Samsung
Warning of a 60% Drop in Profit: What Happens Next? By Ethan
Warrick, Editor Wealth Authority, 4/12/19.
A fourth quarter profit warning has been issued by Samsung,
after which the company’s stock fell — but that could only be part of the
company’s struggles. While Samsung’s CEO believes that Samsung will be the
number one phone maker for the next decade, it appears as though the industry
as a whole is flagging. How can Samsung counter the upcoming smartphone
fatigue?
Samsung provides chips to other manufacturers such as Apple: and
that’s a problem right now. As other manufacturers are pulling back towards the
economy, Samsung is getting hit even harder by the economic uncertainty. Rather
than only having to worry about its own consumer products, it has to worry
about the compounding effect of spending in general being pulled back. Samsung
reported that its customers currently have high levels of inventory for its
products, and consequently aren’t making additional purchases.
That’s one problem, but there’s another: smartphone sales are
also decreasing. Smartphones are selling less frequently, and Samsung spent a
lot of advertising money on its smartphone branch without seeing significant
returns. With smartphone sales flattening, the company simply hasn’t been able
to achieve its targeted revenue.
It isn’t just Samsung that’s experiencing difficulties. LG
recently released a lower than expected profit report, and Apple has been
struggling with smartphone sales as well. In general, smartphones are selling
less frequently.
There are a few reasons for this, but much of it comes down to
smartphone fatigue. For over a decade, consumers have been interested in
getting the best possible smartphone every year, upgrading their smartphones on
a regular basis. Today, consumers are more likely to hold onto their
smartphones for as long as they can.
As handset prices have increased, many consumers have pulled
back on what’s viewed as a luxury expenditure. Having a more expensive smartphone
is less of a status statement, and higher quality phones also mean that
consumers are able to do all they want with their phone for much longer. A
large sequence of phones being released has made it difficult for consumers to
differentiate between product lines, and a lack of exciting new features is
making the prospect of upgrading less exciting.
More expensive smartphones have also led to many consumers
purchasing their smartphones through their cell providers, which means they are
on a structured upgrade schedule: they upgrade when their cell provider tells
them they can, rather than upgrading of their own choice. This can lead to them
putting off their upgrades until a newer line up comes out.
And there’s competition. Google’s Pixel has also been eating
into Samsung’s profits as it grows, with many people moving from Samsung to
Google. While this isn’t, in and of itself, contributing a significant amount
to the drop in profit, it does indicate that competitors may be growing. What
was previously a primarily Samsung and Apple market is becoming split among
smaller competitors.
Samsung is still optimistic that it will maintain the lead as
the largest smartphone provider, but customer fatigue is real. Part of
Samsung’s profit issues were compounded by increased advertising, which didn’t
manage to bring in additional sales. Moving forward, phone providers may need
to reduce the volume of phone generations they’re putting out, pull back on
phone models, and introduce lower-priced phone models rather than more
expensive ones.
Many phone providers are also working on innovation: trying to
find new ways to improve upon the existing technology, rather than releasing
very similar phones generation after generation. In the past few years, phones
have largely been differentiated by the number of cameras they have,
authentication technology, and screen size: while these are all important to
consumers, none of them are dramatically different.
Samsung’s earnings report has already caused a significant drop
in share price, but it’s not unexpected and it hasn’t lost them much ground in
their market. The industry as a whole is seeing a slump, primarily due to the
economic and the way that consumers are now approaching their electronic
devices. Samsung remains confident in its future and may need to revise some of
its marketing and production strategies.
Norb Leahy, Dunwoody
GA Tea Party Leader
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