The Tech Company We Should Really Worry About

January 5th, 2016

As usual with Apple, you’ll read mixed messages from so-called industry analysts on how they’re doing. Some will speak of continued growth, perhaps at a reduced level as markets saturate. Others will speak of no growth at all, or perhaps a contraction, particularly when it comes to iPhones. After all, how many more people are interested in buying one before Apple runs out of customers for high-end gear?

What about all those companies sniping at its heels? Isn’t it time to face reality, some say?

While Apple’s stock price has suffered over unproven concerns, supposedly from the supply chain, about possibly lower iPhone sales, there is a large consumer electronics maker that might really be facing serious headwinds: Samsung. But the news doesn’t come from so-called industry analysts reading tea leaves, or pulling the information from dark places. No, it comes right from Samsung.

According to a USA Today report, quoting Reuters, Samsung’s CEO, Kwon Oh-hyun gave the downbeat forecast. Addressing 500 employees at Samsung’s R&D facility, he stated, “low global growth will persist this year, with greater uncertainty stemming from issues such as financial risks for emerging countries.” He also talked of intensifying competition in the smartphone, TV and memory chip space.

Now this story got some play, but not much. If anything of that sort happened to Apple, it would have become a front page headline and lead newscasts around the world.

Samsung was once a poster child for the successful tech giant. It was widely believed that Apple couldn’t possibly compete with those Galaxy smartphones. In the real world, Samsung was never able to deliver the volumes that Apple could sell in high-end gear. When they sold as much in a month as Apple could move in a single weekend, that was supposed to be a good thing.

Apple, therefore, was in deep trouble. That pronouncement was sometimes accompanied with the usual drivel of Tim Cook being the wrong CEO.

Overall, Samsung sells more units than Apple, but a hefty percentage are low-end handsets, an area in which Apple chooses not to compete. When last estimated, Apple earned 92% of the smartphone profits for the entire industry. Samsung’s share of profits was 15%. The reason this totals more than 100% is due to the fact that some other entrants in this market actually lose money on handset sales.

Indeed, you might wonder why some companies bother, but it may be about staying active, hoping to break even and, perhaps, wait for a miracle. Or perhaps it’s all about cash flow. Even if profits aren’t being made, so long as all or most of the manufacturing and marketing costs are covered, that’s acceptable according to some business plans. Perhaps a company earns profits from other markets.

Indeed, this plays out to a large extent in the PC space. Apple takes most of the profits, but doesn’t match the volume of the largest companies, except for high-end computers. Some pundits and industry analysts suggest Apple should sell cheaper iPhones, iPads and Macs with the goal towards increasing volumes with junk hardware. But Apple has rarely played that game. Well, perhaps with the failed Performa series in the 1990s, but we all saw where that led.

The long and short of it is that Apple succeeds with premium hardware, and high profits. Customers who aspire to higher quality gear often choose Apple. But it doesn’t follow that the products are necessarily overpriced. Premium smartphones from different makers are priced in the same range, Apple’s economies of scale, in part by having fewer models and being able to leverage the same or similar parts across a larger number of units as a result, keeps the resale prices competitive.

Sure, Macs are also regarded as overpriced. But when you compare the hardware configurations, with the same or similar parts, the price difference with PCs may be slim to none. On the high end, Apple’s Mac Pro workstation can often be cheaper than any comparable PC.

True, you may not agree with some of Apple’s design choices, such as the dependance on external expansion in the Mac Pro, or the fact that very few Macs come with the ability to upgrade RAM or a storage device, but that doesn’t make them overpriced either.

The luxury price argument has been around for a long time. Where Apple seems to fail is in RAM and storage upgrades on the few models where they are available. You can almost always get RAM, hard drives or solid state drives for less money from other companies, at least where comparable parts are available.

Now considering Samsung’s expected problems this year, their efforts to hold off paying what they owe Apple for patent infringement, and hoping the Supreme Court will want to get involved, is a foolish maneuver. They’d be better off to write the check, and do their best to sell more parts to Apple. That would probably mean higher revenue and profits at a time when increasing sales is going to be difficult. Well, maybe they don’t want to admit wrongdoing, but it’s time to get over it.

Remember, Apple agreed to pay Italy $350 million in back taxes to resolve a dispute over tax rates. They didn’t drag it out forever with the danger of having to pay far more in interest in penalties as a result. It’s time for Samsung to pay up, and do what can be done to boost revenues and profits.

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