the ghost of its late founder still weighs heavily on the company.

The race for the crown, which is still wide open, is very much for Apple’s to lose. A coronation at this stage would be extremely premature.

The market-share narrative is glaringly wrong, with Steve Jobs it was always about ‘advancing the human race.’ But if he visited Apple now, he would say something like “I’ve been dead for two years, and we’re still arguing over who makes higher resolution screens? That’s boring now. Let’s invent something new. And by the way, fire whoever thought it was okay to have 21 icons on the iPhone 5.”